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 lookingforward-looking statements to reflect new events or circumstances. We caution you that a variety of factors, including but not limited to the factors described under Part II, Item 1A - Risk Factors in our most recent annual report on Form 10-K, could cause our business conditions and results to differ materially from what is contained in forward-looking statements.
Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in Item 1A - Risk Factors in our most recent annual report on Form 10-K in connection with any forward-looking statements that may be made by us. You should not place undue reliance on any forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
We are a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in their respective organizations, primarily in procedures, engineering, technical support and training focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries.
Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve, namely the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although these delays and reductions impacted us, as an essential services provider to an essential industrial base, we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. Additionally, staffing shortages have resulted in new opportunities for our Workforce Solutions segment. In 2021, the effects of the pandemic still impacted the end markets we serve, but those effects have been mitigated by a number of factors, including the following: the pandemic largely has had a targeted effect on the population; a number of vaccines in the market being distributed and, despite logistical challenges, making substantial progress for those in most need; the economy of the United States has not had as much disruption as was initially feared, which has benefited our end markets; and most importantly our end markets seem poised to contract with us for essential services that had been delayed as a result of the pandemic. As we begin 2022, we have publicly announced a number of significant contract wins, which we hope will be a harbinger of a more attractive business environment for the power industries we serve.
As a result of the COVID-19 pandemic, we have sought and obtained support through various business assistance programs. We applied for and, on April 23, 2020, received the PPP Loan under the CARES Act, as administered by the SBA. We used the PPP Loan proceeds to sustain our business during the pandemic, as intended, and we were eligible for full forgiveness of the loan under the CARES act. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA.
25In 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. We applied for $5.0 million in refunds from the IRS with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. For the three months ended March 31, 2022 we received refunds of $1.1 million with a remaining receivable of $3.1 million at March 31, 2022. Subsequent to March 31, 2022 we received an additional $1.0 million in ERC refunds.
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 Nuclear Industry Training and Consulting.Workforce Solutions. The Workforce Solutions segment is referred to as workforce solutions to account for the increasing activity outside of our core nuclear industry focus. Each segment focuses on delivering solutions to customers within our targeted markets - primarily the power and process industries.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 62%52% of revenue)revenue for the three months ended March 31, 2022)
Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, as well astechnical engineering solutionsservices for ASME programs, power plant thermal performance optimization, and interactive computer basedcomputer-based tutorials/simulation focused on the process industry. ThisThe Performance Solutions segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve:serve primarily nuclear and fossil fuel power generation as well asand 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.
Nuclear Industry TrainingOur engineering solutions include the following: (1) in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, and thermal performance; (2) in-service inspection for specialty engineering including ASME Section XI; (3) software solutions; and (4) mechanical design, civil/structural design, electrical, instrumentation and controls design, digital controls/cyber security, and fire protection for nuclear power plant
design modifications. Our GSE True North Consulting and GSE DP Engineering businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements and are included in our Performance Improvement Solutions segment due to their service offerings. GSE has been providing these engineering solutions and services since 1995.
Workforce Solutions (approximately 38%48% of revenue)revenue for the three months ended March 31, 2022)
Nuclear Industry Training and ConsultingWorkforce Solutions provides highly specialized and skilled nuclear operations instructors, procedure writers, technical engineers, and other consultants to the nuclear power industry. These employees work at our clients'clients’ facilities under client direction. Examples of these highly skilled positions are senior reactor operations instructors, procedure writers, project managers, work management specialists, planners and training material developers. This business is managed through Hyperspring and the newly acquired Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate thisthe business line from the rest of the Company'sCompany’s product and service portfolio. GSE and its predecessors havehas been providing these services since 1997.
Business Strategy
Serve existing customers and adjacencies with compelling solutions, with a focus on decarbonization:
Our objective ishas been to providecreate a powerful technology-enabledleading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies. We are now one of the leading, publicly traded engineering and training/consultingtechnology companies serving the zero-carbon energy sector of nuclear power and adjacent nuclear markets in Department of Energy, US Navy and related defense sectors. As a result of this effort and established leadership position in key sectors, we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2022, we will keenly focus on organic growth in the sectors we serve by: cross selling and upselling in our existing markets as we focus on delivering significant value to our customers in a manner of excellence; create new and compelling solutions in-house as a result of advancing our technology offerings in sponsorship with industry early adopters focused on critical business need; develop new services platform for the nuclear industry. We offeras a result of combining our differentiated suite of products and services toexpertise; expand into compelling adjacent markets such as fossilclean energy as they may arise with renewed sales focus.
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 process industries where our offeringsWorkforce Solutions teams together as one team under one leader. The business units operate uniformly within their respective structure. As such, the opportunity to cross-sell the capabilities across the entire customer base is greatly enhanced. This further differentiates us as a unique provider to industry vs. providers of specific niche services. The unified go-to-market efforts, such as cross-selling capability should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. As a result of a rejuvenated marketing effort, we are equipped to take this new approach to market. In particular, with the US government rejoining the Paris Climate Agreement and driving to decarbonize the energy grid by 2035, and create a natural fitcarbon 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 clearfocus on decarbonization, we are poised to benefit from and exploit this investment.
Organic growth through new and compelling technology:
While managing through the pandemic, in parallel, our leadership was investigating compelling opportunities by which we could utilize our capabilities to create significant value proposition 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. Our primary growth strategyNet 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 twofold: (1) seek acquisitions to accelerate our overall growth in a manner that is complementary to our core business and (2) expand organically within our core markets by leveraging our market leadership position and drive increased usage and product adoption via new products and services. To accomplish this, we will pursue the following activities:
Pursue strategic acquisitions opportunistically. We intend to complementkey element of our organic growth strategy through selective acquisitions of other technical engineering as well as training, staffingthesis: focusing on creating and consulting service businesses focusedbringing to market compelling technology solutions.
Focus on the power industry, value added components for the nuclear industry,compelling adjacencies in clean energy, defense, and software utilized in the power industry, both domestic and international. We are focusing our efforts on acquisitions that would enhance our existing portfolio of products and services, strengthen our relationships with our existing customers, and potentially expand our footprint to include new customers in our core served industries. We have made several acquisitions since 2010 and believe the opportunity exists to acquire businesses that are complementary to ours, allowing us to accelerate our growth strategy.national labs:
In January 2011, we acquired a software company called EnVision Systems Inc., which provided interactive multi-media tutorials and simulation models, primarily to the process industries. We have integrated the technology assets from this acquisition and expanded the firm's application to other industries, and we intend to repeat this successful process. In 2014, we acquired Hyperspring, which enabled GSE to offer highly skilled nuclear operations and consulting know-how on site at a large segment of our client base on an operational basis providing essential services. This deepened our relationship with existing clients and won business for us at new client sites in the nuclear industry. This acquisition has proven to be synergistic, enabling cross selling domestically, and in 2015, the expansion of these offerings to international customers for the first time. In September 2017, we acquired Absolute, a provider of technical consulting and staffing solutions to the global nuclear power industry, located in Navarre, Florida. The acquisition of Absolute is expected to strengthen the Company's global leadership in nuclear training and consulting solutions and add new capacities to solution offering and bring highly complementary customers, while deepening GSE relationships with existing clients. The acquisition of Absolute is a significant proof point of the thesis that GSE is a compelling platform for consolidating a fragmented vendor ecosystem for nuclear power. The acquisition adds significant scale and focus to the business, while positioning GSE as a "go to" provider of consulting solutions to the power industry, in particular nuclear power.
Expand our total addressable market. Our focus on growth means introducing product capabilities or new product categories that create value for our customers and therefore expand our total addressable market. Currently we are working on initiatives to expand our solution offerings in both our business segments which may include, but not be limited to, the following: expanding our software product portfolio to the industries we serve with enhanced power and process simulation tools and systems that are complementary to our core offerings; delivering enhanced learning management systems/solutions; offering fully outsourced training solutions to our customers; adding work flow process improvement solutions; and tailoring operational reporting and business intelligence solutions to address the unique need of our end user markets.
