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, 2022
	or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____ to ____

Commission File Number 001-14785

GSE Systems, Inc.

(Exact name of registrant as specified in its charter)

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

6940 Columbia Gateway Dr., Suite 470, 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, $0.01 Par Value	GVP	The NASDAQ Capital Market

There were 21,720,661 shares of common stock, with a par value of $0.01 per share outstanding as of October 31, 2022.

GSE SYSTEMS INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021	6
	Unaudited Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2022 and 2021	8
	Notes to the Consolidated Financial Statements (unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
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

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30, 2022			December 31, 2021
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,660		$	3,550
Restricted cash, current		651			-
Contract receivables, net		10,152			11,257
Prepaid expenses and other current assets		1,969			5,262
Total current assets		16,432			20,069
Equipment, software and leasehold improvements, net		796			839
Software development costs, net		554			532
Goodwill		6,299			13,339
Intangible assets, net		1,854			3,020
Restricted cash - long term		932			-
Operating lease right-of-use assets, net		777			1,200
Other assets		52			52
Total assets	$	27,696		$	39,051
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	-		$	1,817
Current portion of long-term note		2,762			-
Accounts payable		713			1,179
Accrued expenses		2,119			1,358
Accrued compensation		1,655			1,452
Billings in excess of revenue earned		4,152			5,029
Accrued warranty		478			667
Income taxes payable		1,635			1,654
Derivative liabilities		653			-
Other current liabilities		988			1,883
Total current liabilities		15,155			15,039
Long-term note, less current portion		1,181			-
Operating lease liabilities noncurrent		209			790
Other noncurrent liabilities		171			179
Total liabilities		16,716			16,008
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock $0.01 par value; 2,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock $0.01 par value; 60,000,000 shares authorized, 23,319,572 and 22,533,005 shares issued, 21,720,661 and 20,934,094 shares outstanding, respectively		233			225
Additional paid-in capital		82,095			80,505
Accumulated deficit		(68,411	)		(54,584	)
Accumulated other comprehensive income (loss)		62			(104	)
Treasury stock at cost, 1,598,911 shares		(2,999	)		(2,999	)
Total stockholders’ equity		10,980			23,043
Total liabilities and stockholders’ equity	$	27,696		$	39,051

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

3

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three months ended						Nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenue	$	11,898		$	14,686		$	36,918		$	41,312
Cost of revenue		8,642			11,503			28,063			32,512
Gross profit		3,256			3,183			8,855			8,800
Operating expenses:
Selling, general and administrative		4,336			3,265			13,253			10,521
Research and development		186			149			510			460
Restructuring (benefit) charges		-			(10	)		-			798
Goodwill and intangible asset impairment charge		7,505			3			7,505			3
Depreciation		69			69			213			216
Amortization of intangible assets		209			286			700			929
Total operating expenses		12,305			3,762			22,181			12,927
Operating loss		(9,049	)		(579	)		(13,326	)		(4,127	)
Interest expense, net		(422	)		(32	)		(928	)		(135	)
Change in fair value of derivative instruments, net		263			-			377			-
Other (loss) income, net		(2	)		12,215			(58	)		16,853
(Loss) income before income taxes		(9,210	)		11,604			(13,935	)		12,591
(Benefit from) provision for income taxes		(218	)		166			(108	)		127
Net (loss) income	$	(8,992	)	$	11,438		$	(13,827	)	$	12,464
Net (loss) income per common share - basic and diluted	$	(0.42	)	$	0.55		$	(0.66	)	$	0.60
Weighted average shares outstanding used to compute net (loss) income per share - basic		21,288,883			20,863,479			21,101,942			20,714,068
Weighted average shares outstanding used to compute net (loss) income per share - diluted		21,288,883			20,863,479			21,101,942			20,714,068

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

4

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)

	Three months ended						Nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net (loss) income	$	(8,992	)	$	11,438		$	(13,827	)	$	12,464
Cumulative translation adjustment		91			(23	)		166			1,109
Comprehensive (loss) income	$	(8,901	)	$	11,415		$	(13,661	)	$	13,573

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

5

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock										Accumulated			Treasury Stock
Nine Months Ended	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Other Comprehensive Loss			Shares			Amount			Total
Balance, January 1, 2022		22,533	$	225	$	80,505		$	(54,584	)	$	(104	)		(1,599	)	$	(2,999	)	$	23,043
Stock-based compensation expense		-		-		1,504			-			-			-			-			1,504
Common stock issued for RSUs vested		443		5		(5	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(226	)		-			-			-			-			(226	)
Foreign currency translation adjustment		-		-		-			-			166			-			-			166
Repayment of convertible note in shares		344		3		317			-			-			-			-			320
Net loss		-		-		-			(13,827	)		-			-			-			(13,827	)
Balance, September 30, 2022		23,320	$	233	$	82,095		$	(68,411	)	$	62			(1,599	)	$	(2,999	)	$	10,980
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

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

6

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock										Accumulated			Treasury Stock
Three Months Ended	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Other Comprehensive Loss			Shares			Amount			Total
Balance, July 1, 2022		22,850	$	228	$	81,324		$	(59,419	)	$	(29	)		(1,599	)	$	(2,999	)	$	19,105
Stock-based compensation expense		-		-		479			-			-			-			-			479
Common stock issued for RSUs vested		126		2		(2	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(23	)		-			-			-			-			(23	)
Foreign currency translation adjustment		-		-		-			-			91			-			-			91
Repayment of convertible note in shares		344		3		317			-			-			-			-			320
Net loss		-		-		-			(8,992	)		-			-			-			(8,992	)
Balance, September 30, 2022		23,320	$	233	$	82,095		$	(68,411	)	$	62			(1,599	)	$	(2,999	)	$	10,980
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

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

7

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months ended
	September 30, 2022			September 30, 2021
Cash flows from operating activities:
Net (loss) income	$	(13,827	)	$	12,464
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Goodwill and intangible asset impairment charge		7,505			3
Depreciation		213			216
Amortization of intangible assets		700			929
Amortization of capitalized software development costs		255			281
Amortization of deferred financing costs		11			8
Amortization of debt discount		925			-
Gain on PPP loan forgiveness		-			(10,127	)
Stock-based compensation expense		1,592			784
Bad debt expense (recovery)		97			(133	)
Change in fair value of derivative instruments, net		(377	)		-
Deferred income taxes		(80	)		-
Changes in assets and liabilities:
Contract receivables, net		922			(1,888	)
Prepaid expenses and other assets		3,638			(5,356	)
Accounts payable, accrued compensation and accrued expenses		539			1,409
Billings in excess of revenue earned		(818	)		(831	)
Accrued warranty		(163	)		(192	)
Other liabilities		(382	)		2,147
Net cash provided by (used in) operating activities		750			(286	)
Cash flows from investing activities:
Capital expenditures		(171	)		(392	)
Capitalized software development costs		(276	)		(226	)
Net cash used in investing activities		(447	)		(618	)
Cash flows from financing activities:
Proceeds from line of credit		-			800
Repayment of line of credit		(1,817	)		(1,739	)
Repayment of insurance premium		(906	)		(609	)
Proceeds from issuance of long-term note and warrants, net of debt issuance cost and original issue discount		4,782			-
Repayment of convertible note		(319	)		-
Tax paid for shares whithheld		(226	)		(188	)
Net cash provided by (used in) financing activities		1,514			(1,736	)
Effect of exchange rate changes on cash		(124	)		(19	)
Net increase (decrease) in cash, cash equivalents and restricted cash		1,693			(2,659	)
Cash, cash equivalents and restricted cash at beginning of the period		3,550			6,702
Cash, cash equivalents and restricted cash at the end of the period	$	5,243		$	4,043
Cash and cash equivalents	$	3,660		$	4,043
Restricted cash, current		651			-
Restricted cash included in other long-term assets		932			-
Total cash, cash equivalents and restricted cash	$	5,243		$	4,043
Supplemental cash flow disclosures:
Non-cash financing activities
Repayment of convertible note	$	320		$	-
Discount on issuance of convertible note	$	750		$	-

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

8

GSE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

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

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

COVID-19

As of September 30, 2022, most of our employees continue to work remotely except when required to be at the client site for essential project work. As an essential services provider, we maintain a modest office footprint in certain locations to allow for employees to work from those offices as project needs may arise. Throughout the pandemic GSE has complied with local, state and federal directives and regulations. Our Performance Improvement Solutions segment's (see Item 2) contracts, which generally are considered essential services, are permitted to and mostly continue without pause. However, we have experienced certain delays in certain new business opportunities. At the onset of the pandemic, many of our Workforce Solutions segment (see Item 2) customers paused or delayed contracts as they shrank their own on-premise workforces to the minimum operating levels in order to mitigate the effects of the pandemic. As a result, our Workforce Solutions segment has experienced a decline in its billable employee base during this time. Since the beginning of 2022, the Workforce Solutions segment began to receive an increase in opportunities as clients became more comfortable with employees returning to on-site work. Notably, the increase in opportunities shifted greatly to direct hire openings, rather than the normal hourly billable base. We cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time and we have experienced delays in commencing new projects and resuming work on existing contracts. Therefore, our ability to deliver our services and recognize revenue has been delayed for some contracts. We experienced order reductions, cancellations, and other negative changes to orders due to the pandemic. We routinely monitor our operating expenses as a result of contract delays and order reductions; and we have made adjustments to maintain our gross profit at a sustainable level.

9

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

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

Accounting pronouncements not yet adopted

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

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

Note 3 - Basic and Diluted (Loss) Income per Share

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

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

(in thousands, except for share data)	Three months ended					Nine months ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Numerator:
Net (loss) income attributed to common stockholders	$	(8,992	)	$	11,438	$	(13,827	)	$	12,464
Denominator:
Weighted-average shares outstanding for basic earnings per share		21,288,883			20,863,479		21,101,942			20,714,068
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		21,288,883			20,863,479		21,101,942			20,714,068
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive		3,283,400			14,229		2,383,171			77,871

10

Note 4 - Coronavirus Aid, Relief and Economic Security Act

Paycheck Protection Program Loan (PPP Loan)

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the “PPP Loan”) under the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”). The application for receipt of the PPP Loan required us to certify, in good faith, that the economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan was serviced by Citizens Bank, N.A. (the “Citizens”). The PPP Loan bore interest at a rate of 1% per annum and would mature on April 23, 2022, with the first payment deferred until September 2021. We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to Citizens substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. Citizens reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with Citizens’ determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA. We recognized other income of $10.1 million related to this forgiveness during the third quarter of fiscal 2021.

Employee Retention Credits (ERC)

Employee  retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and extended through September 30, 2021. In 2021, we applied for $5.0 million in refunds from the Internal Revenue Service with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We recorded other income of $7.2 million related to the employee retention tax credits earned for the year ended December 31, 2021. During the three months ended September 30, 2022, we didn't receive any employee retention tax credit refunds from the Internal Revenue Service. As of September 30, 2022, we received cumulative employee retention tax credit refunds totaling $3.6 million of the $5.0 million in refunds sought, with remaining outstanding refunds receivable of $1.4 million which was included in the other current assets balance at September 30, 2022. Subsequently, in October 2022, we received a refund of $0.4 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, 2022			December 31, 2021
Billed receivables	$	5,512		$	6,124
Unbilled receivables		5,648			6,143
Allowance for doubtful accounts		(1,008	)		(1,010	)
Total contract receivables, net	$	10,152		$	11,257

11

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.

There was no bad debt expense recorded during the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022 and 2021, we recorded net bad debt expense (recovery) of $97 thousand and $(133) thousand, respectively.

During the month of October 2022, we invoiced $2.5 million of the unbilled receivables as of September 30, 2022.

Our foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each reporting period into our functional currency, using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is included in other income, net in the consolidated statements of operations. During the three months ended September 30, 2022 and 2021, we recognized a gain on remeasurement of these foreign exchange contracts of $4 thousand and $6 thousand, respectively. During the nine months ended September 30, 2022 and 2021, we recognized a (loss) gain on remeasurement of these foreign exchange contracts of $(51) thousand and $27 thousand, respectively.

As of September 30, 2022 and December 31, 2021, we had no customer concentrations in contract receivables that required disclosure.

Note 6 - Goodwill and Intangible Assets

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets.

During the three months ended September 30, 2022, we determined that the deterioration in sales, decline in revenues, delayed pipeline opportunities, and overall downward performance results and the forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. As such, we performed an interim analysis to determine if an impairment existed at September 30, 2022 in accordance with ASC 350 & ASC 360.

ASC 350 Indefinite-Lived Asset Testing – Based on the triggering event indicated above we performed an interim analysis to determine if an impairment of the Workforce Solutions business unit existed at September 30, 2022. Our Goodwill impairment analysis, which includes the use of discounted cash flow models that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, and risk-adjusted discount rates determined the carrying value of Workforce Solutions exceeded the Fair Value by $7.0 million. As such, impairment of the related goodwill was recorded in the three months ended September 30, 2022.

ASC 360 Long-Lived Asset Testing – Based on the triggering event indicated above we also performed an interim analysis to determine if an impairment existed at September 30, 2022 by its individual asset groupings, which we determined to be at the subsidiary level. We used a discounted cash flow analysis to test for impairment and concluded that the carrying value of the definite-lived intangible assets of Absolute, a business unit of the Workforce Solutions segment, exceeded its carrying value by $0.5 million, and we recorded a loss on impairment for this amount as of September 30, 2022. No impairment was identified related to any other asset groupings.

Goodwill

(in thousands)

	Goodwill		Impairment			Net
Performance Improvement Solutions	$	8,278	$	(3,370	)	$	4,908
Workforce Solutions		8,431		(7,040	)		1,391
Net book value at September 30, 2022	$	16,709	$	(10,410	)	$	6,299

(in thousands)

	Goodwill		Impairment			Net
Performance Improvement Solutions	$	8,278	$	(3,370	)	$	4,908
Workforce Solutions		8,431		-			8,431
Net book value at December 31, 2021	$	16,709	$	(3,370	)	$	13,339

12

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

(in thousands)	As of September 30, 2022
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net
Amortized intangible assets:
Customer relationships	$	8,628	$	(6,940	)	$	(464	)	$	1,224
Trade names		1,689		(1,174	)		-			515
Developed technology		471		(471	)		-			-
Non-contractual customer relationships		433		(433	)		-			-
Noncompete agreement		527		(477	)		-			50
Alliance agreement		527		(462	)		-			65
Others		167		(167	)		-			-
Total	$	12,442	$	(10,124	)	$	(464	)	$	1,854

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

Amortization expense related to definite-lived intangible assets totaled $0.2 million and $0.3 million for the three months ended September 30, 2022 and 2021 and $0.7 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:

(in thousands)
Years ended December 31:
2022 remainder	$	167
2023		508
2024		332
2025		255
2026		204
Thereafter		388
Total	$	1,854

Note 7 - Equipment, Software and Leasehold Improvements

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

(in thousands)
	September 30, 2022			December 31, 2021
Computer and equipment	$	2,323		$	2,270
Software		2,263			2,150
Leasehold improvements		659			659
Furniture and fixtures		838			839
		6,083			5,918
Accumulated depreciation		(5,287	)		(5,079	)
Equipment, software and leasehold improvements, net	$	796		$	839

13

Depreciation expense was $69 thousand for both the three months ended September 30, 2022 and 2021. Depreciation expense was $213 thousand and $216 thousand for the nine months ended September 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $37 thousand and $50 thousand were recorded in software for the three months ended September 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $114 thousand and $365 thousand were recorded in software for the nine months ended September 30, 2022 and 2021, respectively.

Note 8 - Fair Value of Financial Instruments

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

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

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

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

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

Our convertible debt issued in February 2022 (See Note 10) includes certain embedded redemption features that are required to be bifurcated as embedded derivatives and measured at fair value on a recurring basis. We estimate the fair value using a Monte Carlo simulation based on estimates of our future stock price and assumptions about the possible redemption scenarios.

The Company used the Monte Carlo simulation model to determine the fair value of the Warrants and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of September 30, 2022 was estimated with the following assumptions.

Exercise Price	$	1.94
Common Stock Price	$	0.90
Risk Free Rate		4.0	%
Volatility		65.0	%
Term (in years)		4.4 yrs.