Initiatives such as these will broaden our scope and enable us to engage more deeply with the segments we serve. Recently, we have delivered a compelling new solution, the GSE GPWRTM Generic Pressurized Water Reactor simulation technology, proving that our modeling technology can be sold via traditional license terms and conditions to the nuclear industry ecosystem. We have both upgraded and expanded the EnVision library of simulation and eLearning tutorials for the process industries with specific new products for training clients in the upstream segment of the oil and gas industry. We continue to provide cutting edge training systems by adapting our technology to systems to meet the specific needs of customers such as U.S. government laboratories.
Research and development (R&D).We invest in R&D in order 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 deliveredintroduced 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'sindustry’s need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP®DesignEP® and RELAP5-HD®RELAP5-HD® solutions. Our entire JADETM suite of simulation software, including industry leading JTOPMERET®JTOPMERET® and JElectricTM software, provides the most accurate simulation of Balance-of-Plant and electrical systems available to the nuclear and fossil plant simulation market. The significant enhancements we have made to our SimExec®SimExec® and OpenSimTM platforms enables customers to be more efficient in the daily operation of their simulators. We are bringing SimExec® have brought SimExec® and OpenSimTMtogether into a next generation unified environment that will addadds new capabilities as requested by clients and driven by market need.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 prudentpragmatic and measured investments in R&D that first and foremost are driven by the market and are complementary to advancingcomplement 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 in anthat is easier to use, fashion,at lower total cost of ownership than any alternative available to customers. GSE hasWe have pioneered a number of industry standards over our lifetime and willintend to continue to be one of the most innovative companies in our industry.
During the three months ended March 31, 2022 and 2021, we have made R&D investments totaling $0.1 million and $0.2 million, respectively.
Strengthen and develop our talent.talent while delivering high-quality solutions.
Over the past several years, we have assembled a unique and highly experienced group of talent through organic growth and strategic acquisition. Our engineering team comprised of design, simulation, regulatory compliance, and performance optimization capabilities are unique to the industry and capable of addressing the entire power generation life cycle.
Our experienced employees and management team are our most valuable resources. Attracting,The continued integration of our team in parallel with attracting, training, and retaining top talent is critical to our success. To achieve our talent goals, we intend to remain focused on providing our employees with entrepreneurial opportunities to increase client contact within their areas of expertise and to expand our business withinand deepen our service offerings. WeAs we refine our product and service areas to best align with the critical areas listed above, we will also continueintegrate and apply our composite employee talent to provide our employees with training,the fullest extent possible combining employee personal and professional growth opportunities performance-basedwith 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.locations will also be utilized to ensure continuity of our approach.
Continue to deliver industry-recognized high-quality services. 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. We have received many industry certificatesAs we continue to integrate and awards including being recognized for outstanding work on projects by Bechtel's Nuclear, Security & Environmental global business unit (NS&E) at the Bechtel Supply Chain Recognition awards in April 2016. In addition, we have a recognized high-value brand as one of the most respected providers of software and services to the industry, as evidenced byleverage our marquee client base and significant market winsindividual company components assembled over the past year. A recently conducted survey of clients with projects underway and/or just delivered validatesseveral years, our brand with a Net Promoter Score of +65, a compelling score for an industrial technologycapabilities and services company.reputation will further strengthen.
Expand international operations in selected markets. We believe there are additional opportunities for us to market our software and services to international customers, and to do so in a cost-effective manner. For example, we believe partnerships with Value Added Resellers (VAR) could significantly expand our sales pipeline for the EnVision software suite. In 2016, we entered into a reseller agreement with an entity in the Middle East that has an established track record of success selling simulation and workforce development solutions to the process industries throughout the region. Such VARs may yield positive results for our pursuit of international nuclear opportunities globally (see industry trends below). We may explore the creation of appropriate joint ventures to target nuclear new-build programs in key growth regions.Employees
Employees. As of September 30, 2017,March 31, 2022, we had approximately 476302 employees, which includes approximately 184194 employees in our Performance Improvement segment and 292approximately 108 employees in our Nuclear Industry Training and ConsultingWorkforce Solutions segment. In addition, we have approximately 100 licensed engineers and other advanced degreed professionals. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.
Backlog. Backlog
As of September 30, 2017,March 31, 2022, we had approximately $76.4$40.1 million of total gross revenue backlog, which included $51.8$31.9 million of Performance Improvement Solutions backlog and $24.6$8.2 million of Nuclear Industry Training and Consulting backlog, $12.7 million of which was attributable to the Absolute acquisition. Workforce Solutions backlog. With respect to our backlog, it includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. Our backlog includes future expected revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client. We calculate backlog without regard to possible project reductions or expansions or potential cancellations unless and until such changes may occur.
Backlog is expressed in terms of gross revenue and, therefore, may include significant estimated amounts of third-party or pass-through costs to subcontractors and other parties. Because backlog is not a defined accounting term,U.S. GAAP measurement, our computation of backlog may not necessarily be comparable to that of our industry peers.
Industry Trends
Industry need for building and sustaining a highly skilled workforce
We believe a critical ongoing challenge facing the industries we serve is access to, and continued development of, a highly trained and efficient workforce. This challenge manifests primarily in two ways: the increasing pace at which industry knowledge and experience are lost as a significant percentage of the existing experienced workforce reaches retirement age and the fact that as new power plants come on-line, there is an increased demand for more workers to staff and operate those plants.
According to Power Engineering magazine (December 2014), in the United States every sector in the energy industry is expected to lose a large percentage of its workforce within the next few years as baby boomers retire on the traditional schedule. The power sector alone will be forced to replace more than 100,000 skilled workers by 2018 simply to replace those retiring. The Nuclear Energy Institute estimates that 39% of the nuclear workforce will be eligible to retire by 2018. As the nuclear industry expands its fleet and strains to maintain the high standards of training the existing workforce, existing plant simulator systems, which provide a critical environment for training services, are often operating 24 hours a day. With workers retiring and the need to backfill as well as expand the workforce for new units, certain operators are exploring the opportunity to de-bottleneck their existing simulator capabilities through the creation of dual reference simulators.
According to the US Energy & Employment Report released in January 2017, the employment in the traditional energy and energy efficiency sectors increased by 55% in 2016, adding 300,000 net new jobs. Electric power generation companies project a 7% growth in 2017 and the Nuclear Energy Institute projects 20,000 new position will be needed in the nuclear industry over the next 5 years.
Globally, as more people increase their standard of living, their demand for power will increase, which in turn will require the on-going construction of power plants to meet this surging demand. Developing a skilled labor force to operate these plants and keeping their skills current and their certifications in compliance with regulatory requirements is a key challenge facing the global power industry.
Growing global power demand and the increasing emphasis on nuclear power
On September 28, 2017, United States Secretary of Energy, Rick Perry, directed the nation's federal grid regulator to create rules recognizing the critical value generated by nuclear power plants. The Notice of Proposed Rulemaking stated that the Federal Energy Regulatory Commission must order grid operators to increase how they value "reliability and resilience attributes" in energy generation. All licensed nuclear power plants and a significant portion of existing coal plants can meet those requirements today.
This would represent one of the most sweeping changes to the U.S. electricity supply market in the past two decades, and could be implemented before the coming winter heating season. The bottom line of this proposal is that eligible power sources will be able to participate in a details-to-be-determined rate structure that allows the owner to recover its "fully allocated costs" plus a "fair return on equity". If adopted, this would be terrific news for the nuclear power industry.
In addition, Secretary Perry announced a separate action to support and accelerate the development of new nuclear plants with conditional commitments of up to $3.7 billion in loan guarantees to the owners of the Vogtle nuclear power plant in Georgia. Secretary Perry stated, "I believe the future of nuclear energy in the United States is bright and look forward to expanding American leadership in innovative nuclear technologies." "Advanced nuclear energy projects like Vogtle are the kind of important energy infrastructure projects that support a reliable and resilient grid, promote economic growth, and strengthen our energy and national security".
World Energy Outlook 2015 projects that electricity demand will increase by more than 70% over the time period from 2013 to 2040. At the same time, countries globally are pledging to reduce greenhouse gas emissions despite this growth in demand for power. These trends are increasingly favorable to nuclear power. The United Kingdom illustrates this trend, with a recently announced energy policy that places a much greater reliance on nuclear power and unveiled plans for a new nuclear fleet, while slashing subsidies for solar energy and seeking to phase out coal fired power plants. With plans to build at least three new nuclear plants, the UK plans to add 16GWe of new nuclear capacity operating by 2030 according to World Nuclear Association.
There are currently 60 nuclear plants under construction in 16 countries, including 20 in China, seven in Russia, five in India and four in the United Arab Emirates per the Nuclear Energy Institute. Two reactors are currently under construction in the U.S. While SCANA stated it is discontinuing building its two reactors at the Summer Nuclear Power Site in South Carolina, Southern Nuclear is building two reactors at its Vogtle, Georgia site. With that said, the CEO of Santee Cooper, an owner of the Summer Nuclear Power Site, publicly stated in September 2017 he believes the plant could be completed at some point in the future. There is precedent in the US with TVA's Watt's Barr unit 2 being completed after a period of pause. Per the World Nuclear Association, there are 160 reactors in 23 countries in specific phases of planning that will be operating by 2030. This pace of construction is surpassing the peak construction velocity of the 1970s and 1980s.
For the existing nuclear U.S. fleet, there is recognition that these plants are essential to meeting goals of reducing carbon emissions even as renewable energy sources are introduced. This recognition of the importance of nuclear providing zero-carbon baseload is demonstrated most recently by the state of New York's Clean Energy Standard that values the emission-free energy of New York's nuclear fleet and in so doing providing an emissions-free subsidy of 1.7¢/kWh. This subsidy helps ensure the state's existing nuclear plants remain economically viable in an era of low cost natural gas and even with wind and solar receiving a subsidy of 4.5¢/kWh. In addition, the Illinois Legislature passed the Future Energy Jobs Bill on December 2, 2016, a measure that ensures the continued operation of the Clinton and Quad Cities nuclear power plants in that state. In a statement, the Nuclear Energy Institute said the bill's passage was a "remarkable moment" for the state and the nuclear industry. Gov. Bruce Rauner signed the bill into law on December 7, 2016. The Future Energy Jobs Bill provides Exelon and Commonwealth Edison with a $235 million annual credit for the carbon-free energy produced by the Clinton and Quad Cities nuclear plants. The actions of New York and Illinois starts a trend which may continue to states such as Ohio, Pennsylvania, New Jersey and Connecticut to recognize the value of zero carbon power produced by nuclear plants in those states. This would be similar to how the Renewable Portfolio Standard was rolled out across more than half the states in the U.S. to recognize the benefits of zero carbon renewable power.
In regulated markets where the economy is growing, the nuclear fleet is profitable and expanding, with two reactors under construction in the southeast U.S. Longer term, the trends for nuclear power are favorable as well. The U.S. Department of Energy recently released a draft plan to double America's nuclear power capacity by 2050. The plan, dubbed "Vision 2050", promotes expanding America's nuclear capacity through advanced reactor designs including small and medium-size reactors.
As countries around the world recognize the importance of lowering carbon emissions from power generation, nuclear energy is an essential component of the solution. India and the UK have recently announced plans to significantly expand nuclear power generation capacity through new builds. China continues to aggressively build out its fleet. In Japan, five reactors have restarted and up to 10 more should restart by end of March 2019 according to the Institute of Energy Economics, Japan.
We believe GSE is well positioned to take full advantage of these strategic global and domestic trends by providing high fidelity simulation and training solutions to the global power and process industries.
ProductsProduct and Services
Performance Improvement Solutions
To assist our clientsOur 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 creating world-class internal trainingalignment with client and engineering improvement processes,industry goals targeting clean energy production and overall decarbonization we offerare positioned to be at the forefront in three critical areas:
optimization of existing generation assets
design support and deployment of advanced reactor designs
integration with renewable power sources
Optimizing Existing Generation Assets
As the existing fleet of nuclear reactors age and competitive pressures increase, we find ever increasing significance in being able to provide value to their continued operation. Maximizing power production through a setvariety of integrated and scalable products and services which provide a structured program focused on continuous skills improvement for experienced employees to engineering services, which include plant designmethods such as digital verification and validation. We provide the right solutionreconciliation, a statistical based analysis used to solve our clients' most pressing needs.
For workforce developmentlower uncertainty, and training, studentsthus increase recognized power output is instrumental in helping these facilities face current competitive pressures. Other approaches involving safe reduction of testing and instructors alike must have a high degree of confidence that their power plant simulator truly reflects plant behavior across the entire range of operations. To achieve this, GSE's simulation solution starts with the most robust engineering approach possible. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, GSE provides simulation solutions that achieve unparalleled fidelity and accuracy. The solutions that GSE providesinspection requirements or performance periodicities are also known for easeat the forefront of use, resulting in increased productivity by end-users. Forour cost saving techniques with defined services and products providing a clear and positive return on investment. In all cases, these reasons, GSE has delivered more nuclearefforts are aligned with keeping this important source of carbon free base power plant simulators than any other company in the world.economically and technically viable.
For virtual commissioning, designersAdvanced 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, being deployed, often involving the integration of disparate technologies for the first time, a high-fidelity simulator allowsenables designers to seemodel the interaction between systems for the very first time.in advance of construction. With our combination of simulation technology and expert engineering, GSE waswe were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale, and mPower.
ExamplesNuScale. Going forward, we also envision many of the typesoptimization techniques and strategies currently emphasized for the existing reactor fleet incorporated with new-build prototypes as they begin to add value and assume a larger component of our clean, carbon free, power requirements.
Renewable Integration
A significant component of overall decarbonization regarding power generation will ultimately fall to renewable sources such as wind, solar, and hydro generation. These technologies are individually well on their way towards assuming a significant share of the overall generation make-up and are expected to significantly increase. One of the particular needs is the ability to safely and efficiently integrate these renewable sources with our existing and planned nuclear generation. We are on the cutting edge, working closely with academia and industry support organizations to design, model, and evaluate creative approaches to support this integration. Base load production, renewable availability, and other pertinent factors are at the core of the solutions we are exploring.
Engineering Solutions for Decarbonization
With overall decarbonization as our primary focus, we will blend our current and future efforts in those areas described above to best support that goal positioning our Engineering team as recognized leaders in the pursuit of Clean Energy. An overview highlighting many areas of our current and planned involvement as well as the associated benefits is summarized below:
With nuclear power being such a high percentage of carbon free power generation, the continued safe and efficient operation of these plants is critical to meeting decarbonization goals. We help the industry achieve these goals through better training and provide engineering services to optimize performance while maintaining regulatory compliance. Our focus is on products and services to improve the efficiency and lower operating costs for existing power generation assets 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 sell include,have delivered more nuclear power plant simulators than any other company in the world.
Even prior to the COVID pandemic, we had delivered training products though the cloud. This delivery method reduces our customers infrastructure and ownership costs and provides anytime, anywhere access to rich learning content. Innovative Critical Thinking Exercises enable autonomous simulation training to take place, reducing the burden on instructors and increasing training touch time for students and employees. All of which enable the training organization to be more flexible and efficient.
Our simulation solutions not only address industry training needs, but are not limitedused 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 following: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.
| ● | Universal Training Simulators: These products complement the Self-Paced Training Tutorials by reinforcing what the student learned in the tutorial, putting it into practice on the Universal Simulator. The simulation models are high fidelity and engineering correct, but represent a typical plant or typical process, rather than the exact replication of a client's plant. We have delivered over 250 such simulation models to clients consisting of major oil companies and educational institutions.