14

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

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Derivative liability	$	-	$	-	$	237	$	237
Warrant liability		-		-		416		416
Cash settled performance-vesting restricted stock units		-		-		56		56
Total liabilities	$	-	$	-	$	709	$	709

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

(in thousands)	Embedded Redemption Features			Warrant			Cash Settled PRSUs			Level 3 Total
Balance at December 31, 2021	$	-		$	-		$	-		$	-
Derivative liabilities at issuance date		306			-			-			306
Warrant liabilities at issuance date		-			724			-			724
Change in fair value included in gain on derivative instruments, net		(69	)		(308	)		-			(377	)
Fair value of cash settled PRSUs vested		-			-			87			87
Cash paid on vested shares		-			-			(31	)		(31	)
Balance at September 30, 2022	$	237		$	416		$	56		$	709

Note 9 - Stock-Based Compensation

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

During the three months ended September 30, 2022 and 2021, we recognized $0.5 million and $0.3 million of stock-based compensation expense related to equity awards, respectively. We recognized $1.5 million and $0.8 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 2022 and 2021, respectively, under the fair value method.

We granted no time-based restricted stock units (“RSUs”) during the three months ended September 30, 2022. During the  nine months ended September 30, 2022, we granted approximately 960,250 RSUs with an aggregate fair value of approximately $1.5 million. 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, 2022, we vested 112,985 and 492,805 RSUs compared to 55,788 and 421,740 RSUs vested during the three and nine months ended September 30, 2021. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of one to three years.

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

During the nine months ended September 30, 2022, we granted 800,000 PRSUs including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards, and a time-vesting restriction, which will vest in equal portions over the next 15 quarters ending December 31, 2025. During the three and nine months ended September 30, 2022, we vested 50,000 and 150,000 PRSUs, of which, 12,500 and 37,500 PRSUs were cash-settled, respectively. No PRSUs were vested during the three and nine months ended September 30, 2021. The market vesting criteria was achieved in April 2022 for the 800,000 PRSUs which will fully vest over the next 13 quarters. During the three and nine months ended September 30, 2021, we did not grant any PRSUs to employees.

We did not grant any stock options for the three and nine months ended September 30, 2022 and 2021.

15

Note 10 - Debt

Convertible Note

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

	Amount
Convertible Note issued	$	5,750
Debt discount		(750	)
Issuance cost:
Commitment fee		(175	)
Balance of investor’s counsel fees		(43	)
Net proceeds of Convertible Note	$	4,782
Fair value of Warrant Liabilities on issuance		(724	)
Fair value of Conversion Feature on issuance		(306	)
Allocated OID costs to Convertible Note		(96	)
Interest expense accrued on Convertible Note as of September 30, 2022		926
Principal and interest payments as of September 30, 2022		(639	)
Balance of Convertible Note as of September 30, 2022	$	3,943

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

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

16

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

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

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

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

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

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

The Company incurred total interest expense related to the Convertible Note, including the amortization of the various discounts, of $443 thousand and $926 thousand for the three and nine months ended September 30, 2022, respectively.

Revolving Line of Credit

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

17

On November 12, 2021, we signed the Tenth Amendment and Reaffirmation Agreement with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. In addition, we agreed, by December 31, 2021, to pay the Bank $0.25 million to be applied to the principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.

During the nine months ended September 30, 2022, using proceeds from the Convertible Note, we repaid in full, all outstanding indebtedness of $1.8 million owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. Certain letters of credit remain in place with Citizens. As of September 30, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

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 $478 thousand, and the remaining $99 thousand is classified as long-term within other non-current liabilities.

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

(in thousands)
Balance at January 1, 2022	$	748
Current period recovery		(3	)
Current period claims		(158	)
Currency adjustment		(10	)
Balance at September 30, 2022	$	577

Note 12 - Revenue

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

The following table represents a disaggregation of revenue by type of goods or services for the three and nine months ended September 30, 2022 and 2021, along with the reporting segment for each category:

(in thousands)	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Performance Improvement Solutions segment
System Design and Build	$	1,537	$	1,623	$	4,991	$	4,712
Over time		1,537		1,623		4,991		4,712
Software and Support		2,010		814		3,560		2,393
Point in time		530		52		662		274
Over time		1,480		762		2,898		2,119
Training and Consulting Services		4,505		4,937		13,851		14,212
Point in time		195		42		1,340		126
Over time		4,310		4,895		12,511		14,086
Workforce Solutions
Training and Consulting Services		3,846		7,312		14,516		19,995
Point in time		52		126		52		375
Over time		3,794		7,186		14,464		19,620
Total revenue	$	11,898	$	14,686	$	36,918	$	41,312

18

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, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period	$	174	$	835	$	2,666	$	4,139

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, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(Loss) income before income taxes	$	(9,210	)	$	11,604		$	(13,935	)	$	12,591
(Benefit from) provision for income taxes		(218	)		166			(108	)		127
Effective tax rate		2.37	%		1.4	%		0.78	%		1.0	%

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

Our effective income tax rate was 2.37% and 0.78% for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2022, the difference between our income tax benefit at an effective tax rate of 2.37% and 0.78% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes. For the three and nine months ended September 30, 2021, the difference between our income tax expense at an effective 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.

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

19

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

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that we will continue to assess a full valuation allowance on our U.S., China, and Slovakia net deferred assets as of September 30, 2022. We have determined that it is not more likely than not that the Company will realize the benefits of its deferred taxes in the U.S. and foreign jurisdictions. The Company has a deferred tax liability in the amount of $13 thousand at September 30, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.

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, 2022		December 31, 2021
Leased Assets
Operating lease - right of use assets	Long term assets	$	777	$	1,200
Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		965		1,205
Operating lease liabilities	Long term liabilities		209		790
		$	1,174	$	1,995

We entered into a lease agreement to lease 2,200 square feet of office space on September 26, 2022, and the lease term will be end on November 30, 2024.

We executed a sublease agreement with a tenant to sublease 850 square feet from the Sykesville office space on September 13, 2021. This agreement is in addition to the previous sublease for 3,650 square feet entered into on May 1, 2019. The addition of the second sublease is for a portion of the space previously abandoned in December 2019. The sublease does not relieve us of our primary lease obligation. The lease 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, 2022 and 2021, (in thousands):

		Three months ended						Nine months ended
Lease Cost	Classification	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Operating lease cost (1)	Selling, general and administrative expenses	$	174		$	179		$	534		$	548
Short-term leases costs (2)	Selling, general and administrative expenses		15			15			45			45
Sublease income (3)	Selling, general and administrative expenses		(18	)		(32	)		(55	)		(96	)
Net lease cost		$	171		$	162		$	524		$	497

⁽¹⁾ Includes variable lease costs which are immaterial.

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

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

20

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, 2022 are as follows:

(in thousands)	Gross Future Minimum Lease Payments
2022 remainder	$	347
2023		701
2024		151
2025		10
2026		3
Thereafter		-
Total lease payments	$	1,212
Less: Interest		38
Present value of lease payments	$	1,174

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

Lease Term and Discount Rate	September 30, 2022			December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.22			1.80
Weighted-average discount rate
Operating leases		5.00	%		5.00	%

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

(in thousands)	Nine months ended
Cash paid for amounts included in measurement of liabilities	September 30, 2022		September 30, 2021
Operating cash flows used in operating leases	$	934	$	958

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 American Society of Mechanical Engineers ("ASME") code and ASME Section XI. The Company provides these services across all market segments through our Performance, True North consulting, and DP Engineering subsidiaries. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.

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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, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenue:
Performance Improvement Solutions	$	8,052		$	7,375		$	22,402		$	21,318
Workforce Solutions		3,846			7,311			14,516			19,994
Total revenue		11,898			14,686			36,918			41,312
Gross Profit
Performance Improvement Solutions		2,654			2,252			7,037			6,204
Workforce Solutions		602			931			1,818			2,596
Total gross profit		3,256			3,183			8,855			8,800
Operating loss
Performance Improvement Solutions		(1,403	)		(469	)		(5,511	)		(3,003	)
Workforce Solutions		(7,646	)		(110	)		(7,815	)		(1,124	)
Operating loss		(9,049	)		(579	)		(13,326	)		(4,127	)
Interest expense, net		(422	)		(32	)		(928	)		(135	)
Change in fair value of derivative instruments, net		263			-			377			-
Other (loss) income, net		(2	)		12,215			(58	)		16,853
(Loss) income before income taxes	$	(9,210	)	$	11,604		$	(13,935	)	$	12,591

The operating loss above for the three and nine months ended September 30, 2022 includes goodwill and intangible asset impairment charge of $7.5 million for Workforce Solutions. There was no impairment recognized for the same periods in 2021 for Workforce Solutions. The operating loss above for the three and nine months ended September 30, 2021 includes impairment of ROU assets of $3 thousand for Performance Improvement Solutions. There was no impairment recognized for the same periods in 2022 for Performance Improvement Solutions.

Note 16 - Commitments and Contingencies

Per ASC 450 Accounting for Contingencies, the Company reviews potential items and areas where a loss contingency could arise. In the opinion of management, we are not a party to any legal proceeding, the outcome of which, in management’s opinion, individually or in the aggregate, would have a material effect on our consolidated results of operations, financial position or cash flows. We expense legal defense costs as incurred.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. Our primary market is the nuclear power industry, predominantly in the United States, but also serving the global nuclear sector with projects in the United Kingdom, Slovakia, Korea, Japan and elsewhere. We also serve natural adjacencies to the commercial nuclear power market such as the United States Department of Energy, and the broader nuclear ecosystem. We additionally serve other heavy industry sectors such as refining, petrochemical, Liquefied Natural Gas ('LNG") and others, with staffing services and our simulation technology and know-how. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in their respective organizations, primarily in procedures, engineering, technical support and training focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries.

As a result of the COVID-19 pandemic, we have sought and obtained support through various business assistance programs. We applied for and, on April 23, 2020, received the PPP Loan under the CARES Act, as administered by the SBA. We used the PPP Loan proceeds to sustain our business during the pandemic, as intended, and we were eligible for full forgiveness of the loan under the CARES act. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA.

In 2021, we participated in the Employee Retention Credit (ERC) program available under the CARES Act. The Company recognized total cumulative ERC credits of $7.2 million consisting of both refunds sought by the Company and credits from unremitted payroll taxes. We applied for $5.0 million in refunds from the IRS with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We didn't receive any refunds for the three months ended September 30, 2022. There was a remaining receivable of $1.4 million at September 30, 2022. Subsequently, in October 2022, we received a refund of $0.4 million.

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On September 9, 2021, President Biden released the COVID-19 Action Plan, Path Out of the Pandemic (the “Plan”), with the stated goal of getting more people vaccinated. As part of the Plan, Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (the “Order”), creates the Safer Federal Workforce Task Force (the “Task Force”), which released guidance for U.S. Government contractors and their subcontractors. This guidance included mandatory vaccination of all employees working on or for a government contract, either directly or indirectly, by January 4, 2022 (subject to medical and religious exemptions). As a part of the Plan and Order, President Biden also directed, the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) requiring that all employers with at least 100 employees ensure that their U.S.-based employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week.

On November 4, 2021, OSHA issued this ETS, however the implementation of the ETS was blocked by federal appeals courts, pending resolution of ongoing litigation challenging the constitutionality of the ETS, and the ETS was withdrawn by OSHA on January 25, 2022. OSHA, however has not withdrawn the proposed rule that would effectuate the same mandate, and it cannot be known whether OSHA may reissue the ETS or otherwise issue new emergency temporary standards imposing similar mandates. We have already received notice by both government customers and prime contractors serving government customers regarding the vaccination requirement and its application to our business with those customers. As an employer of more than 100 employees, we would also be subject to the ETS or a similar mandate should it become effective. It is possible that additional jurisdictions where we do business may impose similar mandates that would apply to our employees.  In addition, certain of our customers may require vaccines for those of our employees who provide on-site service at their facilities. We will continue to monitor the status of these or other mandates or regulations and their application to us and our business.

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 beyond 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 61% of revenue for the nine months ended September 30, 2022)

Our Performance Improvement Solutions segment primarily encompasses our simulation solutions, technical engineering services for ASME programs, power plant thermal performance optimization, all primarily focused on the nuclear power industry and adjacencies. We also provide interactive computer-based tutorials/simulation solutions focused on the process industries, including but not limited to refining, petrochemical and LNG sectors. 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, now positioned for go-to-market as GSE Programs and Performance; GSE DP Engineering, now positioned for go-to-market as GSE Design and Analysis, businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements, These lines of business 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 39% of revenue for the nine months ended September 30, 2022)

Workforce Solutions, comprised to GSE Technical Staffing and Training Services, provides highly specialized and skilled, predominantly white collar “above the shoulders” labor on a contingency basis to the nuclear power industry and other heavy industry sectors, including but not limited to, LNG, petrochemical, refining, and specialty manufacturing sectors. 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. 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.

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Business Strategy

Serve existing customers and adjacencies with compelling solutions, with a focus on decarbonization:

Our objective has been to create a leading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies. We are now one of the few, publicly traded engineering and technology companies serving the zero-carbon energy sector of nuclear power and adjacent nuclear markets in Department of Energy, US Navy and related sectors. As a result of this effort and established leadership position in key sectors, we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2022, we are keenly focused on organic growth in the sectors we serve by: cross selling and upselling in our existing markets as we focus on delivering significant value to our; create new and compelling solutions in-house as a result of advancing our technology offerings in sponsorship with industry early adopters focused on critical business need; develop  new services as a result of combining our expertise; expand into compelling adjacent markets such as clean energy as they may arise with renewed sales focus. The focus on organic growth is a reflection of our need to grow in a self-funded manner to achieve cash flow break even route to recovering to our pre-pandemic revenue levels.

Cross sell and upsell into existing markets:

For the past several years, we have devoted considerable time and effort to diversify the Company’s solutions capabilities for the nuclear power sector via a rollup of essential services providers to the industry. To ensure efficient and streamlined operations for the business, we have brought all of the engineering services together into one organization under one leader, and the Workforce Solutions teams together as one team under one leader. The business units operate uniformly within their respective structure. As such, the opportunity to cross-sell the capabilities across the entire customer base is greatly enhanced and a clear focus of our sales efforts. This further differentiates us as a unique provider to industry vs. providers of specific niche services. Our goals are for the unified go-to-market efforts, such as cross-selling capability, could and should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. Just as the broader economy was impacted by the onset of the pandemic, so as to our end markets been affected.  Our perspective is that the industries we serve are quick to respond to a crisis and disruption, but slow to emerge and recover to pre-crisis operations. This is understandable for our primary market of nuclear power, and this cycle has repeated itself for the past with other market and industry disruptions such as the 2008 global economic crisis, the Fukushima disaster in 2011 and the global pandemic and ongoing economic disruption that has resulted. As with past disasters, our end markets usually catch up to delays in work years after the onset of the disruption and our Company is positioned to take advantage of the recovery if and when it occurs. As a result of a rejuvenated cross-sell and upsell effort, we are equipped to take this new approach to the market. In particular, with the US government rejoining the Paris Climate Agreement and driving to decarbonize the energy grid by 2035, and create a carbon neutral economy by 2050, decarbonization of the energy sector will require significant investment for decades to come. As a key provider of essential services to the power sector, with a focus on decarbonization, we are poised to benefit from and exploit this investment as it rolls out to the vendor ecosystem serving these key sectors. We have also spent significant effort to put in place Master Services Agreements (“MSA’s”) with key utility operators. Having this commercial infrastructure in place is a significant step forward to facilitate ease of consumption of our solutions once a decision to do so is made by these clients/prospects.

Organic growth through new and compelling technology:

While managing through the pandemic, in parallel, our leadership was investigating compelling opportunities by which we could utilize our capabilities to create significant value for the industry and advance the efforts of decarbonizing the power sector. As a result, we have identified a robust pipeline of new and compelling technology solutions to develop and take to market. Net new solutions, such as Data Validation and Reconciliation (“DVR”) and Thermal System Monitoring (“TSM”), have created new revenue streams with the potential of on-going annuities through license revenue, software maintenance and services revenue. More on DVR and TSM below. GSE has announced a handful of new wins for these new solutions, which were created through our unique combination of our industry/engineering know-how and software development capabilities. As we have demonstrated in the past few years, small wins over time accrue into meaningful revenue on an on-going basis. This is a key element of our organic growth thesis: focusing on creating and bringing to market compelling technology solutions.