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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.
| ● | Part-Task Training Simulators: Like the Universal Simulators, we provide other unique training solutions such as a generic nuclear plant simulator and VPanel® displays, which replicate control room hardware and simulator solutions specific to industry needs such as severe accident models to train on and aid in the understanding of events like the Fukushima Daiichi accident.
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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.
| ● | Plant-Specific Operator Training Simulators: These simulators provide an exact replication of the plant control room and plant operations. They provide the highest level of realism and training and allow users to practice their own plant-specific procedures. Clients can safely practice startup, shutdown, normal operations, as well as response to abnormal events we all hope they never have to experience in real life. Since our inception, we have delivered nearly 450 plant-specific simulators to clients in the nuclear power, fossil power and process industries worldwide.
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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:
31Design 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 performanceNuclear Industry TrainingSimulation engineering for nuclear, thermal and Consultingprocess 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'customers’ experienced staffemployees retire or pursue other opportunities, access to industry experts that can helpto operate and train existing and new employees in how to operate theirnuclear plants is essential to ensure safe, ongoing plant operations.operation. In addition, operating and training needs change over time and sometimes our clients require fixed-price, discrete projects, new or updated methods, or specialized courses.courses in contrast to straight staff augmentation. The industry needs operating personnel, including procedure writers, engineers, operators and instructors who can step in and use, as well as, update the client'sclient’s operating methods, procedures, training material.material and more. Finding professionaltechnical professionals and instructors, who know the subject, can perform the work or teach it to others and can adapt to the client'sclient’s culture is critical. GSE provides bothWe provide qualified professionals, instructors and turnkey projects/courses that work within the client'sclient’s system and complement the operating or training methods they already have in place. Examples of our training program courses include senior reactor operator (“SRO”) certification, generic fundamentals training, and simulation supervisor training. In addition, weWe also provide expert support through workforce solutions, consulting, or turnkey projects for procedure writing, technical engineers, project managers, training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability. Our Workforce Solutions segment include traditional staffing services, such as temporary and direct hire, as well as customized approaches in which we work with our customers to evaluate their specific needs and put together a strategic plan specifically to meet their unique needs. Workforce solutions is not only a complement to our other service offerings; it often leads the way as the preferred method for many of our clients to execute entire projects and/or supplement their own staff during project peak periods or with specialized skill sets that are often hard to find. Our staffing experts give our customers the ability to ramp up quickly, eliminate risks, and provide more flexible options as situations often demand.
In addition to the core training and staffing business lines in the nuclear sector, we continue to see significant organic growth opportunity with our Workforce Solutions segment by expanding our service offerings to meet the evolving needs of the energy industry as well as other opportunities that support decarbonization and major infrastructure projects. Due to the experience within our team, we are well positioned to expand our Workforce Solutions segment offerings through our existing relationships and industry knowledge. This growth is occurring both with existing and new customers. We are placing a greater emphasis on cross-selling the services offered by our Workforce Solutions segment with our Performance Improvement Solutions segment. The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and our success is showing with contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies dedicated to clean energy solutions. We have continued to better position us to support these opportunities with strategic hires and staff alignment. As the recent increases in employment transition have demonstrated, companies must also be able to adapt quickly to evolving staffing needs. This has certainly been demonstrated with companies adjusting and allowing more employees to work from home, but it’s not the only answer. Employees are making changes in their professional lives for many reasons, and our workforce solutions offer our customers added support and more flexibility to support ever changing needs. In fact, Workforce Solutions is uniquely positioned for growth in these types of employment environments. Our flexible solutions, and specialized industry experience position us both for current and future staffing needs.
We recognize the necessity to listen to the needs of our customers and provide the right solution. Whether the answer is one of our traditional service offerings or putting together a customized approach, we have the capabilities to help our customers get the job done. We bring together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high-fidelity simulation and training solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate level training solutions of EnVision, andbacked by the extensive nuclear industry training and consultingWorkforce Solutions services of Absolute and Hyperspring.Hyperspring, and now strengthened by our ability to successfully adapt, diversify, and offer a solutions based approach with our Workforce Solutions.
Westinghouse Bankruptcy
On March 29, 2017, Westinghouse, a customer of our Performance Improvement Solutions segment, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York, Case No. 17-10751. During the second quarter of 2017, Westinghouse assumed one of our contracts related to Southern Nuclear Company. Therefore, we have not recorded a reserve for outstanding receivables related to this contract. On July 31, 2017, South Carolina Electric and Gas Company announced that it will cease construction of new nuclear plants at the V.C. Summer Nuclear Station, one of the facilities for which the Company has an executory contract with Westinghouse for the provision of simulator software and equipment. Although there has been no formal rejection of the contract as part of the Westinghouse bankruptcy process, GSE now considers it likely that Westinghouse will reject the parties' contract pertaining to the V.C. Summer Nuclear Station. Therefore, at June 30, 2017, GSE reserved 100% of accounts receivable, unbilled receivables, and billings in excess related to the V.C. Summer Nuclear Station, resulting in a net bad debt charge of $118,000.
At September 30, 2017, in addition to the foregoing amounts associated with the V.C. Summer Nuclear Station, the Company had approximately $0.1 million in net billed and unbilled pre-petition receivables attributable to Westinghouse. The Company has assessed the recoverability of the remaining $0.1 million in net billed and unbilled pre-petition receivables and concluded that the likelihood of loss is not probable, and therefore, none of the remaining outstanding amounts have been reserved at September 30, 2017.
Results of Operations
The following table sets forth theour results of operations, for the periods presented expressed in thousands of dollars and as a percentage of revenue:
| | | Three months ended | |
(in thousands) | Three months ended September 30, | | Nine months ended September 30, | | March 31, 2022 | | | March 31, 2021 | |
| 2017 | | % | | 2016 | | % | | 2017 | | % | | 2016 | | % | | $ | | % | | | $ | | % | |
Revenue | $ | 15,409 | | 100.0 % | | $ | 14,428 | | 100.0 % | | $ | 48,876 | | 100.0 % | | $ | 39,820 | | 100.0 % | | $ | 12,275 | | 100.0 | % | | $ | 13,104 | | 100.0 | % |
Cost of revenue | | 11,185 | | 72.6 % | | | 10,430 | | 72.3 % | | | 35,513 | | 72.7 % | | | 28,329 | | 71.1 % | | | 9,848 | | | 80.2 | % | | | 10,176 | | | 77.7 | % |
Gross profit | | | 2,427 | | 19.8 | % | | 2,928 | | 22.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | 4,224 | | 27.4 % | | | 3,998 | | 27.7 % | | | 13,363 | | 27.3 % | | | 11,491 | | 28.9 % | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | 4,374 | | 28.4 % | | | 2,936 | | 20.3 % | | | 11,740 | | 24.0 % | | | 8,606 | | 21.6 % | | 4,507 | | 36.5 | % | | 3,734 | | 28.5 | % |
Research and development | | 353 | | 2.3 % | | | 381 | | 2.6 % | | | 1,103 | | 2.4 % | | | 1,010 | | 2.5 % | | 142 | | 1.2 | % | | 157 | | 1.2 | % |
Restructuring charges | | - | | 0.0% | | | 85 | | 0.6% | | | 45 | | 0.1% | | | 487 | | 1.2% | | - | | 0.0 | % | | 808 | | 6.2 | % |
Loss on impairment | | | - | | 0.0 | % | | - | | 0.0 | % |
Depreciation | | 79 | | 0.5 % | | | 91 | | 0.6 % | | | 254 | | 0.5 % | | | 294 | | 0.7 % | | 72 | | 0.6 | % | | 76 | | 0.6 | % |
Amortization of definite-lived intangible assets | | 50 | | 0.3 % | | | 72 | | 0.5 % | | | 148 | | 0.3 % | | | 219 | | 0.5 % | |
Amortization of intangible assets | | | | 260 | | | 2.1 | % | | | 340 | | | 2.6 | % |
Total operating expenses | | 4,856 | | 31.5 % | | | 3,565 | | 24.7 % | | | 13,290 | | 27.2 % | | | 10,616 | | 26.7 % | | | 4,981 | | | 40.6 | % | | | 5,115 | | | 39.0 | % |
| | | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | (632) | | (4.1)% | | | 433 | | 3.0% | | | 73 | | 0.1% | | | 875 | | 2.2% | |
| | | | | | | | | | | | | | | | | | | | |
Interest income, net | | 15 | | 0.1 % | | | 11 | | 0.1 % | | | 60 | | 0.1 % | | | 52 | | 0.1 % | |
Gain (loss) on derivative instruments, net | | 71 | | 0.5% | | | (211) | | (1.5)% | | | 226 | | 0.5% | | | (346) | | (0.9)% | |
Other income (expense), net | | 33 | | 0.2% | | | 15 | | 0.2% | | | (4) | | 0.0% | | | 112 | | 0.3% | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income before income taxes | | (513) | | (3.3)% | | | 248 | | 1.7% | | | 355 | | 0.7% | | | 693 | | 1.7% | |
| | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | 92 | | 0.6% | | | 80 | | 0.7% | | | 399 | | 0.8% | | | 275 | | 0.7% | |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income | $ | (605) | | (3.9)% | | $ | 168 | | 1.2% | | $ | (44) | | (0.1)% | | $ | 418 | | 1.0% | |
Operating loss | | | 2,554 |
| | (20.9 | )% | | (2,187 | ) | | (16.8 | )% |
Interest expense, net | | | (148 | ) | | (1.2 | )% | | (54 | ) | | (0.4 | )% |
Change in fair value of derivative instruments, net | | | (581 | ) | | (4.9 | )% | | - | | 0.0 | % |
Other income, net | | | | 16 | | | 0.1 | % | | | 1 | | | 0.0 | % |
Loss before income taxes | | | (3,267 | ) | | (26.6 | )% | | (2,240 | ) | | (17.1 | )% |
Provision for (benefit from) income taxes | | | | 167 | | | 1.4 | % | | | (35 | ) | | | (0.3 | )% |
Net loss | | | $ | (3,434 | ) | | | (28.0 | )% | | $ | (2,205 | ) | | | (16.8 | )% |
Revenue
Results of Operations - Three and nine
Revenue for the three months ended September 30, 2017, versus three and nine months ended September 30, 2016
Revenue. TotalMarch 31, 2022 totaled $12.3 million, which was 6% less than the $13.1 million of revenue for the three months ended September 30, 2017, increased 6.8% greater compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, revenue increased 22.7% compared to the nine months ended September 30, 2016. The increase in revenue was primarily driven by the year over year increase in revenue in the Nuclear Industry Training and Consulting segment, as described below.March 31, 2021.
| Three months ended | | Nine months ended | |
| September 30, | | September 30, | | Three months ended | |
(in thousands) | 2017 | | 2016 | | | 2017 | | 2016 | | March 31, 2022 | | | March 31, 2021 | | | Change | |
Revenue: | | | | | | | | | | | | | | | | | $ | | % | |
Performance Improvement Solutions | $ | 8,737 | | $ | 10,215 | | $ | 30,093 | | $ | 27,382 | | $ | 6,397 | | $ | 7,081 | | (684 | ) | | (10 | )% |
Nuclear Industry Training and Consulting | | 6,672 | | | 4,213 | | | 18,783 | | | 12,438 | |
Workforce Solutions | | | | 5,878 | | | 6,023 | | | (145 | ) | | | (2 | )% |
Total revenue | $ | 15,409 | | $ | 14,428 | | $ | 48,876 | | $ | 39,820 | | $ | 12,275 | | $ | 13,104 | | | (829 | ) | | | (6 | )% |
Performance Improvement Solutions revenue decreased approximately $1.510% from $7.1 million or 14.5% duringto $6.4 million for the three months ended September 30, 2017, compared to the same period in the prior year. Additionally, total new orders for this segment were $2.9 million during the three months ended September 30, 2017, aMarch 31, 2022 and 2021, respectively. The decrease of $7.3 million when compared to the $10.2 million in the new orders during the three months ended September 30, 2016. The decrease in new orders in the three months ended September 30, 2017, is primarily due to timing difference, a few key orders slipped into the fourth quarter. The decrease in revenues isrevenue was primarily due to a decline in revenues from our foreign subsidiaries of approximately $0.8 million. In addition, wesoftware license sales as well as software maintenance renewals. We recorded a revenue adjustment of approximately $0.5 million related to a customer contract, due to an expected change order, which was offset by a similar adjustment to cost of revenue.
For the nine months ended September 30, 2017,total Performance Improvement Solutions revenue was $30.1 million compared to $27.4 million for the nine months ended September 30, 2016. However, we recorded total orders of $12.0 million during the nine months ended September 30, 2017, compared to $50.7 million in the nine months ended September 30, 2016. The increase in revenue for the nine months ended September 30, 2017 compared to the prior year is mainly driven by an additional $7.4 million in revenues from a major customer per the large contract executed in the first quarter of 2016. Excluding this customer, revenues were down $4.7 million compared to the prior year. This decrease was primarily due to a $2.3 million decrease in revenues from foreign subsidiaries as well as several large contracts that were completed in 2016 and only partially backfilled by new orders in 2017.
For the three months ended September 30, 2017, Nuclear Industry Training and Consulting revenue increased $2.5 million, or 58.4% compared to the three months ended September 30, 2016. Total orders for this segment were $6.3 million in the three months ended September 30, 2017, compared to $3.6 million in the prior year. Absolute contributed $1.2 million of revenues to the current year increase. Hyperspring's largest customer contributed $1.5 million of increased revenues compared to the prior year.
For the nine months ended September 30, 2017, Nuclear Industry Training and Consulting revenue increased $6.3 million, or 51.0% compared to the nine months ended September 30, 2016. We recorded total orders of $25.1 million in the nine months ended September 30, 2017, compared to $12.1 million in the nine months ended September 30, 2016. The $6.3 million increase was primarily attributable to the acquisition of Absolute, which contributed $1.2 million of revenues to the current year increase, as well as Hyperspring's largest customer, which contributed $6.4 million of increased revenues compared to the prior year.
At September 30, 2017, backlog was $76.4 million: $51.8 million for the Performance Improvement Solutions business segment and $24.6 million for Nuclear Industry Training and Consulting, $12.7 million of which was attributable to Absolute. At December 31, 2016, the Company's backlog was $73.2 million: $68.8 million for the Performance Improvement Solutions business segment and $4.4 million for Nuclear Industry Training and Consulting. Excluding Absolute, total backlog decreased approximately $9.5 million from $73.2 million at December 31, 2016 to $63.7 million at September 30, 2017. The decrease in backlog is primarily due to 2016 backlog that was converted to revenues during 2017 and has only been partially backfilled by new orders. Excluding Absolute, Nuclear Industry Training and Consulting's backlog increased $7.5 million during 2017 primarily due to increased orders from Hyperspring's two largest customers.
Gross Profit. Gross profit totaled $4.2$5.6 million for the three months ended September 30, 2017,March 31, 2022 and 2021, respectively.
For the three months ended March 31, 2022, Workforce Solutions revenue decreased 2% to $5.9 million compared to $4.0revenue of $6.0 million for the same period in 2016. As a percentage of revenue, gross profit decreased from 27.7% for the three months ended September 30, 2016,March 31, 2021. The decrease in revenue was due to 27.4%a minor reduction in staffing needs from our major customers. We recorded total new orders of $4.7 million and $7.4 million for the three months ended September 30, 2017. ForMarch 31, 2022 and 2021, respectively.