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Focus on compelling adjacencies in clean energy, defense, and national labs:

Research and development (R&D). We invest in R&D to deliver unique solutions that add value to our end-user markets. Our software tools leverage the high-end expertise of our experienced staff in helping plants operate better and more efficiently. Our software technology together with our deep staff expertise supports multiple industries including the nuclear industry, as a part of the larger decarbonization drive. Our software technology includes decision-support tools for engineering simulation supporting design and plant commissioning, operational performance tools, and training platform. 

One area of significant recent enhancement is in improving the thermal performance of power plants. We have introduced the next generation platform in TSM, providing the technology platform to centralize and continuously monitor plant thermal performance. The solution benefits our customers by automating standardized reporting in modern dashboards available to engineers and decision makers across the fleet, leveraging automation to facilitate troubleshooting plant performance issues, reducing time and error with direct access to source data, and applying industry guidelines for problem resolution. This platform also supports integration with DVR (implemented by True North) that enhances the quality of data for plant performance insights, analysis and decision making, providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.  

In the area of engineering simulations, we deliver nuclear core and Balance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry’s need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP^® and RELAP5-HD^® solutions. Our entire JADE^TM suite of simulation software, including industry leading JTOPMERET^® and JElectric^TM 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 OpenSim^TM together into a next generation unified environment that adds new capabilities as requested by clients and driven by market need.

Additionally, enhancements to training content and delivery continue through the EnVision On-Demand platform, allowing our customers to access training content from anywhere in synchronous and asynchronous modes, thus increasing their efficiency and reducing infrastructure costs. We intend to continue to make pragmatic and measured investments in R&D that first and foremost are driven by the market and complement our growth strategy. Such investments in R&D may result in on-going enhancement of existing solutions as well as the creation of new solutions to serve our target markets, ensuring that we add greater value that is easier to use, at lower total cost of ownership than any alternative available to customers. We have pioneered a number of industry standards and intend to continue to be one of the most innovative companies in our industry. During the three months ended September 30, 2022 and 2021, we had R&D expenditures totaling $186 thousand and $149 thousand, respectively. During the nine months ended September 30, 2022 and 2021, we had R&D expenditures totaling  $510 thousand and $460 thousand, respectively.

Strengthen and develop our talent while delivering high-quality solutions. 

Over the past several years, we have assembled a unique and highly experienced group of talent through organic growth and strategic acquisition. Our engineering team is comprised of design, simulation, regulatory compliance, and performance optimization professionals who are unique to the industry and capable of addressing the entire power generation life cycle. 

Our experienced employees and management team are our most valuable resources. The continued integration of our team in parallel with attracting, training, and retaining top talent is critical to our success. To achieve our goals, we intend to remain focused on providing our employees with opportunities to increase client contact within their areas of expertise and to expand and deepen our service offerings. As we refine our product and service areas to best align with the critical areas listed above, we will also integrate and apply our composite employee talent to the fullest extent possible combining employee personal and professional growth opportunities with fulfillment of cutting-edge industry needs. Performance-based incentives including opportunities for stock ownership, bonuses and competitive benefits as benchmarked to our industry and locations will also be utilized to ensure continuity of our approach.  

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The Company is not immune to the intense pressure and business risks associated with attracting and retaining talented professionals in this current environment. We have developed a strong reputation for quality services based upon our industry-recognized depth of experience, ability to attract and retain quality professionals, and exceptional expertise across multiple service sectors. As we continue to integrate and leverage our individual company components assembled over the past several years, our capabilities and reputation will further strengthen. Attracting and retaining excellent professionals is a key effort for the company.

Employees

As of September 30, 2022, we had approximately 273 employees, which includes approximately 198 employees in our Performance segment and approximately 75 employees in our Workforce Solutions segment.

Backlog

As of September 30, 2022, we had approximately $32.3 million of total gross revenue backlog, which included $26.7 million of Performance backlog and $5.6 million of Workforce Solutions backlog. As of December 31, 2021, our backlog was $41.3 million with $31.8 million attributed to our Performance segment and $9.5 million to Workforce Solutions. 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 are unique to the industry and capable of addressing the entire power generation life cycle. As we move forward in alignment with client and industry goals targeting clean energy production and overall decarbonization we are positioned to be at the forefront in three critical areas:  

• optimization of existing generation assets;

• design support and deployment of advanced reactor designs; and

• integration with renewable power sources.

Optimizing Existing Generation Assets

As the existing fleet of nuclear reactors age and competitive pressures increase, we find ever increasing significance in being able to provide value to their continued operation.  Maximizing power production through a variety of methods such as digital verification and reconciliation, a statistical based analysis used to lower uncertainty, and thus increase recognized power output is instrumental in helping these facilities face current competitive pressures.  Other approaches involving safe reduction of testing and inspection requirements, or performance periodicities are also at the forefront of our cost saving techniques with defined services and products providing a clear and positive return on investment. In all cases, these efforts are aligned with keeping this important source of carbon free base power economically and technically viable. 

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Advanced Reactor Designs & Deployment

Designers of first-of-a-kind plants or existing plants need a highly accurate dynamic simulation platform to model a wide variety of design assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in deployment of new technology, often involving the integration of disparate technologies for the first time, a high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale.  Going forward, we also envision many of the optimization techniques and strategies currently emphasized for the existing reactor fleet incorporated with new-build prototypes as they begin to add value and assume a larger component of our clean, carbon free, power requirements. We are grateful to see the positive headlines in the news about nuclear power being recognized as a key means by which to achieve energy security and zero carbon goals.  Yet, the Company has yet to see a recovery to pre pandemic levels of spending from the sector.  We are focused on organic growth from where pend is flowing today, while positioning ourselves to benefit from these very significant, multi-decade projects that are being announced in the US and overseas. 

Renewable Integration 

A significant component of overall decarbonization regarding power generation will ultimately fall to renewable sources such as wind, solar, and “green” hydrogen generation. These technologies are individually well on their way towards assuming a significant share of the overall generation make-up and are expected to significantly increase. One of the particular needs is the ability to safely and efficiently integrate these renewable sources with our existing and planned nuclear generation. We are on the cutting edge, working closely with academia and industry support organizations to design, model, and evaluate creative approaches to support this integration. Base load production, renewable availability, and other pertinent factors are at the core of the solutions we are exploring. If and as spending unfold to advanced engineering and simulation solutions for these efforts, GSE should be well positioned to take advantage of this spend. 

Engineering Solutions for Decarbonization

With overall decarbonization as 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 low carbon energy as the world progresses on the current energy transition efforts. An overview highlighting many areas of our current and planned involvement as well as the associated benefits is summarized below: 

With nuclear power being such a high percentage of carbon free power generation, the continued safe and efficient operation of these plants is critical to meeting decarbonization goals. We help the industry achieve these goals through better training and provide engineering services to optimize performance while maintaining regulatory compliance. Our focus is on products and services to improve the efficiency and lower operating costs for existing power generation assets as well as help the next generation of carbon free power plants achieve design approval and plant startup as quickly as possible. 

Training plant operators and engineers is critical to safe operations and continued viability of the industry. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, we provide simulation solutions that achieve unparalleled fidelity and accuracy. We have also adapted these solutions to provide highly accurate training across a variety of delivery platforms. These include universal or generic simulators which are excellent in teaching fundamental concepts, systems, and plant behaviors. They are also used by academia for research on improved plant operations, human factors design and the development of automated procedures and decision support systems for the next generation of reactors. Our part task simulators and virtual control panels are cost effective solutions enabling customers broader freedom in where they deliver simulation training and opening the door for plant engineers and maintenance staff to access high fidelity training without interrupting the operator training program. Our full scope simulators use the most sophisticated modeling technology. For these reasons, we have delivered more nuclear power plant simulators than any other company in the world.   

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We deliver training products through the cloud. This delivery method reduces our customers infrastructure and ownership costs and provides anytime, anywhere access to rich learning content. Innovative Critical Thinking Exercises enable autonomous simulation training to take place, reducing the burden on instructors and increasing training touch time for students and employees. All of which enable the training organization to be more flexible and efficient. 

Our simulation solutions not only address industry training needs, but are used for simulation assisted engineering, the process of using simulation to virtually test and commission plant designs prior to construction.  Because new builds and upgrades to existing plants result in deployment of new technology, our high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. This technique reduces design costs, accelerates design approvals, de-risks projects, and provides clients with a tool to sell their new plant designs to both customers and regulators.  In essence, enabling our customers to get to market faster. 

Beyond training, our technology is used to improve the efficiency of existing power generation assets. Our TSM System provide live insights into plant operations, by monitoring performance of key plant equipment, analyzes degradation and advises actions to be taken. When combined with DVR techniques, we can help reduce operating and maintenance cost. DVR enhances the quality of data for analysis and decision making, providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.    

Our EP-Plus software suite provides one common platform for all engineering programs, helping client engineers keep track of engineering program inspection and monitoring requirements aimed at safe plant operations. This reduces the engineering workload of our customers, saving costs and enabling staff to focus on the most critical activities. 

All of these technologies leverage the vast experience and industry expertise of our engineering team. Our engineering team helps our clients throughout the entire plant lifecycle. We are the Engineer of Choice (“EOC”) in areas such as: 

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

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

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

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

Workforce Solutions

As our customers’ experienced employees retire or pursue other opportunities, access to industry experts is essential to ensure ongoing quality operations. Our Workforce Solutions division provides flexible staffing services, knowledge transfer support, end to end workforce management programs, procedures services, and specialized training programs and services.  Staffing and training needs change over time and sometimes our clients need options.  Options we can offer include fixed-price, discrete projects, new or updated methods, customized search, or specialized courses in contrast to traditional straight staff augmentation. Further, we understand the importance and necessity of fully understanding the unique needs of each customer, and we have the ability to provide the needed solutions.

The industries we serve need talent, including operating personnel, procedure writers, engineers, operators, technical professionals, and instructors, just to name a few.  Our customers need talent who can step in and use, as well as, update the client’s operating methods, procedures, training material and more. Finding technical professionals, who know the needed subject matters, can perform the work or teach it to others and can adapt to the client’s culture is critical. We provide qualified professionals, instructors and turnkey projects/courses that work within the client’s system and complement the methods they already have in place.

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We provide expert support through workforce solutions, consulting, or turnkey projects for procedure writing, technical engineers, project managers, training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability. Examples of our training program courses include senior reactor operator (“SRO”) certification, generic fundamentals training, and simulation supervisor training. Our Workforce Solutions segment includes traditional staffing services, such as temporary and direct hire, as well as customized approaches in which we work with our customers to evaluate their specific needs and put together a strategic plan specifically to meet their unique needs. Workforce solutions is not only a complement to our other service offerings; it often leads the way as the preferred method for many of our clients to execute entire projects and/or supplement their own staff during project peak periods or with specialized skill sets that are often hard to find.  Our staffing experts give our customers the ability to ramp up quickly, eliminate risks, and provide more flexible options as situations often demand.

In addition to the core training and staffing business lines in the nuclear sector, we continue to see organic growth opportunity with our Workforce Solutions segment by expanding our service offerings to meet the evolving needs of the energy and engineering industries as well as other opportunities that support decarbonization and major infrastructure projects. Due to the experience within our team, we are well positioned to expand our Workforce Solutions segment offerings through our existing relationships and industry knowledge. This growth is occurring both with existing and new customers. We place great emphasis on cross-selling the services offered by our Workforce Solutions segment with our Performance Improvement Solutions segment. The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and our success is showing with contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies dedicated to clean energy solutions. We continue to better position ourselves to support these opportunities with strategic hires and staff alignment. As the recent increases in employment transition have demonstrated, companies must also be able to adapt quickly to evolving staffing needs. This has certainly been demonstrated with companies needing to adjust compensation packages, adjusting and allowing more employees to work from home, and expanding options for acquiring the needed talent.  Employees are making changes in their professional lives for many reasons, and our workforce solutions offer our customers added support and more flexibility to support ever changing needs. In fact, Workforce Solutions is uniquely positioned for growth in these types of employment environments. Our flexible solutions, and specialized industry experience position us both for current and future staffing needs.

We recognize the necessity to listen to the needs of our customers and provide the right solution. Whether the answer is one of our traditional service offerings or putting together a customized approach, we have the capabilities to help our customers get the job done.  We  bring together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high-fidelity simulation and training solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate level training solutions of EnVision, backed by the extensive Workforce Solutions services of Absolute and Hyperspring, and now strengthened by our ability to successfully adapt, diversify, and offer a solutions based approach with our Workforce Solutions.

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, 2022					September 30, 2021					September 30, 2022					September 30, 2021
	$			%		$			%		$			%		$			%
Revenue	$	11,898		100.0	%	$	14,686		100.0	%	$	36,918		100.0	%	$	41,312		100.0	%
Cost of revenue		8,642		72.6	%		11,503		78.3	%		28,063		76.0	%		32,512		78.7	%
Gross profit		3,256		27.4	%		3,183		21.7	%		8,855		24.0	%		8,800		21.3	%
Operating expenses:
Selling, general and administrative		4,336		36.4	%		3,265		22.2	%		13,253		35.9	%		10,521		25.5	%
Research and development		186		1.6	%		149		1.0	%		510		1.4	%		460		1.1	%
Restructuring (benefit) charges		-		0.0	%		(10	)	(0.1	)%		-		0.0	%		798		1.9	%
Goodwill and intangible asset impairment charge		7,505		63.1	%		3		0.0	%		7,505		20.3	%		3		0.0	%
Depreciation		69		0.6	%		69		0.5	%		213		0.6	%		216		0.5	%
Amortization of intangible assets		209		1.8	%		286		1.9	%		700		1.9	%		929		2.2	%
Total operating expenses		12,305		103.4	%		3,762		25.6	%		22,181		60.1	%		12,927		31.3	%
Operating loss		(9,049	)	(76.1	)%		(579	)	(3.9	)%		(13,326	)	(36.2	)%		(4,127	)	(10.1	)%
Interest expense, net		(422	)	(3.5	)%		(32	)	(0.2	)%		(928	)	(2.5	)%		(135	)	(0.3	)%
Change in fair value of derivative instruments, net		263		2.2	%		-		0.0	%		377		1.0	%		-		0.0	%
Other (loss) income, net		(2	)	0.0	%		12,215		83.2	%		(58	)	(0.2	)%		16,853		40.8	%
(Loss) income before income taxes		(9,210	)	(77.4	)%		11,604		79.0	%		(13,935	)	(37.7	)%		12,591		30.5	%
(Benefit from) provision for income taxes		(218	)	(1.8	)%		166		1.1	%		(108	)	0.3	%		127		0.3	%
Net (loss) income	$	(8,992	)	(75.6	)%	$	11,438		77.9	%	$	(13,827	)	(37.5	)%	$	12,464		30.2	%

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Revenue

Consolidated revenue for the three months ended September 30, 2022 totaled $11.9 million, which was 19% less than the $14.7 million of revenue for the three months ended September 30, 2021. Revenue for the nine months ended September 30, 2022 totaled $36.9 million, which was 11% less than the $41.3 million of revenue for the nine months ended September 30, 2021.

	Three Months Ended									Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2021		Change					September 30, 2022		September 30, 2021		Change
Revenue:					$			%						$			%
Performance	$	8,052	$	7,375		677		9	%	$	22,402	$	21,318		1,084		5	%
Workforce Solutions		3,846		7,311		(3,465	)	(47	)%		14,516		19,994		(5,478	)	(27	)%
Total revenue	$	11,898	$	14,686		(2,788	)	(19	)%	$	36,918	$	41,312		(4,394	)	(11	)%

Performance Improvement Solutions revenue for the three months ended September 30, 2022 totaled $8.1 million, which was a 9% increase from the $7.4 million of revenue for the three months ended September 30, 2021. The increase in revenue was primarily attributable to the projects awarded with higher margins and improved processes. Total Performance Improvement Solutions orders of $7.2 million and $11.2 million were recorded for the three months ended September 30, 2022 and 2021, respectively.

Performance Improvement Solutions revenue for the nine months ended September 30, 2022 totaled $22.4 million, which was a 5% increase from the $21.3 million of revenue for the nine months ended September 30, 2021. The increase of revenue was primarily attributable to several significant contracts awarded with high margin performance obligations completed efficiently which began later in 2022. Total Performance Improvement Solutions orders of $17.4 million and $22.6 million were recorded for the nine months ended September 30, 2022 and 2021, respectively.

For the three months ended September 30, 2022, Workforce Solutions revenue decreased by 47% to $3.8 million compared to revenue of $7.3 million for the three months ended September 30, 2021. The decrease in revenue was due to a reduction in staffing needs from our major customers. Total new orders of $3.0 million and $3.5 million were recorded for the three months ended September 30, 2022 and 2021, respectively.

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For the nine months ended September 30, 2022, Workforce Solutions revenue decreased by 27% to $14.5 million compared to revenue of $20.0 million for the nine months ended September 30, 2021. The decrease in revenue was primarily due to the wind down of large projects resulting in a reduction in demand for staffing from our major customers. Total new orders of $10.8 million and $15.9 million were recorded for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, our backlog was $32.3 million, of which, $26.7 million was attributed to the Performance segment and $5.6 million was attributed to the Workforce Solutions segment. As of December 31, 2021, our backlog was $41.3 million with $31.8 million attributed to our Performance segment and $9.5 million to Workforce Solutions.

Gross Profit

Gross profit was $3.3  million and 27.4% of revenue and $3.2 million and 21.7% of revenue for the three months ended September 30, 2022 and 2021, respectively. Gross profit was $8.9 million and 24.0% of revenue and $8.8 million and 21.3% of revenue for the nine months ended September 30, 2022 and 2021, respectively.

(in thousands)	Three Months Ended								Nine Months Ended
	September 30, 2022				September 30, 2021				September 30, 2022				September 30, 2021
	$		%		$		%		$		%		$		%
Gross profit:
Performance Improvement Solutions	$	2,654	33.0	%	$	2,252	30.5	%	$	7,037	31.4	%	$	6,204	29.1	%
Workforce Solutions		602	15.7	%		931	12.7	%		1,818	12.5	%		2,596	13.0	%
Total gross profit	$	3,256	27.4	%	$	3,183	21.7	%	$	8,855	24.0	%	$	8,800	21.3	%

The Performance Improvement Solutions segment’s gross profit increased by $0.4 million during the three months ended September 30, 2022 over three months ended September 30, 2021. The Performance Improvement Solutions segment’s gross profit increased by $0.8 million during nine months ended September 30, 2022 over nine months ended September 30, 2021. The increase is primarily related to the projects with higher margins, shorter lead times and improved processes, in addition to increased software sales.

The Workforce Solutions segment’s gross profit decreased by $0.3 million during the three months ended September 30, 2022 over  the three months ended September 30, 2021. The Workforce Solutions segment’s gross profit decreased by $0.8 million during  the nine months ended September 30, 2022 over the nine months ended September 30, 2021. The decrease in the three months and nine months ended September 30, 2022 was primarily due to the reduction in the demand from existing customers for additional workforce professionals.

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

Selling, general and administrative (SG&A) expenses totaled $4.3 million and $3.3 million for the three months ended September 30, 2022 and 2021, respectively. Selling, general and administrative (SG&A) expenses totaled $13.3 million and $10.5 million for the nine months ended September 30, 2022 and 2021, respectively. Fluctuations in the components of SG&A spending were as follows.

	Three months ended				Nine months ended
(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Corporate charges	$	3,201	$	2,364	$	10,058	$	7,754
Business development		951		714		2,511		2,230
Facility operation & maintenance (O&M)		182		186		575		654
Bad debt expense		-		-		97		(133	)
Other		2		1		12		16
Total	$	4,336	$	3,265	$	13,253	$	10,521

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Corporate charges

During the three months ended September 30, 2022, corporate charges increased by $0.8 million over the same period of the prior year. During the nine months ended September 30, 2022 corporate charges increased by $2.3 million over the same period of the prior year. The increase was primarily due to a $0.9 million increase in stock compensation expense, a $0.6 million increase in indirect labor & burden cost due to increased headcount, a $0.3 million increase related to business insurance, and a $0.5 million increase in legal fees and other business expenses during the nine months ended September 30, 2022.

Business development expenses

Business development expense increased $237 thousand during the three months ended September 30, 2022 over the same period of the prior year. Business development expense increased $281 thousand during the nine months ended September 30, 2022 over the same period of the prior fiscal year. The increase was primarily due to increased recruiting fees, commission expense, and Indirect Labor & Burden due to increased headcount during the nine months ended September 30, 2022.

Facility operation & maintenance (“O&M”)

Facility O&M expenses decreased $4 thousand for three months ended September 30, 2022, compared to the same period in 2021. Facility O&M expenses decreased $79 thousand for nine months ended September 30, 2022, compared to the same period in 2021. The decrease in facility O&M during the nine months ended September 30, 2022 was mainly due to an increased allocation of facility cost from O&M to COGS.

Bad debt (recovery) expense

We recorded no bad debt expense (recovery) during the three months ended September 30, 2022 and 2021. We recorded $97 thousand and $(133) thousand of bad debt expense (recovery) during the nine months ended September 30, 2022 and 2021, respectively.

Research and development

Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled $186 thousand and $149 thousand for the three months ended September 30, 2022 and 2021, respectively. Research and development costs totaled $510 thousand and $460 thousand for the nine months ended September 30, 2022 and 2021, respectively. The increase was mainly due to higher headcount.

Restructuring

We recorded no restructuring charges for the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, we recorded restructuring (benefit) charges of $(10) thousand and $798 thousand, respectively. The decrease was mainly due to final charges related to the liquidation of our Sweden operations during the prior period, pursuant to our foreign restructuring plan.

Goodwill and Intangible asset impairment charge

We recognized a $7.5 million goodwill and intangible asset impairment charge during the three and nine months ended September 30, 2022. We recognized a $3 thousand ROU asset impairment during the three and nine months ended September 30, 2021. In the interim period ended September 30, 2022, we determined that the deterioration in sales, decline in revenues, delayed pipeline opportunities, and overall downward performance results and the forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. As a result of the ASC 350 and 360 analysis, there was determined to be an impairment of both the goodwill and intangible assets, totaling $7.5 million.

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Depreciation

We recorded depreciation expense of $69 thousand for both the three months ended September 30, 2022 and 2021. Depreciation expense was $213 thousand and $216 thousand for the nine months ended September 30, 2022 and 2021, respectively. The reduction of $3 thousand for the nine months ended September 30, 2022 over the same period in 2021 was due primarily due to assets becoming fully depreciated in 2022.

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled $209 thousand and $286 thousand for the three months ended September 30, 2022 and 2021, respectively, and $700 thousand and $929 thousand for the nine months ended September 30, 2022 and 2021, respectively. The decrease in amortization expense was primarily due to the amortization of Customer Contracts and Relationships, which are amortized at a declining rate over the 15-year useful life.

Interest expense, net

Interest expense totaled $422 thousand and $32 thousand for the three months ended September 30, 2022 and 2021, respectively. Interest expense totaled $928 thousand and $135 thousand for the nine months ended September 30, 2022 and 2021, respectively. The increase for the three and nine month periods was due to an increase in total indebtedness compared to prior period.

Other (loss) income, net

For the three months ended September 30, 2022 and 2021, we recognized other (loss) income, net of $(2) thousand and $12.2 million, respectively. For the nine months ended September 30, 2022 and 2021, we recognized other (loss) income, net of $(58) thousand and $16.9 million, respectively. The decrease was primarily due to $10.1 million of PPP loan forgiveness granted during the three months ended September 30, 2021. Additionally, we recorded $2.1 million and $7.2 million Employee Retention Credit during the three and nine months ended September 30, 2021 offset by a Value-Added Tax (VAT) write-off of $0.5 million during the second quarter of 2021. We paid VAT taxes for subcontractor equipment purchase and had pursued the collection of this VAT refund for multiple years. In May of 2021, we were informed by our tax advisor that this VAT refund was no longer collectable.

Income tax (benefit) expense

Income tax expense for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit of $(218) thousand for the three months ended September 30, 2022 was comprised mainly of current foreign tax benefit, deferred federal and state tax benefit related to the portion of goodwill which cannot be offset by deferred tax assets, and state tax expense. The total income tax expense of $166 thousand for the three months ended September 30, 2021 was comprised mainly of current state and foreign tax expense. Total income tax expense of $(108) thousand for the nine months ended September 30, 2022 was comprised mainly of current foreign tax benefit, deferred federal and state tax benefit related to the portion of goodwill which cannot be offset by deferred tax assets, and state tax expense. Total tax expense of $127 thousand for the nine months ended September 30, 2021 was comprised mainly of current state and foreign tax expense.

Our effective income tax rate was 2.37% and (0.78)% for the three and nine months ended September 30, 2022, respectively. For the  three and nine months ended September 30, 2022, the difference between our income tax expense and (benefit), at an effective tax rate of 2.37% and (0.78)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes. For the three and nine months ended September 30, 2021, the difference between our income tax expense at an effective 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.

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Critical Accounting Policies and Estimates

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

Liquidity and Capital Resources

As of September 30, 2022, our cash, cash equivalents and restricted cash totaled $5.2 million, compared to $3.6 million as of December 31, 2021.

As of September 30, 2022, we have current restricted cash and long-term restricted cash of $0.7 million and $0.9 million, respectively. We have restricted cash of $1.1 million to secure four letters of credit with various customers and $0.5 million to secure our corporate credit card program.

For the nine months ended September 30, 2022 and 2021, net cash provided by operating activities were $0.8 million and net cash used in operating activities were $0.3 million, respectively. The increase in cash flows provided by operating activities was primarily driven by ERC refunds and increased collections in the nine months ended September 30, 2022 and slower billing in the nine months ended September 30, 2021.

Net cash used in investing activities totaled $0.4 million and 0.6 million for the nine months ended September 30, 2022 and 2021, respectively.

For the nine months ended September 30, 2022 and 2021, net cash provided by financing activities was $1.5 million and net cash used in financing activities was $1.7 million, respectively. The increase in cash provided by financing activities of $3.3 million was primarily driven by $4.8 million of proceeds received from issuance of Convertible Note, offset by a $1.8 million repayment of the line of credit and a $0.3 million repayment of Convertible Note during the nine months ended September 30, 2022.

Paycheck Protection Program Loan

We applied for and, on April 23, 2020, received the PPP Loan under the CARES Act, as administered by the SBA (further described in Note 4 to Consolidated Financial Statements). Citizens reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with Citizens’ determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA.

Credit Facilities

On February 23, 2022, the Company issued a Convertible Note (further described in Note 10 to Consolidated Financial Statements). The proceeds received from the Convertible Note were used to repay in full, all outstanding indebtedness of $1.8 million owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. As of September 30, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

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Non-GAAP Financial Measures

Adjusted EBITDA

References to “EBITDA” mean net (loss) income, before considering interest expense, provision for income taxes, depreciation and amortization. References to Adjusted EBITDA excludes goodwill and intangible asset impairment charges, employee retention credit, PPP loan and accumulated interest forgiveness, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments and VAT write-off. EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP. Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other U.S. GAAP measures, are useful to investors to evaluate the Company's results because it excludes certain items that are not directly related to the Company's core operating performance that may, or could, have a disproportionate positive or negative impact on our results for any particular period. Investors should recognize that EBITDA and Adjusted EBITDA might not be comparable to similarly-titled measures of other companies. This measure should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with U.S. GAAP. A reconciliation of non-U.S. 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, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net (loss) income	$	(8,992	)	$	11,438		$	(13,827	)	$	12,464
Interest expense, net		422			32			928			135
Provision for income taxes		(218	)		166			(108	)		127
Depreciation and amortization		365			432			1,167			1,426
EBITDA		(8,423	)		12,068			(11,840	)		14,152
Goodwill and intangible asset impairment charge		7,505			3			7,505			3
Employee retention credit		-			(2,087	)		-			(7,162	)
PPP loan and accumulated interest forgiveness		-			(10,127	)		-			(10,127	)
Restructuring charges		-			(10	)		-			798
Stock-based compensation expense		491			283			1,592			784
Change in fair value of derivative instruments, net		(263	)		-			(377	)		-
VAT write-off		-			-			-			450
Adjusted EBITDA	$	(690	)	$	130		$	(3,120	)	$	(1,102	)

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Adjusted Net Loss and Adjusted Loss per Share Reconciliation

References to Adjusted Net Loss excludes the goodwill and intangible asset impairment charges, employee retention credit, PPP loan and accumulated interest forgiveness, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, VAT write off and amortization of intangible assets. Adjusted Net Loss and Adjusted Loss per Share (adjusted EPS) are not measures of financial performance under U.S. GAAP. Management believes Adjusted Net Loss and Adjusted Loss per Share, in addition to other U.S. GAAP measures, are useful to investors to evaluate the Company's results because they exclude certain items that are not directly related to the Company's core operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results for any particular period, such as stock-based compensation expense. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with U.S. GAAP. A reconciliation of non-U.S. GAAP Adjusted Net Loss and Adjusted Loss per common Share to U.S. GAAP net (loss) income, the most directly comparable U.S. GAAP financial measure, is as follows:

(in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net (loss) income	$	(8,992	)	$	11,438		$	(13,827	)	$	12,464
Goodwill and intangible asset impairment charge		7,505			3			7,505			3
Employee retention credit		-			(2,087	)		-			(7,162	)
PPP loan and accumulated interest forgiveness		-			(10,127	)		-			(10,127	)
Restructuring charges		-			(10	)		-			798
Stock-based compensation expense		491			283			1,592			784
Change in fair value of derivative instruments, net		(263	)		-			(377	)		-
VAT write-off		-			-			-			450
Amortization of intangible assets related to acquisitions		209			286			700			929
Adjusted net loss	$	(1,050	)	$	(214	)	$	(4,407	)	$	(1,861	)
Adjusted net loss per common share – diluted	$	(0.05	)	$	(0.01	)	$	(0.21	)	$	(0.09	)
Weighted average shares outstanding used to compute adjusted net loss per share - diluted(1)		21,288,883			20,863,479			21,101,942			20,714,068

⁽¹⁾ During the three and nine months ended September 30, 2022, we reported a U.S. GAAP net loss and an adjusted net loss. Accordingly, there was no dilutive shares from RSUs included in the adjusted net loss per share calculation that were considered anti-dilutive when calculating the net loss per share.

⁽¹⁾ During the three and nine months ended September 30, 2021, we reported a U.S. GAAP net loss 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.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report and our annual report, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective; we are currently in remediation of our internal controls to address material weaknesses identified in our Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022, in our form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 15, 2022, and in our Form 10-Q for the quarter ended June 30, 2022, filed with the SEC on August 15, 2022.

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

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

Changes in Internal Control over Financial Reporting

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

Limitation of Effectiveness of Controls

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

39

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The following additional risk factors should be read in conjunction with the risk factors set forth under “Item 1A. Risk Factors” in our 2021 Form 10-K. Except as described herein, there have been no material changes with respect to the risk factors disclosed in our 2021 Form 10-K.

If we are unable to maintain compliance with Nasdaq’s listing requirements, our common stock may be delisted from The Nasdaq Stock Market, which would allow our Lender to deliver a demand for payment, result in an event of default under that certain February 23, 2022 Senior Convertible Note, could have a material adverse effect on the Company’s financial condition and could make it more difficult for holders of the Company’s common stock to sell their shares.

The company’s common stock is listed on the Nasdaq Capital Market and we are therefore subject to its continued listing requirements, including requirements with respect to the market value of publicly-held shares, market value of listed shares, minimum bid price per share, and minimum stockholder’s equity, among others, and requirements relating to board and committee independence. If we fail to satisfy one or more of these continued listing requirements, our common stock may be delisted from the Nasdaq Capital Market. On November 4, 2022, the Company received a written notice (from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) stating that the Company failed to maintain a minimum closing bid price of $1.00 per share for the prior 30 consecutive trading day period, as set forth in Nasdaq Listing Rule 5550(a)(2).