As of March 31, 2022, our backlog was $40.1 million, of which, $31.9 million was attributed to the ninePerformance segment and $8.2 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 $2.4 million or 19.8% of revenue and $2.9 million or 22.3% of revenue for the three months ended September 30, 2017, gross profit was $13.4 million compared to $11.5 million for the same period in 2016. As a percentage of revenue,March 31, 2022 and 2021, respectively.
| | Three months ended | |
| | March 31, 2022 | | | March 31, 2021 | |
(in thousands) | | $ | | | % | | | $ | | | % | |
Gross profit: | | | | | | | | | | | | | | |
Performance Improvement Solutions | | $ | 1,815 | | | | 28.4 | % | | $ | 2,192 | | | | 31.0 | % |
Workforce Solutions | | | 612 | | | | 10.4 | % | | | 736 | | | | 12.2 | % |
Total gross profit | | $ | 2,427 | | | | 19.8 | % | | $ | 2,928 | | | | 22.3 | % |
The Performance Improvement Solutions segment’s gross profit decreased from 28.9% for the nineby $0.4 million during three months ended September 30, 2016, to 27.3% for the nineMarch 31, 2022 over three months ended September 30, 2017.March 31, 2021. The decrease is primarily related to lower revenue and a shift in product mix to lower margin projects.
| Three months ended | | Nine months ended |
| September 30, | | September 30, |
(in thousands) | 2017 | | % | | 2016 | | % | | 2017 | | % | | 2016 | | % |
Gross profit: | | | | | | | | | | | | | | | | | | | |
Performance Improvement Solutions | $ | 2,904 | | 33.2 % | | $ | 3,507 | | 34.3 % | | $ | 10,337 | | 34.3 % | | $ | 9,871 | | 36.0 % |
Nuclear Industry Training and Consulting | | 1,320 | | 19.8 % | | | 491 | | 11.7 % | | | 3,026 | | 16.1 % | | | 1,620 | | 13.0 % |
Consolidated gross profit | $ | 4,224 | | 27.4 % | | $ | 3,998 | | 27.7 % | | $ | 13,363 | | 27.3 % | | $ | 11,491 | | 28.9 % |
The yearWorkforce Solutions segment’s gross profit decreased by $0.1 million during three months ended March 31, 2022 over yearthree months ended March 31, 2021. The decrease in gross profit percentage for Performance Improvement Solutions during 2017 was primarily driven by three major nuclear simulation projects with lower margin.
The year over year increase in Nuclear Industry Consulting and Training gross profit percentage for 2017 was primarily driven by the changea product mix shift in the mix of projects with higherWorkforce Solutions business that had new contracts undertaken at lower margins which reflected the segment's focus on entering higher margin contracts.compared to prior year.
Selling, General and Administrative Expenses. Selling, general and administrative ("expenses (“SG&A"&A”)
SG&A expenses totaled $4.4$4.5 million inand $3.7 million for the three months ended September 30, 2017, a 49.0% increase from the $2.9 million for the same period in 2016. For the nine months ended September 30, 2017March 31, 2022 and 2016, SG&A expenses totaled $11.7 million and $8.6 million,2021, respectively. Fluctuations in the components of SG&A spending were as follows:follows.
| Three months ended | | Nine months ended |
| September 30, | | September 30, |
(in thousands) | 2017 | | 2016 | | | 2017 | | 2016 |
Corporate charges | $ | 3,245 | | $ | 2,381 | | $ | 8,287 | | $ | 5,785 |
Business development | | 773 | | | 802 | | | 2,250 | | | 2,378 |
Facility operation & maintenance ("O&M") | | 213 | | | 262 | | | 645 | | | 785 |
Bad debt expense | | - | | | - | | | 118 | | | - |
Contingent consideration accretion | | 139 | | | (525) | | | 436 | | | (370) |
Other | | 4 | | | 16 | | | 4 | | | 28 |
Total | $ | 4,374 | | $ | 2,936 | | $ | 11,740 | | $ | 8,606 |
| | | | | Three months ended | | | | |
(in thousands) | | March 31, 2022 | | | % | | | March 31, 2021 | | | % | |
| | | | | | | | | | | | |
Selling, general and administrative expenses: | | | | | | | | | | | | |
Corporate charges | | $ | 3,482 | | | | 77.3 | % | | $ | 2,758 | | | | 73.9 | % |
Business development | | | 839 | | | | 18.6 | % | | | 767 | | | | 20.5 | % |
Facility operation & maintenance (O&M) | | | 177 | | | | 3.9 | % | | | 200 | | | | 5.4 | % |
Bad debt expense | | | - | | | | 0.0 | % | | | 4 | | | | 0.1 | % |
Other | | | 9 | | | | 0.2 | % | | | 5 | | | | 0.1 | % |
Total | | $ | 4,507 | | | | 100.0 | % | | $ | 3,734 | | | | 100.0 | % |
Corporate charges increased from $2.4 million for
During the three months ended September 30, 2016,March 31, 2022, corporate charges increased by $0.7 million over the same period of the prior year. The increase was primarily due to $3.2an increase of stock compensation expense of $0.3 million forand an increase in corporate bonus accrual of $0.3 million in Q1 2022.
Business development expenses
Business development expense increased $0.1 million during the three months ended September 30, 2017. The increase was primarily driven byMarch 31, 2022 over the acquisition-related expensessame period of $0.5 million and an increase of $0.2 million in stock-based compensation in 2017. For the nine months ended September 30, 2017 and 2016, corporate charges increased from $5.8 million to $8.3 million.prior fiscal year. The increase was primarily due to higher stock-based compensationcommission costs and recruiting fees in Q1 2022.
Facility operation & maintenance (“O&M”)
Facility O&M expenses of $0.9 million, acquisition-related expenses of $0.5 million, higher professional fees of $0.5 million, and higher realized foreign currency exchange losses of $0.2 million.
Business development expense decreased $29,000 and $128,000$23 thousand for the three and nine months ended September 30, 2017,March 31, 2022, respectively, compared to the same periodsperiod in 2016. This2021. The decrease in facility O&M during fiscal 2022 was mainly due to lower headcount.lease terminations in the first half of 2021.
Facility O&M expensesBad debt expense
We recorded no bad debt expense during the three months ended March 31, 2022. We recorded $4 thousand of bad debt expense during the three months ended March 31, 2021.
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 $213,000$142 thousand and $262,000$157 thousand for the three months ended September 30, 2017March 31, 2022 and 2016,2021, respectively. For the nine months ended September 30, 2017 and 2016, the facility O&M expenses totaled $645,000 and $785,000, respectively. The decrease in 2017 was mainly due to the sublease of a portion of our Sykesville location and the closing of our Georgia office at the end of 2016.
Restructuring
We recorded bad debt expense of $118,000 for the nine months ended September 30, 2017. We did not record bad debt expense for the three and nine months ended September 30, 2016. On July 31, 2017, South Carolina Electric and Gas Company announced that it would cease construction of new nuclear plants at the V.C. Summer Nuclear Station, one of the facilities for which the Company has an executory contract with Westinghouse for the provision of simulator software and equipment. Although there has been no formal rejection of the contract as part of the Westinghouse bankruptcy process, GSE considered it likely that Westinghouse would reject the parties' contract pertaining to the V.C. Summer Nuclear Station. Therefore, at June 30, 2017, GSE reserved 100% of accounts receivable, unbilled receivables, and billings in excess related to the V.C. Summer Nuclear Station, resulting in a net bad debt charge of $118,000.
Contingent consideration expense mainly reflected the fair value adjustments related to our November 2014 Hyperspring acquisition. The contingent consideration expenses totaled $139,000 and $436,000 for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, we recorded contingent consideration accretion income of $525,000 and $370,000, respectively. The increase in contingent consideration expenses primarily reflected better performance for Hyperspring in 2017.
Research and Development Expenses. Research and Development ("R&D") expenses totaled $0.4 million for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, R&D expenses totaled $1.1 million and $1.0 million, respectively.
Restructuring Charges. There were no restructuring charges during the three months ended September 30, 2017, comparedMarch 31, 2022. We recorded $808 thousand restructuring charges during the three months ended March 31, 2021. The decrease was mainly due to $0.1 millionfinal charges related to the liquidation of our Sweden operations in Q1 2021, pursuant to our foreign restructuring plan.
Depreciation
We recorded depreciation expense of $72 thousand and $76 thousand for the three months ended September 30, 2016. For the nine months ended September 30, 2017March 31, 2022 and 2016, restructuring charges totaled $45,000 and $487,000,2021, respectively. The decrease in restructuring charges in 2017 was primarily due to nearing completion on the Company's restructuring activities initiated during 2015.
Depreciation. Depreciation expense totaled $0.1 millionreduction of $4 thousand for each of the three months ended September 30, 2017 and 2016. For each ofMarch 31, 2022 over the nine months ended September 30, 2017 and 2016, depreciation expense totaled $0.3 million.same period in 2021 was due primarily to additional assets becoming fully depreciated.
Amortization of Definite-lived Intangible Assets. intangible assets
Amortization expense related to definite-lived intangible assets totaled $50,000$0.3 million for both the three months ended March 31, 2022 and $72,0002021.
Interest expense, net
Interest expense totaled $148 thousand and $54 thousand for the three months ended September 30, 2017March 31, 2022 and 2016,2021, respectively. The increase was mainly due to an increase in total indebtedness compared to Q1 2021.
Change in fair value of derivative instruments, net
For the ninethree months ended September 30, 2017 and 2016, amortization expenseMarch 31, 2022, we recognized a net loss of $0.6 million related to definite-lived intangible assets totaled $148,000 and $219,000, respectively. The decrease in amortization of definite-lived intangible assets in 2017 was primarily due to lower amortization of customer-related intangible assets that were recorded in conjunction with the Hyperspring acquisition in 2014.
Gain (Loss) on Derivative Instruments, Net. The Company periodically enters into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated trade receivables. As of September 30, 2017, the Company had foreign exchange contracts outstanding of approximately 212.5 million Japanese Yen, 0.2 million Euro and 0.2 million Australian Dollars at fixed rates. The contracts expire on various dates through December 2018. The Company has not designated the contracts as cash flow hedges and has recognized a gain on the change in the estimatedof fair value of the contracts of $74,000 and $145,000 for the three and nine months ended September 30, 2017, respectively.
As of September 30, 2016, the Company had foreign exchange contracts outstanding of approximately 341.4 million Japanese Yen, 1.6 million Euro, 0.7 million Australian Dollars, and 0.5 million Canadian Dollars at fixed rates. The contracts expired on various dates through June 2017. The Company had not designated the contracts as hedges and had recognized a loss of $125,000 and $302,000 for the three and nine months ended September 30, 2016, respectively.
The foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals that areembedded derivative liability related to the outstanding foreign exchange contracts were remeasured into the functional currency using the current exchange rate at the end of the period. Convertible Note and warrant liability.
Other income, net
For the three and nine months ended September 30, 2017, the Company recognized a loss of $3,000March 31, 2022 and a gain of $81,000, respectively. For the three and nine months ended September 30, 2016, the Company recognized a loss of $86,000 and $44,000, respectively.
Other Income (Expense), Net. For the three and nine months ended September 30, 2017, the Company2021, we recognized other income, net of $33,000$16 thousand and other$1 thousand, respectively.
Income taxes expense net, of $4,000, respectively. For the three and nine months ended September 30, 2016, the Company recognized other income, net, of $15,000 and $112,000, respectively. During the first quarter of 2016, the Company's Chinese subsidiary received a $101,000 refund of Value Added Tax.(benefit)
Provision for Income Taxes
Income tax expense was $92,000 and $399,000 with effective income tax rates of (17.9)% and 112.4% for the three and nine months ended September 30, 2017, respectively. This is compared to income tax expense of $80,000 and $275,000 with effective income tax rates of 32.3% and 39.7%, for the three and nine months ended September 30, 2016, respectively. The Company's income tax provision(benefit) for interim periods is determined using an estimate of itsour annual effective tax rate, adjusted for discrete items arising in that quarter. TaxTotal income tax expense in both periods isof $167 thousand for the three months ended March 31, 2022 was comprised mainly of current foreign and state tax expense and deferred federal and state tax expense related to the portion of goodwill which cannot be offset by deferred tax assets. Total income tax benefit of $(35) thousand for the three months ended March 31, 2021 was comprised mainly of foreign and state tax benefit.
Our income effective tax rate was (5.1)% and 1.6% for the three months ended March 31, 2022 and 2021, respectively. The difference between our income tax expense Alternative Minimum Tax, state taxes,at an effective tax rate of (5.1)% and deferred tax expense relating toa benefit at the tax amortization of goodwill.
Because of the net operating loss carryforwards, the Company is subject to U.S. statutory federal and state income tax examinations from years 1997 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 and forward for Sweden, 2014 and forward for China, and 2015 and forward for both India andrate of 21% was primarily due a change in valuation allowance in our U.S. entity, the UK.
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 likelihoodpermanent disallowance of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Interest and penaltiesinterest expense related to income taxes are accounted for as income tax expense. The Company has recordeddisqualified debt, accruals related to uncertain tax positions for certain foreign tax contingencies, and discrete item adjustments for U.S. and foreign taxes. For the three months ended March 31, 2021, the difference between the income tax benefit at an effective tax rate of 1.6% and a benefit at 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 China, South Korea and the Ukraine.
The Company has recorded a fulltax valuation allowance in our U.S. and China subsidiaries, and discrete item adjustments for its U.S., U.K., Swedish, and Chinese net deferred tax assets at September 30, 2017.foreign taxes.
Critical Accounting Policies and Estimates
In preparing the Company'sour consolidated financial statements, managementManagement makes several estimates and assumptions that affect the Company'sour reported amounts of assets, liabilities, revenues and expenses. Those accounting estimates that have theOur most significant impact on the Company's operating results and place the most significant demands on management's judgment includeestimates relate to revenue recognition allowance for doubtful accounts, impairmenton contracts with customers, product warranties, valuation of goodwill and intangible assets including goodwill, capitalization of computer software development costs,acquired, valuation of contingent consideration for business acquisitions,long-lived assets to be disposed, valuation of stock-based compensation awards and the recoverability of deferred income tax valuation allowance.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.10-K, filed with the SEC on March 31, 2022. In addition, in the quarter ending 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 of theseaccounting policies described in this document, management cautions that future events rarely develop exactly as forecast,forecasted and theeven our best estimates may require adjustment.
38
adjustment as facts and circumstances change.
Liquidity and Capital Resources
As of September 30, 2017, the Company'sMarch 31, 2022, our cash, and cash equivalents and restricted cash totaled $15.5$7.0 million, compared to $21.7$3.6 million atas of December 31, 2016.2021.
As of March 31, 2022, we have a long-term restricted cash of $1.6 million. We had $1.1 million of restricted cash to secure four letters of credit with various customers and $0.5 million to secure our corporate credit card program.
For the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, net cash provided by operating activities was $3.4were both $1.1 million and $3.9net cash used in operating activities were $2.0 million, respectively. The year over year decreaseincrease in cash flows provided by operating activities was primarily driven by an ERC refund increased revenues during 2017, primarily driven by our two largest customerscollections in the first quarter of 2022 and contributing approximately $1.8 millionslower billing in the first quarter of additional gross profit; an increase2021.
30
Net cash used byin investing activities totaled $8.5both $0.2 million for the ninethree months ended September 30, 2017, compared toMarch 31, 2022 and 2021, respectively.