Under that certain Senior Convertible Promissory Note issued by the Company to Lind Global Fund II LP (“Lind”) on February 23, 2024 (the Note”), if our common stock ceases to be listed on Nasdaq (or another stock exchange), Lind (or the holder of such note) may deliver a demand for payment to the Company and, if such a demand is delivered, the Company shall, within ten (10) Business Days following receipt of the demand for payment from the Holder, pay all of the outstanding principal amount or, at its election, Lind may elect to convert all or a portion of the outstanding principal amount and the conversion price shall be adjusted to the lower of the then-current conversion price and eighty percent (80%) of the average of the three (3) lowest daily variable average weighted prices during the twenty (20) trading days prior to delivery. Additionally, if we are unable to maintain our listing on Nasdaq, it will constitute an event of default under the Note, which would trigger certain obligation under the Note including, but not limited to, causing an amount equal one hundred twenty percent (120%) of the outstanding principal amount of the Note to immediately become due.

Delisting from Nasdaq also may adversely affect our ability to raise additional financing through the public or private sale of equity securities, may significantly affect the ability of investors to trade our securities and may negatively affect the value and liquidity of our common stock. Delisting also could have other negative results, including the potential loss of investor confidence or interest in strategic transactions or opportunities, as well as negatively impact our ability to recruit and retain personnel through equity incentive awards.

The notice provided that we have a period of 180 calendar days, or until May 3, 2023, to regain compliance with the minimum bid price requirement. During this period, our common stock will continue to trade on the Nasdaq Capital Market.

We intend to actively monitor the closing bid price of our common stock and will evaluate available options to regain compliance with the minimum bid price requirement. However, there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with any of the other Nasdaq continued listing requirements.

The Company’s board may determine to implement a reverse stock split to attempt to regain compliance with the minimum bid price requirement. However, there can be no assurance that the reverse stock split, if approved by the stockholders and implemented, will increase the market price of our common stock in proportion to the reverse split ratio or result in a sustained increase in the market price of our common stock. In addition, it is possible that the reduced number of issued shares of common stock resulting from a reverse stock split could adversely affect the liquidity of our common stock.

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.

40

Item 6. Exhibits

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

41

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 14, 2022
	GSE SYSTEMS, INC.
	/S/ KYLE J. LOUDERMILK
	Kyle J. Loudermilk
	Chief Executive Officer
	(Principal Executive Officer)
	/S/ EMMETT A. PEPE
	Emmett A. Pepe
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

42

EX-31.1

Exhibit 31.1

Certification of the Chief Executive Officer

I, Kyle J. Loudermilk, certify that:

1. I have reviewed this quarterly report on Form 10-Q of GSE Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

Date:  November 14, 2022	/s/ Kyle J. Loudermilk
	Kyle J. Loudermilk
	Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of the Chief Financial Officer

I, Emmett A. Pepe, certify that:

1. I have reviewed this quarterly report on Form 10-Q of GSE Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

Date: November 14, 2022	/s/ Emmett A. Pepe
	Emmett A. Pepe
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of GSE Systems, Inc. (the “Company”) for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kyle J. Loudermilk, Chief Executive Officer of the Company, and I, Emmett A. Pepe, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 14, 2022	/s/ Kyle J. Loudermilk	/s/ Emmett A. Pepe
	Kyle J. Loudermilk	Emmett A. Pepe
	Chief Executive Officer	Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2022	Oct. 31, 2022
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2022
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q3
Document Transition Report	false
Entity File Number	001-14785
Entity Registrant Name	GSE Systems, Inc.
Entity Central Index Key	0000944480
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	52-1868008
Entity Address, Address Line One	6940 Columbia Gateway Dr.
Entity Address, Address Line Two	Suite 470
Entity Address, City or Town	Columbia
Entity Address, State or Province	MD
Entity Address, Postal Zip Code	21046
City Area Code	410
Local Phone Number	970-7800
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Title of 12(b) Security	Common Stock, $0.01 Par Value
Trading Symbol	GVP
Security Exchange Name	NASDAQ
Entity Common Stock, Shares Outstanding		21,720,661

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Current assets:
Cash and cash equivalents	$ 3,660	$ 3,550
Restricted cash, current	651	0
Contract receivables, net	10,152	11,257
Prepaid expenses and other current assets	1,969	5,262
Total current assets	16,432	20,069
Equipment, software and leasehold improvements, net	796	839
Software development costs, net	554	532
Goodwill	6,299	13,339
Intangible assets, net	1,854	3,020
Restricted cash - long term	932	0
Operating lease right-of-use assets, net	777	1,200
Other assets	52	52
Total assets	27,696	39,051
Current liabilities:
Line of credit	0	1,817
Current portion of long-term note	2,762	0
Accounts payable	713	1,179
Accrued expenses	2,119	1,358
Accrued compensation	1,655	1,452
Billings in excess of revenue earned	4,152	5,029
Accrued warranty	478	667
Income taxes payable	1,635	1,654
Derivative liabilities	653	0
Other current liabilities	988	1,883
Total current liabilities	15,155	15,039
Long-term note, less current portion	1,181	0
Operating lease liabilities noncurrent	209	790
Other noncurrent liabilities	171	179
Total liabilities	16,716	16,008
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock $0.01 par value; 2,000,000 shares authorized; no shares issued and outstanding	0	0
Common stock $0.01 par value; 60,000,000 shares authorized, 23,319,572 and 22,533,005 shares issued, 21,720,661 and 20,934,094 shares outstanding, respectively	233	225
Additional paid-in capital	82,095	80,505
Accumulated deficit	(68,411)	(54,584)
Accumulated other comprehensive income (loss)	62	(104)
Treasury stock at cost, 1,598,911 shares	(2,999)	(2,999)
Total stockholders' equity	10,980	23,043
Total liabilities and stockholders' equity	$ 27,696	$ 39,051

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2022	Dec. 31, 2021
Stockholders' equity:
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	2,000,000	2,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	60,000,000	60,000,000
Common stock, shares issued (in shares)	23,319,572	22,533,005
Common stock, shares outstanding (in shares)	21,720,661	20,934,094
Treasury stock at cost (in shares)	1,598,911	1,598,911

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Revenue	$ 11,898	$ 14,686	$ 36,918	$ 41,312
Cost of revenue	8,642	11,503	28,063	32,512
Gross profit	3,256	3,183	8,855	8,800
Operating expenses:
Selling, general and administrative	4,336	3,265	13,253	10,521
Research and development	186	149	510	460
Restructuring (benefit) charges	0	(10)	0	798
Goodwill and intangible asset impairment charge	7,505	3	7,505	3
Depreciation	69	69	213	216
Amortization of intangible assets	209	286	700	929
Total operating expenses	12,305	3,762	22,181	12,927
Operating loss	(9,049)	(579)	(13,326)	(4,127)
Interest expense, net	(422)	(32)	(928)	(135)
Change in fair value of derivative instruments, net	263	0	377	0
Other (loss) income, net	(2)	12,215	(58)	16,853
(Loss) income before income taxes	(9,210)	11,604	(13,935)	12,591
(Benefit from) provision for income taxes	(218)	166	(108)	127
Net (loss) income	$ (8,992)	$ 11,438	$ (13,827)	$ 12,464
Net (loss) income per common share - basic (in dollars per share)	$ (0.42)	$ 0.55	$ (0.66)	$ 0.6
Net (loss) income per common share - diluted (in dollars per share)	$ (0.42)	$ 0.55	$ (0.66)	$ 0.6
Weighted average shares outstanding used to compute net (loss) income per share - basic (in shares)	21,288,883	20,863,479	21,101,942	20,714,068
Weighted average shares outstanding used to compute net (loss) income per share - diluted (in shares)	21,288,883	20,863,479	21,101,942	20,714,068

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME [Abstract]
Net (loss) income	$ (8,992)	$ 11,438	$ (13,827)	$ 12,464
Cumulative translation adjustment	91	(23)	166	1,109
Comprehensive (loss) income	$ (8,901)	$ 11,415	$ (13,661)	$ 13,573

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Loss [Member]	Treasury Stock [Member]	Total
Balance at Dec. 31, 2020	$ 222	$ 79,687	$ (65,191)	$ (1,214)	$ (2,999)	$ 10,505
Balance (in shares) at Dec. 31, 2020	22,193				(1,599)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense	$ 0	784	0	0	$ 0	784
Common stock issued for RSUs vested	$ 3	(3)	0	0	0	0
Common stock issued for RSUs vested (in shares)	306
Shares withheld to pay taxes	$ 0	(188)	0	0	0	(188)
Foreign currency translation adjustment	0	0	0	1,109	0	1,109
Net (loss) income	0	0	12,464	0	0	12,464
Balance at Sep. 30, 2021	$ 225	80,280	(52,727)	(105)	$ (2,999)	24,674
Balance (in shares) at Sep. 30, 2021	22,499				(1,599)
Balance at Jun. 30, 2021	$ 225	80,024	(64,165)	(82)	$ (2,999)	13,003
Balance (in shares) at Jun. 30, 2021	22,461				(1,599)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense	$ 0	283	0	0	$ 0	283
Common stock issued for RSUs vested	$ 0	0	0	0	0	0
Common stock issued for RSUs vested (in shares)	38
Shares withheld to pay taxes	$ 0	(27)	0	0	0	(27)
Foreign currency translation adjustment	0	0	0	(23)	0	(23)
Net (loss) income	0	0	11,438	0	0	11,438
Balance at Sep. 30, 2021	$ 225	80,280	(52,727)	(105)	$ (2,999)	24,674
Balance (in shares) at Sep. 30, 2021	22,499				(1,599)
Balance at Dec. 31, 2021	$ 225	80,505	(54,584)	(104)	$ (2,999)	23,043
Balance (in shares) at Dec. 31, 2021	22,533				(1,599)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense	$ 0	1,504	0	0	$ 0	1,504
Common stock issued for RSUs vested	$ 5	(5)	0	0	0	0
Common stock issued for RSUs vested (in shares)	443
Shares withheld to pay taxes	$ 0	(226)	0	0	0	(226)
Foreign currency translation adjustment	0	0	0	166	0	166
Repayment of convertible note in shares	$ 3	317	0	0	0	320
Repayment of convertible note in shares (in shares)	344
Net (loss) income	$ 0	0	(13,827)	0	0	(13,827)
Balance at Sep. 30, 2022	$ 233	82,095	(68,411)	62	$ (2,999)	10,980
Balance (in shares) at Sep. 30, 2022	23,320				(1,599)
Balance at Jun. 30, 2022	$ 228	81,324	(59,419)	(29)	$ (2,999)	19,105
Balance (in shares) at Jun. 30, 2022	22,850				(1,599)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense	$ 0	479	0	0	$ 0	479
Common stock issued for RSUs vested	$ 2	(2)	0	0	0	0
Common stock issued for RSUs vested (in shares)	126
Shares withheld to pay taxes	$ 0	(23)	0	0	0	(23)
Foreign currency translation adjustment	0	0	0	91	0	91
Repayment of convertible note in shares	$ 3	317	0	0	0	320
Repayment of convertible note in shares (in shares)	344
Net (loss) income	$ 0	0	(8,992)	0	0	(8,992)
Balance at Sep. 30, 2022	$ 233	$ 82,095	$ (68,411)	$ 62	$ (2,999)	$ 10,980
Balance (in shares) at Sep. 30, 2022	23,320				(1,599)

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Cash flows from operating activities:
Net (loss) income	$ (8,992)	$ 11,438	$ (13,827)	$ 12,464
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Goodwill and intangible asset impairment charge	7,505	3	7,505	3
Depreciation	69	69	213	216
Amortization of intangible assets	209	286	700	929
Amortization of capitalized software development costs			255	281
Amortization of deferred financing costs			11	8
Amortization of debt discount			925	0
Gain on PPP loan forgiveness			0	(10,127)
Stock-based compensation expense			1,592	784
Bad debt expense (recovery)	0	0	97	(133)
Change in fair value of derivative instruments, net			(377)	0
Deferred income taxes			(80)	0
Changes in assets and liabilities:
Contract receivables, net			922	(1,888)
Prepaid expenses and other assets			3,638	(5,356)
Accounts payable, accrued compensation and accrued expenses			539	1,409
Billings in excess of revenue earned			(818)	(831)
Accrued warranty			(163)	(192)
Other liabilities			(382)	2,147
Net cash provided by (used in) operating activities			750	(286)
Cash flows from investing activities:
Capital expenditures			(171)	(392)
Capitalized software development costs			(276)	(226)
Net cash used in investing activities			(447)	(618)
Cash flows from financing activities:
Proceeds from line of credit			0	800
Repayment of line of credit			(1,817)	(1,739)
Repayment of insurance premium			(906)	(609)
Proceeds from issuance of long-term note and warrants, net of debt issuance cost and original issue discount			4,782	0
Repayment of convertible note			(319)	0
Tax paid for shares withheld			(226)	(188)
Net cash provided by (used in) financing activities			1,514	(1,736)
Effect of exchange rate changes on cash			(124)	(19)
Net increase (decrease) in cash, cash equivalents and restricted cash			1,693	(2,659)
Cash, cash equivalents and restricted cash at beginning of the period			3,550	6,702
Cash, cash equivalents and restricted cash at the end of the period	5,243	4,043	5,243	4,043
Cash and cash equivalents	3,660	4,043	3,660	4,043
Restricted cash, current	651	0	651	0
Restricted cash included in other long-term assets	932	0	932	0
Total cash, cash equivalents and restricted cash	5,243	4,043	5,243	4,043
Non-cash financing activities
Repayment of convertible note			320	0
Discount on issuance of convertible note	$ 750	$ 0	$ 750	$ 0

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2022

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

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

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

COVID-19

As of September 30, 2022, most of our employees continue to work remotely except when required to be at the client site for essential project work. As an essential services provider, we maintain a modest office footprint in certain locations to allow for employees to work from those offices as project needs may arise. Throughout the pandemic GSE has complied with local, state and federal directives and regulations. Our Performance Improvement Solutions segment's (see Item 2) contracts, which generally are considered essential services, are permitted to and mostly continue without pause. However, we have experienced certain delays in certain new business opportunities. At the onset of the pandemic, many of our Workforce Solutions segment (see Item 2) customers paused or delayed contracts as they shrank their own on-premise workforces to the minimum operating levels in order to mitigate the effects of the pandemic. As a result, our Workforce Solutions segment has experienced a decline in its billable employee base during this time. Since the beginning of 2022, the Workforce Solutions segment began to receive an increase in opportunities as clients became more comfortable with employees returning to on-site work. Notably, the increase in opportunities shifted greatly to direct hire openings, rather than the normal hourly billable base. We cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time and we have experienced delays in commencing new projects and resuming work on existing contracts. Therefore, our ability to deliver our services and recognize revenue has been delayed for some contracts. We experienced order reductions, cancellations, and other negative changes to orders due to the pandemic. We routinely monitor our operating expenses as a result of contract delays and order reductions; and we have made adjustments to maintain our gross profit at a sustainable level.

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2022

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

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

Accounting pronouncements not yet adopted

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

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

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Basic and Diluted (Loss) Income per Share

9 Months Ended

Sep. 30, 2022

Basic and Diluted (Loss) Income per Share [Abstract]

Basic and Diluted (Loss) Income per Share

Note 3 - Basic and Diluted (Loss) Income per Share

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

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

(in thousands, except for share data)	Three months ended					Nine months ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Numerator:
Net (loss) income attributed to common stockholders	$	(8,992	)	$	11,438	$	(13,827	)	$	12,464
Denominator:
Weighted-average shares outstanding for basic earnings per share		21,288,883			20,863,479		21,101,942			20,714,068
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		21,288,883			20,863,479		21,101,942			20,714,068
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive		3,283,400			14,229		2,383,171			77,871

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Coronavirus Aid, Relief and Economic Security Act

9 Months Ended

Sep. 30, 2022

Coronavirus Aid, Relief and Economic Security Act [Abstract]

Coronavirus Aid, Relief and Economic Security Act

Note 4 - Coronavirus Aid, Relief and Economic Security Act

Paycheck Protection Program Loan (PPP Loan)

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the “PPP Loan”) under the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”). The application for receipt of the PPP Loan required us to certify, in good faith, that the economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan was serviced by Citizens Bank, N.A. (the “Citizens”). The PPP Loan bore interest at a rate of 1% per annum and would mature on April 23, 2022, with the first payment deferred until September 2021. We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to Citizens substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. Citizens reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with Citizens’ determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA. We recognized other income of $10.1 million related to this forgiveness during the third quarter of fiscal 2021.

Employee Retention Credits (ERC)

Employee  retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and extended through September 30, 2021. In 2021, we applied for $5.0 million in refunds from the Internal Revenue Service with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We recorded other income of $7.2 million related to the employee retention tax credits earned for the year ended December 31, 2021. During the three months ended September 30, 2022, we didn't receive any employee retention tax credit refunds from the Internal Revenue Service. As of September 30, 2022, we received cumulative employee retention tax credit refunds totaling $3.6 million of the $5.0 million in refunds sought, with remaining outstanding refunds receivable of $1.4 million which was included in the other current assets balance at September 30, 2022. Subsequently, in October 2022, we received a refund of $0.4 million.

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Contract Receivables

9 Months Ended

Sep. 30, 2022

Contract Receivables [Abstract]

Contract Receivables

Note 5 - Contract Receivables

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

The components of contract receivables were as follows:

(in thousands)	September 30, 2022			December 31, 2021
Billed receivables	$	5,512		$	6,124
Unbilled receivables		5,648			6,143
Allowance for doubtful accounts		(1,008	)		(1,010	)
Total contract receivables, net	$	10,152		$	11,257

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

There was no bad debt expense recorded during the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022 and 2021, we recorded net bad debt expense (recovery) of $97 thousand and $(133) thousand, respectively.

During the month of October 2022, we invoiced $2.5 million of the unbilled receivables as of September 30, 2022.

Our foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each reporting period into our functional currency, using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is included in other income, net in the consolidated statements of operations. During the three months ended September 30, 2022 and 2021, we recognized a gain on remeasurement of these foreign exchange contracts of $4 thousand and $6 thousand, respectively. During the nine months ended September 30, 2022 and 2021, we recognized a (loss) gain on remeasurement of these foreign exchange contracts of $(51) thousand and $27 thousand, respectively.

As of September 30, 2022 and December 31, 2021, we had no customer concentrations in contract receivables that required disclosure.

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Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets [Abstract]

Goodwill and Intangible Assets

Note 6 - Goodwill and Intangible Assets

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets.

During the three months ended September 30, 2022, we determined that the deterioration in sales, decline in revenues, delayed pipeline opportunities, and overall downward performance results and the forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. As such, we performed an interim analysis to determine if an impairment existed at September 30, 2022 in accordance with ASC 350 & ASC 360.

ASC 350 Indefinite-Lived Asset Testing – Based on the triggering event indicated above we performed an interim analysis to determine if an impairment of the Workforce Solutions business unit existed at September 30, 2022. Our Goodwill impairment analysis, which includes the use of discounted cash flow models that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, and risk-adjusted discount rates determined the carrying value of Workforce Solutions exceeded the Fair Value by $7.0 million. As such, impairment of the related goodwill was recorded in the three months ended September 30, 2022.

ASC 360 Long-Lived Asset Testing – Based on the triggering event indicated above we also performed an interim analysis to determine if an impairment existed at September 30, 2022 by its individual asset groupings, which we determined to be at the subsidiary level. We used a discounted cash flow analysis to test for impairment and concluded that the carrying value of the definite-lived intangible assets of Absolute, a business unit of the Workforce Solutions segment, exceeded its carrying value by $0.5 million, and we recorded a loss on impairment for this amount as of September 30, 2022. No impairment was identified related to any other asset groupings.

Goodwill

(in thousands)

	Goodwill		Impairment			Net
Performance Improvement Solutions	$	8,278	$	(3,370	)	$	4,908
Workforce Solutions		8,431		(7,040	)		1,391
Net book value at September 30, 2022	$	16,709	$	(10,410	)	$	6,299

(in thousands)

	Goodwill		Impairment			Net
Performance Improvement Solutions	$	8,278	$	(3,370	)	$	4,908
Workforce Solutions		8,431		-			8,431
Net book value at December 31, 2021	$	16,709	$	(3,370	)	$	13,339

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

(in thousands)	As of September 30, 2022
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net
Amortized intangible assets:
Customer relationships	$	8,628	$	(6,940	)	$	(464	)	$	1,224
Trade names		1,689		(1,174	)		-			515
Developed technology		471		(471	)		-			-
Non-contractual customer relationships		433		(433	)		-			-
Noncompete agreement		527		(477	)		-			50
Alliance agreement		527		(462	)		-			65
Others		167		(167	)		-			-
Total	$	12,442	$	(10,124	)	$	(464	)	$	1,854

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

Amortization expense related to definite-lived intangible assets totaled $0.2 million and $0.3 million for the three months ended September 30, 2022 and 2021 and $0.7 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:

(in thousands)
Years ended December 31:
2022 remainder	$	167
2023		508
2024		332
2025		255
2026		204
Thereafter		388
Total	$	1,854

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Equipment, Software and Leasehold Improvements

9 Months Ended

Sep. 30, 2022

Equipment, Software and Leasehold Improvements [Abstract]

Equipment, Software and Leasehold Improvements

Note 7 - Equipment, Software and Leasehold Improvements

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

(in thousands)
	September 30, 2022			December 31, 2021
Computer and equipment	$	2,323		$	2,270
Software		2,263			2,150
Leasehold improvements		659			659
Furniture and fixtures		838			839
		6,083			5,918
Accumulated depreciation		(5,287	)		(5,079	)
Equipment, software and leasehold improvements, net	$	796		$	839

Depreciation expense was $69 thousand for both the three months ended September 30, 2022 and 2021. Depreciation expense was $213 thousand and $216 thousand for the nine months ended September 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $37 thousand and $50 thousand were recorded in software for the three months ended September 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $114 thousand and $365 thousand were recorded in software for the nine months ended September 30, 2022 and 2021, respectively.

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

Note 8 - Fair Value of Financial Instruments

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

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

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

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

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

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

Our convertible debt issued in February 2022 (See Note 10) includes certain embedded redemption features that are required to be bifurcated as embedded derivatives and measured at fair value on a recurring basis. We estimate the fair value using a Monte Carlo simulation based on estimates of our future stock price and assumptions about the possible redemption scenarios.

The Company used the Monte Carlo simulation model to determine the fair value of the Warrants and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of September 30, 2022 was estimated with the following assumptions.

Exercise Price	$	1.94
Common Stock Price	$	0.90
Risk Free Rate		4.0	%
Volatility		65.0	%
Term (in years)		4.4 yrs.

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

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Derivative liability	$	-	$	-	$	237	$	237
Warrant liability		-		-		416		416
Cash settled performance-vesting restricted stock units		-		-		56		56
Total liabilities	$	-	$	-	$	709	$	709

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

(in thousands)	Embedded Redemption Features			Warrant			Cash Settled PRSUs			Level 3 Total
Balance at December 31, 2021	$	-		$	-		$	-		$	-
Derivative liabilities at issuance date		306			-			-			306
Warrant liabilities at issuance date		-			724			-			724
Change in fair value included in gain on derivative instruments, net		(69	)		(308	)		-			(377	)
Fair value of cash settled PRSUs vested		-			-			87			87
Cash paid on vested shares		-			-			(31	)		(31	)
Balance at September 30, 2022	$	237		$	416		$	56		$	709

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2022

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 9 - Stock-Based Compensation

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

During the three months ended September 30, 2022 and 2021, we recognized $0.5 million and $0.3 million of stock-based compensation expense related to equity awards, respectively. We recognized $1.5 million and $0.8 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 2022 and 2021, respectively, under the fair value method.

We granted no time-based restricted stock units (“RSUs”) during the three months ended September 30, 2022. During the  nine months ended September 30, 2022, we granted approximately 960,250 RSUs with an aggregate fair value of approximately $1.5 million. 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, 2022, we vested 112,985 and 492,805 RSUs compared to 55,788 and 421,740 RSUs vested during the three and nine months ended September 30, 2021. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of one to three years.

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

During the nine months ended September 30, 2022, we granted 800,000 PRSUs including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards, and a time-vesting restriction, which will vest in equal portions over the next 15 quarters ending December 31, 2025. During the three and nine months ended September 30, 2022, we vested 50,000 and 150,000 PRSUs, of which, 12,500 and 37,500 PRSUs were cash-settled, respectively. No PRSUs were vested during the three and nine months ended September 30, 2021. The market vesting criteria was achieved in April 2022 for the 800,000 PRSUs which will fully vest over the next 13 quarters. During the three and nine months ended September 30, 2021, we did not grant any PRSUs to employees.

We did not grant any stock options for the three and nine months ended September 30, 2022 and 2021.

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Debt

9 Months Ended

Sep. 30, 2022

Debt [Abstract]

Debt

Note 10 - Debt

Convertible Note

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

	Amount
Convertible Note issued	$	5,750
Debt discount		(750	)
Issuance cost:
Commitment fee		(175	)
Balance of investor’s counsel fees		(43	)
Net proceeds of Convertible Note	$	4,782
Fair value of Warrant Liabilities on issuance		(724	)
Fair value of Conversion Feature on issuance		(306	)
Allocated OID costs to Convertible Note		(96	)
Interest expense accrued on Convertible Note as of September 30, 2022		926
Principal and interest payments as of September 30, 2022		(639	)
Balance of Convertible Note as of September 30, 2022	$	3,943

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

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

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

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

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

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

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

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

The Company incurred total interest expense related to the Convertible Note, including the amortization of the various discounts, of $443 thousand and $926 thousand for the three and nine months ended September 30, 2022, respectively.

Revolving Line of Credit

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

On November 12, 2021, we signed the Tenth Amendment and Reaffirmation Agreement with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. In addition, we agreed, by December 31, 2021, to pay the Bank $0.25 million to be applied to the principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.

During the nine months ended September 30, 2022, using proceeds from the Convertible Note, we repaid in full, all outstanding indebtedness of $1.8 million owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. Certain letters of credit remain in place with Citizens. As of September 30, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

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Product Warranty

9 Months Ended

Sep. 30, 2022

Product Warranty [Abstract]

Product Warranty

Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one year base warranty on the systems. The portion of our warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $478 thousand, and the remaining $99 thousand is classified as long-term within other non-current liabilities.

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

(in thousands)
Balance at January 1, 2022	$	748
Current period recovery		(3	)
Current period claims		(158	)
Currency adjustment		(10	)
Balance at September 30, 2022	$	577

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Revenue

9 Months Ended

Sep. 30, 2022

Revenue [Abstract]

Revenue

Note 12 - Revenue

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

The following table represents a disaggregation of revenue by type of goods or services for the three and nine months ended September 30, 2022 and 2021, along with the reporting segment for each category:

(in thousands)	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Performance Improvement Solutions segment
System Design and Build	$	1,537	$	1,623	$	4,991	$	4,712
Over time		1,537		1,623		4,991		4,712
Software and Support		2,010		814		3,560		2,393
Point in time		530		52		662		274
Over time		1,480		762		2,898		2,119
Training and Consulting Services		4,505		4,937		13,851		14,212
Point in time		195		42		1,340		126
Over time		4,310		4,895		12,511		14,086
Workforce Solutions
Training and Consulting Services		3,846		7,312		14,516		19,995
Point in time		52		126		52		375
Over time		3,794		7,186		14,464		19,620
Total revenue	$	11,898	$	14,686	$	36,918	$	41,312

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, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period	$	174	$	835	$	2,666	$	4,139

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Income Taxes

9 Months Ended

Sep. 30, 2022

Income Taxes [Abstract]

Income Taxes

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, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(Loss) income before income taxes	$	(9,210	)	$	11,604		$	(13,935	)	$	12,591
(Benefit from) provision for income taxes		(218	)		166			(108	)		127
Effective tax rate		2.37	%		1.4	%		0.78	%		1.0	%

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

Our effective income tax rate was 2.37% and 0.78% for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2022, the difference between our income tax benefit at an effective tax rate of 2.37% and 0.78% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes. For the three and nine months ended September 30, 2021, the difference between our income tax expense at an effective 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.

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

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

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that we will continue to assess a full valuation allowance on our U.S., China, and Slovakia net deferred assets as of September 30, 2022. We have determined that it is not more likely than not that the Company will realize the benefits of its deferred taxes in the U.S. and foreign jurisdictions. The Company has a deferred tax liability in the amount of $13 thousand at September 30, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.

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Leases

9 Months Ended

Sep. 30, 2022

Leases [Abstract]

Leases

Note 14 - Leases

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

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

(in thousands)

		As of
Operating Leases	Classification	September 30, 2022		December 31, 2021
Leased Assets
Operating lease - right of use assets	Long term assets	$	777	$	1,200
Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		965		1,205
Operating lease liabilities	Long term liabilities		209		790
		$	1,174	$	1,995

We entered into a lease agreement to lease 2,200 square feet of office space on September 26, 2022, and the lease term will be end on November 30, 2024.

We executed a sublease agreement with a tenant to sublease 850 square feet from the Sykesville office space on September 13, 2021. This agreement is in addition to the previous sublease for 3,650 square feet entered into on May 1, 2019. The addition of the second sublease is for a portion of the space previously abandoned in December 2019. The sublease does not relieve us of our primary lease obligation. The lease 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, 2022 and 2021, (in thousands):

		Three months ended						Nine months ended
Lease Cost	Classification	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Operating lease cost (1)	Selling, general and administrative expenses	$	174		$	179		$	534		$	548
Short-term leases costs (2)	Selling, general and administrative expenses		15			15			45			45
Sublease income (3)	Selling, general and administrative expenses		(18	)		(32	)		(55	)		(96	)
Net lease cost		$	171		$	162		$	524		$	497

⁽¹⁾ Includes variable lease costs which are immaterial.

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

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

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

(in thousands)	Gross Future Minimum Lease Payments
2022 remainder	$	347
2023		701
2024		151
2025		10
2026		3
Thereafter		-
Total lease payments	$	1,212
Less: Interest		38
Present value of lease payments	$	1,174

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

Lease Term and Discount Rate	September 30, 2022			December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.22			1.80
Weighted-average discount rate
Operating leases		5.00	%		5.00	%

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

(in thousands)	Nine months ended
Cash paid for amounts included in measurement of liabilities	September 30, 2022		September 30, 2021
Operating cash flows used in operating leases	$	934	$	958

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Segment Information

9 Months Ended

Sep. 30, 2022

Segment Information [Abstract]

Segment Information

Note 15 - Segment Information

We have two reportable business segments. The Performance Improvement Solutions segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example engineering services include, but are not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for American Society of Mechanical Engineers ("ASME") code and ASME Section XI. The Company provides these services across all market segments through our Performance, True North consulting, and DP Engineering subsidiaries. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.

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

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

	Three months ended						Nine months ended
(in thousands)	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenue:
Performance Improvement Solutions	$	8,052		$	7,375		$	22,402		$	21,318
Workforce Solutions		3,846			7,311			14,516			19,994
Total revenue		11,898			14,686			36,918			41,312
Gross Profit
Performance Improvement Solutions		2,654			2,252			7,037			6,204
Workforce Solutions		602			931			1,818			2,596
Total gross profit		3,256			3,183			8,855			8,800
Operating loss
Performance Improvement Solutions		(1,403	)		(469	)		(5,511	)		(3,003	)
Workforce Solutions		(7,646	)		(110	)		(7,815	)		(1,124	)
Operating loss		(9,049	)		(579	)		(13,326	)		(4,127	)
Interest expense, net		(422	)		(32	)		(928	)		(135	)
Change in fair value of derivative instruments, net		263			-			377			-
Other (loss) income, net		(2	)		12,215			(58	)		16,853
(Loss) income before income taxes	$	(9,210	)	$	11,604		$	(13,935	)	$	12,591

The operating loss above for the three and nine months ended September 30, 2022 includes goodwill and intangible asset impairment charge of $7.5 million for Workforce Solutions. There was no impairment recognized for the same periods in 2021 for Workforce Solutions. The operating loss above for the three and nine months ended September 30, 2021 includes impairment of ROU assets of $3 thousand for Performance Improvement Solutions. There was no impairment recognized for the same periods in 2022 for Performance Improvement Solutions.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2022

Commitments and Contingencies [Abstract]

Commitments and Contingencies

Note 16 - Commitments and Contingencies

Per ASC 450 Accounting for Contingencies, the Company reviews potential items and areas where a loss contingency could arise. In the opinion of management, we are not a party to any legal proceeding, the outcome of which, in management’s opinion, individually or in the aggregate, would have a material effect on our consolidated results of operations, financial position or cash flows. We expense legal defense costs as incurred.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2022

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

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

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

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

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

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

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Recent Accounting Pronouncements (Policies)

9 Months Ended

Sep. 30, 2022

Recent Accounting Pronouncements [Abstract]

Accounting pronouncements recently adopted/not yet adopted

Accounting pronouncements recently adopted

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

Accounting pronouncements not yet adopted

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

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

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Basic and Diluted (Loss) Income per Share (Tables)

9 Months Ended

Sep. 30, 2022

Basic and Diluted (Loss) Income per Share [Abstract]

(Loss) Income Per Share, Basic and Diluted

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

(in thousands, except for share data)	Three months ended					Nine months ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Numerator:
Net (loss) income attributed to common stockholders	$	(8,992	)	$	11,438	$	(13,827	)	$	12,464
Denominator:
Weighted-average shares outstanding for basic earnings per share		21,288,883			20,863,479		21,101,942			20,714,068
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		21,288,883			20,863,479		21,101,942			20,714,068
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive		3,283,400			14,229		2,383,171			77,871

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Contract Receivables (Tables)

9 Months Ended

Sep. 30, 2022

Contract Receivables [Abstract]

Contract Receivables

The components of contract receivables were as follows:

(in thousands)	September 30, 2022			December 31, 2021
Billed receivables	$	5,512		$	6,124
Unbilled receivables		5,648			6,143
Allowance for doubtful accounts		(1,008	)		(1,010	)
Total contract receivables, net	$	10,152		$	11,257

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Goodwill and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets [Abstract]

Net Carrying Amount of Goodwill

Goodwill

(in thousands)

	Goodwill		Impairment			Net
Performance Improvement Solutions	$	8,278	$	(3,370	)	$	4,908
Workforce Solutions		8,431		(7,040	)		1,391
Net book value at September 30, 2022	$	16,709	$	(10,410	)	$	6,299

(in thousands)

	Goodwill		Impairment			Net
Performance Improvement Solutions	$	8,278	$	(3,370	)	$	4,908
Workforce Solutions		8,431		-			8,431
Net book value at December 31, 2021	$	16,709	$	(3,370	)	$	13,339

Schedule of Acquired Finite-Lived Intangible Assets by Major Class

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

(in thousands)	As of September 30, 2022
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net
Amortized intangible assets:
Customer relationships	$	8,628	$	(6,940	)	$	(464	)	$	1,224
Trade names		1,689		(1,174	)		-			515
Developed technology		471		(471	)		-			-
Non-contractual customer relationships		433		(433	)		-			-
Noncompete agreement		527		(477	)		-			50
Alliance agreement		527		(462	)		-			65
Others		167		(167	)		-			-
Total	$	12,442	$	(10,124	)	$	(464	)	$	1,854

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

Finite-Lived Intangible Assets, Future Amortization Expense

The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:

(in thousands)
Years ended December 31:
2022 remainder	$	167
2023		508
2024		332
2025		255
2026		204
Thereafter		388
Total	$	1,854

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Equipment, Software and Leasehold Improvements (Tables)

9 Months Ended

Sep. 30, 2022

Equipment, Software and Leasehold Improvements [Abstract]

Equipment, Software and Leasehold Improvements

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

(in thousands)
	September 30, 2022			December 31, 2021
Computer and equipment	$	2,323		$	2,270
Software		2,263			2,150
Leasehold improvements		659			659
Furniture and fixtures		838			839
		6,083			5,918
Accumulated depreciation		(5,287	)		(5,079	)
Equipment, software and leasehold improvements, net	$	796		$	839

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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2022

Fair Value of Financial Instruments [Abstract]

Level 3 Fair Value Measurement Inputs

The Company used the Monte Carlo simulation model to determine the fair value of the Warrants and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of September 30, 2022 was estimated with the following assumptions.

Exercise Price	$	1.94
Common Stock Price	$	0.90
Risk Free Rate		4.0	%
Volatility		65.0	%
Term (in years)		4.4 yrs.

Assets and Liabilities Measured at Fair Value

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

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Derivative liability	$	-	$	-	$	237	$	237
Warrant liability		-		-		416		416
Cash settled performance-vesting restricted stock units		-		-		56		56
Total liabilities	$	-	$	-	$	709	$	709

Changes in Fair Value of Level 3 Liabilities

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

(in thousands)	Embedded Redemption Features			Warrant			Cash Settled PRSUs			Level 3 Total
Balance at December 31, 2021	$	-		$	-		$	-		$	-
Derivative liabilities at issuance date		306			-			-			306
Warrant liabilities at issuance date		-			724			-			724
Change in fair value included in gain on derivative instruments, net		(69	)		(308	)		-			(377	)
Fair value of cash settled PRSUs vested		-			-			87			87
Cash paid on vested shares		-			-			(31	)		(31	)
Balance at September 30, 2022	$	237		$	416		$	56		$	709

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Debt (Tables)

9 Months Ended

Sep. 30, 2022

Debt [Abstract]

Convertible Note

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

	Amount
Convertible Note issued	$	5,750
Debt discount		(750	)
Issuance cost:
Commitment fee		(175	)
Balance of investor’s counsel fees		(43	)
Net proceeds of Convertible Note	$	4,782
Fair value of Warrant Liabilities on issuance		(724	)
Fair value of Conversion Feature on issuance		(306	)
Allocated OID costs to Convertible Note		(96	)
Interest expense accrued on Convertible Note as of September 30, 2022		926
Principal and interest payments as of September 30, 2022		(639	)
Balance of Convertible Note as of September 30, 2022	$	3,943

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Product Warranty (Tables)

9 Months Ended

Sep. 30, 2022

Product Warranty [Abstract]

Activities in the Accrued Warranty Accounts

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

(in thousands)
Balance at January 1, 2022	$	748
Current period recovery		(3	)
Current period claims		(158	)
Currency adjustment		(10	)
Balance at September 30, 2022	$	577

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Revenue (Tables)

9 Months Ended

Sep. 30, 2022

Revenue [Abstract]

Disaggregation of Revenue

The following table represents a disaggregation of revenue by type of goods or services for the three and nine months ended September 30, 2022 and 2021, along with the reporting segment for each category:

(in thousands)	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Performance Improvement Solutions segment
System Design and Build	$	1,537	$	1,623	$	4,991	$	4,712
Over time		1,537		1,623		4,991		4,712
Software and Support		2,010		814		3,560		2,393
Point in time		530		52		662		274
Over time		1,480		762		2,898		2,119
Training and Consulting Services		4,505		4,937		13,851		14,212
Point in time		195		42		1,340		126
Over time		4,310		4,895		12,511		14,086
Workforce Solutions
Training and Consulting Services		3,846		7,312		14,516		19,995
Point in time		52		126		52		375
Over time		3,794		7,186		14,464		19,620
Total revenue	$	11,898	$	14,686	$	36,918	$	41,312

Balance of Contract Liabilities and Revenue Recognized in Reporting Period

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, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period	$	174	$	835	$	2,666	$	4,139

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2022

Income Taxes [Abstract]

Provision for (Benefit from) 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, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(Loss) income before income taxes	$	(9,210	)	$	11,604		$	(13,935	)	$	12,591
(Benefit from) provision for income taxes		(218	)		166			(108	)		127
Effective tax rate		2.37	%		1.4	%		0.78	%		1.0	%

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Leases (Tables)

9 Months Ended

Sep. 30, 2022

Leases [Abstract]

Classification of Operating ROU Assets and Lease Liabilities on the Balance Sheet

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, 2022		December 31, 2021
Leased Assets
Operating lease - right of use assets	Long term assets	$	777	$	1,200
Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		965		1,205
Operating lease liabilities	Long term liabilities		209		790
		$	1,174	$	1,995

Lease Income and 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, 2022 and 2021, (in thousands):

		Three months ended						Nine months ended
Lease Cost	Classification	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Operating lease cost (1)	Selling, general and administrative expenses	$	174		$	179		$	534		$	548
Short-term leases costs (2)	Selling, general and administrative expenses		15			15			45			45
Sublease income (3)	Selling, general and administrative expenses		(18	)		(32	)		(55	)		(96	)
Net lease cost		$	171		$	162		$	524		$	497

⁽¹⁾ Includes variable lease costs which are immaterial.

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

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

Future Minimum Lease Payments

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, 2022 are as follows:

(in thousands)	Gross Future Minimum Lease Payments
2022 remainder	$	347
2023		701
2024		151
2025		10
2026		3
Thereafter		-
Total lease payments	$	1,212
Less: Interest		38
Present value of lease payments	$	1,174

Operating Lease Weighted Average Remaining Lease Term And Discount Rate

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

Lease Term and Discount Rate	September 30, 2022			December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.22			1.80
Weighted-average discount rate
Operating leases		5.00	%		5.00	%

Classification of Lease Payments in the Statement of Cash Flows

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, 2022		September 30, 2021
Operating cash flows used in operating leases	$	934	$	958

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2022

Segment Information [Abstract]

Reconciliation of Segment Revenue to Consolidated Revenue and Operating Results to Consolidated Income Before Income Taxes

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, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenue:
Performance Improvement Solutions	$	8,052		$	7,375		$	22,402		$	21,318
Workforce Solutions		3,846			7,311			14,516			19,994
Total revenue		11,898			14,686			36,918			41,312
Gross Profit
Performance Improvement Solutions		2,654			2,252			7,037			6,204
Workforce Solutions		602			931			1,818			2,596
Total gross profit		3,256			3,183			8,855			8,800
Operating loss
Performance Improvement Solutions		(1,403	)		(469	)		(5,511	)		(3,003	)
Workforce Solutions		(7,646	)		(110	)		(7,815	)		(1,124	)
Operating loss		(9,049	)		(579	)		(13,326	)		(4,127	)
Interest expense, net		(422	)		(32	)		(928	)		(135	)
Change in fair value of derivative instruments, net		263			-			377			-
Other (loss) income, net		(2	)		12,215			(58	)		16,853
(Loss) income before income taxes	$	(9,210	)	$	11,604		$	(13,935	)	$	12,591

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Basic and Diluted (Loss) Income per Share (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Numerator [Abstract]
Net (loss) income attributed to common stockholders	$ (8,992)	$ 11,438	$ (13,827)	$ 12,464
Denominator [Abstract]
Weighted-average shares outstanding for basic earnings per share (in shares)	21,288,883	20,863,479	21,101,942	20,714,068
Effect of dilutive securities [Abstract]
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share (in shares)	21,288,883	20,863,479	21,101,942	20,714,068
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive (in shares)	3,283,400	14,229	2,383,171	77,871

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Coronavirus Aid, Relief and Economic Security Act (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Oct. 31, 2022	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Employee Retention Credits [Abstract]
Tax benefit recognized		$ (218)	$ 166	$ (108)	$ 127
Paycheck Protection Program [Member]
Debt Instruments [Abstract]
Other income			$ 10,100
Paycheck Protection Program Loan [Abstract]
Amount received from Paycheck Protection Program		$ 10,000		$ 10,000
Interest rate		1.00%		1.00%
Employee Retention Credits [Member]
Debt Instruments [Abstract]
Other income						$ 7,200
Employee Retention Credits [Abstract]
Refund of employee retention credit						5,000
Tax benefit recognized						$ 2,200
Tax credit refunds received		$ 0
Employee retention credits received		3,600		$ 3,600
Refund of employee retention credit receivable		$ 1,400		$ 1,400
Employee Retention Credits [Member] | Subsequent Event [Member]
Employee Retention Credits [Abstract]
Tax credit refunds received	$ 400

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Contract Receivables (Details) $ in Thousands		3 Months Ended		9 Months Ended
	Oct. 31, 2022 USD ($)	Sep. 30, 2022 USD ($) Customer	Sep. 30, 2021 USD ($)	Sep. 30, 2022 USD ($) Customer	Sep. 30, 2021 USD ($)	Dec. 31, 2021 USD ($) Customer
Components of contract receivables [Abstract]
Billed receivables		$ 5,512		$ 5,512		$ 6,124
Unbilled receivables		5,648		5,648		6,143
Allowance for doubtful accounts		(1,008)		(1,008)		(1,010)
Total contract receivables, net		10,152		10,152		$ 11,257
Bad debt expense (recovery)		0	$ 0	97	$ (133)
Gain (loss) on foreign exchange contracts		$ 4	$ 6	$ (51)	$ 27
Subsequent Event [Member]
Unbilled Contract Receivables [Abstract]
Subsequent billing	$ 2,500
Contract Receivable [Member]
Concentration Risk [Abstract]
Number of customers accounting for contract receivables | Customer		0		0		0

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Goodwill and Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Goodwill, Impaired [Abstract]
Goodwill	$ 16,709		$ 16,709		$ 16,709
Impairment	(10,410)		(10,410)		(3,370)
Net	6,299		6,299		13,339
Amortized Intangible Assets [Abstract]
Gross carrying amount	12,442		12,442		12,442
Accumulated amortization	(10,124)		(10,124)		(9,422)
Impairment			(464)
Net	1,854		1,854		3,020
Amortization of intangible assets	209	$ 286	700	$ 929
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
2022 remainder	167		167
2023	508		508
2024	332		332
2025	255		255
2026	204		204
Thereafter	388		388
Total	1,854		1,854		3,020
Customer Relationships [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	8,628		8,628		8,628
Accumulated amortization	(6,940)		(6,940)		(6,432)
Impairment			(464)
Net	1,224		1,224		2,196
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	1,224		1,224		2,196
Trade Names [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	1,689		1,689		1,689
Accumulated amortization	(1,174)		(1,174)		(1,108)
Impairment			0
Net	515		515		581
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	515		515		581
Developed Technology [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	471		471		471
Accumulated amortization	(471)		(471)		(471)
Impairment			0
Net	0		0		0
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	0		0		0
Non-Contractual Customer Relationships [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	433		433		433
Accumulated amortization	(433)		(433)		(433)
Impairment			0
Net	0		0		0
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	0		0		0
Noncompete Agreement [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	527		527		527
Accumulated amortization	(477)		(477)		(429)
Impairment			0
Net	50		50		98
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	50		50		98
Alliance Agreement [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	527		527		527
Accumulated amortization	(462)		(462)		(382)
Impairment			0
Net	65		65		145
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	65		65		145
Others [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount	167		167		167
Accumulated amortization	(167)		(167)		(167)
Impairment			0
Net	0		0		0
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total	0		0		0
Performance Improvement Solutions [Member]
Goodwill, Impaired [Abstract]
Goodwill	8,278		8,278		8,278
Impairment	(3,370)		(3,370)		(3,370)
Net	4,908		4,908		4,908
Workforce Solutions [Member]
Goodwill, Impaired [Abstract]
Goodwill	8,431		8,431		8,431
Impairment	(7,040)		(7,040)		0
Net	$ 1,391		$ 1,391		$ 8,431

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Equipment, Software and Leasehold Improvements (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Equipment, Software and Leasehold Improvements, Net [Abstract]
Equipment, software and leasehold improvements	$ 6,083		$ 6,083		$ 5,918
Accumulated depreciation	(5,287)		(5,287)		(5,079)
Equipment, software and leasehold improvements, net	796		796		839
Depreciation expense	69	$ 69	213	$ 216
Computer and Equipment [Member]
Equipment, Software and Leasehold Improvements, Net [Abstract]
Equipment, software and leasehold improvements	2,323		2,323		2,270
Software [Member]
Equipment, Software and Leasehold Improvements, Net [Abstract]
Equipment, software and leasehold improvements	2,263		2,263		2,150
Capitalization of internal-use software cost	37	$ 50	114	$ 365
Leasehold Improvements [Member]
Equipment, Software and Leasehold Improvements, Net [Abstract]
Equipment, software and leasehold improvements	659		659		659
Furniture and Fixtures [Member]
Equipment, Software and Leasehold Improvements, Net [Abstract]
Equipment, software and leasehold improvements	$ 838		$ 838		$ 839

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Fair Value of Financial Instruments (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2022 USD ($) $ / shares
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	$ 709
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Significant Other Observable Inputs (Level 2) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Significant Unobservable Inputs (Level 3) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	709
Changes in Fair Value of Level 3 Liabilities [Abstract]
Balance, Beginning Period	0
Derivative liabilities at issuance date	306
Warrant liabilities at issuance date	724
Change in fair value included in gain on derivative instruments, net	(377)
Fair value of cash settled PRSUs vested	87
Cash paid on vested shares	(31)
Balance, Ending Period	709
Embedded Redemption Features [Member]
Changes in Fair Value of Level 3 Liabilities [Abstract]
Warrant liabilities at issuance date	306
Embedded Redemption Features [Member] | Significant Unobservable Inputs (Level 3) [Member]
Changes in Fair Value of Level 3 Liabilities [Abstract]
Balance, Beginning Period	0
Derivative liabilities at issuance date	306
Warrant liabilities at issuance date	0
Change in fair value included in gain on derivative instruments, net	(69)
Fair value of cash settled PRSUs vested	0
Cash paid on vested shares	0
Balance, Ending Period	237
Cash Settled Performance-Vesting Restricted Stock Units [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	56
Cash Settled Performance-Vesting Restricted Stock Units [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Cash Settled Performance-Vesting Restricted Stock Units [Member] | Significant Other Observable Inputs (Level 2) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Cash Settled Performance-Vesting Restricted Stock Units [Member] | Significant Unobservable Inputs (Level 3) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	56
Changes in Fair Value of Level 3 Liabilities [Abstract]
Balance, Beginning Period	0
Derivative liabilities at issuance date	0
Warrant liabilities at issuance date	0
Change in fair value included in gain on derivative instruments, net	0
Fair value of cash settled PRSUs vested	87
Cash paid on vested shares	(31)
Balance, Ending Period	56
Derivative Liability [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	237
Derivative Liability [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Derivative Liability [Member] | Significant Other Observable Inputs (Level 2) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Derivative Liability [Member] | Significant Unobservable Inputs (Level 3) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	237
Warrant Liability [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	$ 416
Fair Value Measurements [Abstract]
Term (in years)	4 years 4 months 24 days
Changes in Fair Value of Level 3 Liabilities [Abstract]
Derivative liabilities at issuance date	$ 724
Warrant Liability [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Warrant Liability [Member] | Significant Other Observable Inputs (Level 2) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	0
Warrant Liability [Member] | Significant Unobservable Inputs (Level 3) [Member]
Assets and Liabilities Measured at Fair Value [Abstract]
Total liabilities	416
Changes in Fair Value of Level 3 Liabilities [Abstract]
Balance, Beginning Period	0
Derivative liabilities at issuance date	0
Warrant liabilities at issuance date	724
Change in fair value included in gain on derivative instruments, net	(308)
Fair value of cash settled PRSUs vested	0
Cash paid on vested shares	0
Balance, Ending Period	$ 416
Warrant Liability [Member] | Exercise Price [Member]
Fair Value Measurements [Abstract]
Measurement input | $ / shares	1.94
Warrant Liability [Member] | Common Stock Price [Member]
Fair Value Measurements [Abstract]
Measurement input | $ / shares	0.9
Warrant Liability [Member] | Risk Free Rate [Member]
Fair Value Measurements [Abstract]
Measurement input	0.04
Warrant Liability [Member] | Volatility [Member]
Fair Value Measurements [Abstract]
Measurement input	0.65

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Stock-Based Compensation (Details) $ / shares in Units, $ in Thousands		1 Months Ended	3 Months Ended		9 Months Ended
	Feb. 23, 2022 d $ / shares	Apr. 30, 2022 qtr shares	Sep. 30, 2022 USD ($) $ / shares shares	Sep. 30, 2021 USD ($) shares	Sep. 30, 2022 USD ($) d qtr $ / shares shares	Sep. 30, 2021 USD ($) shares
Share-based Compensation [Abstract]
Stock options granted (in shares)			0	0	0	0
Convertible Note [Member]
Share-based Compensation [Abstract]
Number of trading days | d	20				20
Exercise price (in dollars per share) | $ / shares	$ 1.94		$ 1.94		$ 1.94
Stock Option [Member]
Share-based Compensation [Abstract]
Stock-based compensation expense | $			$ 500	$ 300	$ 1,500	$ 800
Restricted Stock Units [Member]
Share-based Compensation [Abstract]
Stock-based compensation expense | $					$ 200,000
Granted time-based RSUs (in shares)			0	20,000	960,250	824,661
Aggregate fair value for time-based RSUs | $				$ 30	$ 1,500	$ 1,400
Number of quarters time-based RSU's will vest quarterly | qtr					8
Granted performance-based RSUs (in shares)		800,000		0	800,000	0
RSUs vested (in shares)			112,985	55,788	492,805	421,740
Period to fully vest performance RSUs | qtr		13			15
Restricted Stock Units [Member] | Minimum [Member]
Share-based Compensation [Abstract]
Period in which time-based RSU's will vest annually in equal amounts					1 year
Restricted Stock Units [Member] | Maximum [Member]
Share-based Compensation [Abstract]
Period in which time-based RSU's will vest annually in equal amounts					3 years
PRSUs [Member]
Share-based Compensation [Abstract]
RSUs vested (in shares)			50,000	0	150,000	0
Cash Settled PRSUs [Member]
Share-based Compensation [Abstract]
RSUs vested (in shares)			12,500		37,500

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Debt, Convertible Note (Details) $ / shares in Units, $ in Thousands		3 Months Ended	9 Months Ended
	Feb. 23, 2022 USD ($) d $ / shares shares	Sep. 30, 2022 USD ($) $ / shares	Sep. 30, 2022 USD ($) d $ / shares
Embedded Redemption Features [Member]
Convertible Debt [Abstract]
Fair value of Conversion Feature on issuance		$ (306)	$ (306)
Warrant Liability [Member]
Convertible Debt [Abstract]
Fair value of Warrant Liabilities on issuance		(724)	$ (724)
Convertible Note [Member]
Convertible Debt [Abstract]
Debt instrument term			2 years
Purchase of warrant to acquire shares of common stock (in shares) | shares	1,283,732
Convertible Note issued	$ 5,750
Debt discount	(750)
Net proceeds of Convertible Note	4,782
Allocated OID costs to Convertible Note		(96)	$ (96)
Interest expense accrued on Convertible Note		443	926
Principal and interest payments		(639)	(639)
Balance of Convertible Note		$ 3,943	$ 3,943
Frequency of periodic payment			monthly
Monthly principal repayments	$ 319
Period for repayment of convertible note from issuance	180 days
Period for conversion	6 months
Conversion price (in dollars per share) | $ / shares	$ 1.94
Maturity date			Feb. 29, 2024
Conversion ratio	0.33
Percentage of volume-weighted average price	80.00%
Average of trading days | d	3
Number of trading days | d	20		20
Exercise price (in dollars per share) | $ / shares	$ 1.94	$ 1.94	$ 1.94
Fair value	$ 700
Net proceeds from issuance of convertible note	4,800
Convertible Note [Member] | Commitment Fee [Member]
Convertible Debt [Abstract]
Issuance cost	(175)
Convertible Note [Member] | Investor's Counsel Fees [Member]
Convertible Debt [Abstract]
Issuance cost	$ (43)

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Debt, Revolving Line of Credit (Details) $ in Thousands		3 Months Ended	9 Months Ended		12 Months Ended
	Nov. 12, 2021 USD ($)	Mar. 29, 2021 USD ($)	Sep. 30, 2022 USD ($) Letter	Sep. 30, 2021 USD ($)	Dec. 31, 2021 USD ($)	Jun. 30, 2021 USD ($)	Mar. 31, 2021 USD ($)
Line of Credit Facility [Abstract]
Repayment on line of credit			$ 1,817	$ 1,739
Ninth Amendment and Reaffirmation Agreement [Member]
Line of Credit Facility [Abstract]
Fixed charge coverage ratio						1.1	1.1
Amendment fee amount					$ 25
Revolving Credit Facility [Member]
Line of Credit Facility [Abstract]
Repayment on line of credit			$ 1,800
Number of letters of credit | Letter			4
Outstanding letter of credit balance			$ 1,100
Revolving Credit Facility [Member] | Ninth Amendment and Reaffirmation Agreement [Member]
Line of Credit Facility [Abstract]
Repayment on line of credit		$ 500
Liquidity		2,500
Line of credit				$ 3,500		$ 3,750	$ 4,250
Amount available at the reporting date		500			75
Periodic payment		$ 500
Revolving Credit Facility [Member] | Tenth Amendment and Reaffirmation Agreement [Member]
Line of Credit Facility [Abstract]
Periodic payment					$ 250
Amendment fee amount	$ 15
Basis points	0.75%

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Product Warranty (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2022 USD ($)
Product warranty provision [Abstract]
Warranty terms for SDB contracts	1 year
Accrued warranty, current	$ 478
Accrued warranty, noncurrent	99
Activities in product warranty account [Abstract]
Balance at beginning of period	748
Current period recovery	(3)
Current period claims	(158)
Currency adjustment	(10)
Balance at end of period	$ 577

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Revenue (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022 USD ($)	Sep. 30, 2021 USD ($)	Sep. 30, 2022 USD ($) Stream	Sep. 30, 2021 USD ($)
Disaggregation of Revenue [Abstract]
Revenue	$ 11,898	$ 14,686	$ 36,918	$ 41,312
Number of distinct revenue streams | Stream			3
Contract with Customer, Asset and Liability [Abstract]
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period	174	835	$ 2,666	4,139
Performance Improvement Solutions [Member]
Disaggregation of Revenue [Abstract]
Revenue	8,052	7,375	22,402	21,318
Performance Improvement Solutions [Member] | System Design and Build [Member]
Disaggregation of Revenue [Abstract]
Revenue	1,537	1,623	4,991	4,712
Performance Improvement Solutions [Member] | System Design and Build [Member] | Over Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	1,537	1,623	4,991	4,712
Performance Improvement Solutions [Member] | Software and Support [Member]
Disaggregation of Revenue [Abstract]
Revenue	2,010	814	3,560	2,393
Performance Improvement Solutions [Member] | Software and Support [Member] | Point in Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	530	52	662	274
Performance Improvement Solutions [Member] | Software and Support [Member] | Over Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	1,480	762	2,898	2,119
Performance Improvement Solutions [Member] | Training and Consulting [Member]
Disaggregation of Revenue [Abstract]
Revenue	4,505	4,937	13,851	14,212
Performance Improvement Solutions [Member] | Training and Consulting [Member] | Point in Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	195	42	1,340	126
Performance Improvement Solutions [Member] | Training and Consulting [Member] | Over Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	4,310	4,895	12,511	14,086
Workforce Solutions [Member]
Disaggregation of Revenue [Abstract]
Revenue	3,846	7,311	14,516	19,994
Workforce Solutions [Member] | Training and Consulting [Member]
Disaggregation of Revenue [Abstract]
Revenue	3,846	7,312	14,516	19,995
Workforce Solutions [Member] | Training and Consulting [Member] | Point in Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	52	126	52	375
Workforce Solutions [Member] | Training and Consulting [Member] | Over Time [Member]
Disaggregation of Revenue [Abstract]
Revenue	$ 3,794	$ 7,186	$ 14,464	$ 19,620

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Income Taxes [Abstract]
(Loss) income before income taxes	$ (9,210)	$ 11,604	$ (13,935)	$ 12,591
(Benefit from) provision for income taxes	$ (218)	$ 166	$ (108)	$ 127
Effective tax rate	2.37%	1.40%	0.78%	1.00%
Statutory federal income tax rate	21.00%	21.00%	21.00%	21.00%
Income Tax Examination [Abstract]
Probability of uncertain tax position to be recognized			50.00%
Percentage of tax position realized upon ultimate settlement			50.00%
Deferred tax liability	$ 13		$ 13
Federal [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination			2000
State [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination			2000
Foreign [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination			2016

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Leases (Details) $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2022 USD ($)	Sep. 30, 2021 USD ($)	Sep. 30, 2022 USD ($) ft² Tenant	Sep. 30, 2021 USD ($)	Dec. 31, 2021 USD ($)
Leased Assets [Abstract]
Operating lease - right of use assets		$ 777		$ 777		$ 1,200
Operating Lease, Right-of-Use Asset, Statement of Financial Position [Extensible Enumeration]		Operating lease - right of use assets		Operating lease - right of use assets		Operating lease - right of use assets
Lease Liabilities [Abstract]
Operating lease liabilities - current		$ 965		$ 965		$ 1,205
Operating Lease, Liability, Current, Statement of Financial Position [Extensible Enumeration]		Other current liabilities		Other current liabilities		Other current liabilities
Operating lease liabilities		$ 209		$ 209		$ 790
Operating Lease, Liability, Noncurrent, Statement of Financial Position [Extensible Enumeration]		Operating lease liabilities		Operating lease liabilities		Operating lease liabilities
Lease liabilities		$ 1,174		$ 1,174		$ 1,995
Area of office space leased | ft²				2,200
Lease agreement date				Sep. 26, 2022
Lease expiration date				Nov. 30, 2024
Sublease Agreement [Abstract]
Sublease square feet | ft²				850
Sublease date				Sep. 13, 2021
Previously subleased square feet, one | ft²				3,650
Previous sublease date, one				May 01, 2019
Consolidated Statement of Operations Information [Abstract]
Operating lease cost	[1]	174	$ 179	$ 534	$ 548
Short-term leases costs	[2]	15	15	45	45
Sublease income	[3]	(18)	(32)	(55)	(96)
Net lease cost		171	$ 162	$ 524	497
Number of tenants | Tenant				2
Minimum Lease Payments [Abstract]
2022 remainder		347		$ 347
2023		701		701
2024		151		151
2025		10		10
2026		3		3
Thereafter		0		0
Total lease payments		1,212		1,212
Less: Interest		38		38
Present value of lease payments		$ 1,174		$ 1,174		$ 1,995
Lease Term and Discount Rate [Abstract]
Weighted-average remaining lease term (in years)		1 year 2 months 19 days		1 year 2 months 19 days		1 year 9 months 18 days
Weighted-average discount rate		5.00%		5.00%		5.00%
Cash paid for amounts included in measurement of liabilities [Abstract]
Operating cash flows used in operating leases				$ 934	$ 958

[1] Includes variable lease costs which are immaterial.

[2] Includes leases maturing less than twelve months from the report date.

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

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Segment Information (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022 USD ($)	Sep. 30, 2021 USD ($)	Sep. 30, 2022 USD ($) Segment	Sep. 30, 2021 USD ($)
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Number of reportable business segments | Segment			2
Contract term			2 years
Goodwill and intangible asset impairment charge	$ 7,505	$ 3	$ 7,505	$ 3
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue	11,898	14,686	36,918	41,312
Gross profit	3,256	3,183	8,855	8,800
Operating loss	(9,049)	(579)	(13,326)	(4,127)
Interest expense, net	(422)	(32)	(928)	(135)
Change in fair value of derivative instruments, net	263	0	377	0
Other (loss) income, net	(2)	12,215	(58)	16,853
(Loss) income before income taxes	(9,210)	11,604	(13,935)	12,591
Performance Improvement Solutions [Member]
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Impairment of ROU assets	0	3	0	3
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue	8,052	7,375	22,402	21,318
Gross profit	2,654	2,252	7,037	6,204
Operating loss	(1,403)	(469)	(5,511)	(3,003)
Workforce Solutions [Member]
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Goodwill and intangible asset impairment charge	7,500	0	7,500	0
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue	3,846	7,311	14,516	19,994
Gross profit	602	931	1,818	2,596
Operating loss	$ (7,646)	$ (110)	$ (7,815)	$ (1,124)