For the three months ended March 31, 2022 and 2021, net cash provided in investingby financing activities was $31,000 in the prior year. The significant cash outflow in 2017 was primarily driven by the acquisition of Absolute. The net cash consideration for the acquisition was $8.5 million.
For the nine months ended September 30, 2017$2.6 million and 2016, net cash used in financing activities totaled $1.5 million and $0.8was $0.7 million, respectively. The increase in the cash outflow fromprovided by financing activities is largelyof $3.3 million was primarily driven by the Company withholding RSUs in order to pay employees' payroll withholding taxes on vested RSUs totaling approximately $1.0$4.8 million and a $0.3 million decrease inof proceeds received from stock option exercises, partiallyissuance of Convertible Note, offset by a $0.6$1.8 million decrease in contingent consideration payments torepayment of the former Hyperspring owners in 2017.
At September 30, 2017, the Company had cash and cash equivalents of $15.5 million. The Company believes that its (i) cash and cash equivalents and (ii) cash generated from normal operations will be sufficient to fund its working capital and other requirements for at least the next twelve months.
Line of Credit
Citizens Bank
The Company entered into a three-year, $5.0 million revolving line of credit facility ("RLOC") with Citizens Bankduring the three months ended March 31, 2022.
Paycheck Protection Program Loan
We applied for and, on December 29, 2016, to fund general working capital needs, including acquisitions. Working capital advances bear interest of one-month LIBOR plus 2.25% per annum and letter of credit fees are 1.25% per annum. The Company is not required to maintain a restricted cash collateral account at Citizens Bank for outstanding letters of credit and working capital advances.
The maximum availabilityApril 23, 2020, received the PPP Loan under the RLOCCARES 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 subjectfully 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 a borrowing base equalConsolidated Financial Statements). The proceeds received from the Convertible Note were used to 80%repay in full, all outstanding indebtedness of eligible accounts receivable,$1.8 million owed to Citizens, and is reduced for any issuedthe Amended and outstanding lettersRestated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. As of credit and working capital advances. At September 30, 2017, there were no outstanding borrowings on the RLOC and sixMarch 31, 2022, we had four letters of credit totaling $1.7 million, two of which expired and are pending on release by the bank and customer. The amount available at September 30, 2017, after consideration of the borrowing base, letters of credit and working capital advances was approximately $3.3 million.
The credit facility agreement is subject to standard financial covenants and reporting requirements. At September 30, 2017, the Company was in compliance with its financial covenants.
BB&T Bank
At September 30, 2017, we had three letters of credit with BB&T totaling $0.9 million, which expired and are pending on release by the bank and customer. At September 30, 2017 and December 31, 2016, the cash collateral account with BB&T totaled $1.0 million and $1.1 million respectively andoutstanding to certain customers which were classified assecured with restricted cash on the consolidated balance sheets..
Non-GAAP Financial Measures
Adjusted EBITDA
References to “EBITDA” mean net (loss) income, before taking into account interest expense (income), provision for income taxes, depreciation and amortization. References to Adjusted EBITDA exclude the impact of restructuring charges, stock-based compensation expense and change in fair value of derivative instruments. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles ("GAAP")(GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate the Company'sour results because it excludes certain items that are not directly related to the Company'sour 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-titledsimilarly titled measures of other companies. These measuresThis measure should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. ReconciliationA reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measures are asmeasure in accordance with SEC Regulation G follows:
| | | | | Three months ended | | Nine months ended |
| | | | | September 30, | | September 30, |
| | | | | 2017 | | 2016 | | 2017 | | 2016 |
Net (loss) income | ($605) | | $168 | | ($44) | | $418 |
Interest income, net | (15) | | (11) | | (60) | | (52) |
Provision for income taxes | 92 | | 80 | | 399 | | 275 |
Depreciation and amortization | 247 | | 276 | | 754 | | 809 |
EBITDA | (281) | | 513 | | 1,049 | | 1,450 |
Loss (gain) from the change in fair value of contingent consideration | 139 | | (525) | | 436 | | (370) |
Restructuring charges | - | | 85 | | 45 | | 487 |
Stock-based compensation expense | 627 | | 412 | | 1,873 | | 900 |
Consulting support for finance restructuring | - | | 232 | | - | | 310 |
Acquisition-related expense | 454 | | - | | 473 | | - |
Westinghouse bankruptcy related expense | - | | - | | 122 | | - |
Adjusted EBITDA | $939 | | $717 | | $3,998 | | $2,777 |
(in thousands)
| | Three months ended | |
| | March 31, 2022 | | | March 31, 2021 | |
Net loss | | $ | (3,434 | ) | | $ | (2,205 | ) |
Interest expense, net | | | 148 | | | | 54 | |
Provision for income taxes | | | 167 | | | | (35 | ) |
Depreciation and amortization | | | 415 | | | | 513 | |
EBITDA | | | (2,704 | ) | | | (1,673 | ) |
Restructuring charges | | | - | | | | 808 | |
Stock-based compensation expense | | | 408 | | | | 38 | |
Change in fair value of derivative instruments, net
| | | 581 | | | | - | |
Adjusted EBITDA | | $ | (1,715 | ) | | $ | (827 | ) |
Adjusted Net (Loss) Income and Adjusted EPS(Loss) Earnings per Share Reconciliation(
References to Adjusted net (loss) income exclude the impact of restructuring charges, stock-based compensation expense, change in thousands, except per share amounts)
fair value of derivative instruments and amortization of intangible assets related to acquisitions. Adjusted Net Income and adjusted earnings (loss) per share ("adjusted EPS")(adjusted EPS) are not measures of financial performance under GAAP. Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, provide meaningful supplemental information regarding our operational performance. Our management uses Adjusted Net Income and other non-GAAP measuresare useful to investors to evaluate the performance of our business and makeresults because they exclude certain operating decisions (e.g., budgeting, planning, employee compensation and resource allocation). This information facilitates management's internal comparisonsitems that are not directly related to our historicalcore operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results as well as to the operating results of our competitors. Since management finds this measure to be useful, we believe that our investors can benefit by evaluating both non-GAAP and GAAP results.for any particular period. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to GAAP net income, the most directly comparable GAAP financial measure, is as follows:
(in thousands) | | | | | Three months ended | | Nine months ended |
| | | | | September 30, | | September 30, |
| | | | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | |
Net (loss) income | ($605) | | $168 | | ($44) | | $418 |
Loss (gain) from the change in fair value of contingent consideration | 139 | | (525) | | 436 | | (370) |
Restructuring charges | - | | 85 | | 45 | | 487 |
Stock-based compensation expense | 627 | | 412 | | 1,873 | | 900 |
Consulting support for finance restructuring | - | | 232 | | - | | 310 |
Acquisition-related expense | 454 | | - | | 473 | | - |
Westinghouse bankruptcy related expense | - | | - | | 122 | | - |
Adjusted net income | $615 | | $372 | | $2,905 | | $1,745 |
| | | | | | | |
(Loss) earnings per share - diluted | ($0.03) | | $0.01 | | $0.00 | | $0.02 |
| | | | | | | |
Adjusted earnings per share - diluted (a) | $0.03 | | $0.02 | | $0.15 | | $0.10 |
| | | | | | | |
Weighted average shares outstanding - Diluted (a) | 19,702,742 | | 18,470,117 | | 19,601,661 | | 18,287,870 |
(a)(in thousands) | | Three months ended | |
| | March 31, 2022 | | | March 31, 2021 | |
| | | | | | |
Net loss | | $ | (3,434 | ) | | $ | (2,205 | ) |
Restructuring charges | | | - | | | | 808 | |
Stock-based compensation expense | | | 408 | | | | 38 | |
Change in fair value of derivative instruments, net | | | 581 | | | | - | |
Amortization of intangible assets related to acquisitions | | | 260 | | | | 340 | |
Adjusted net loss | | $ | (2,185 | ) | | $ | (1,019 | ) |
| | | | | | | | |
Adjusted loss per common share – Diluted | | $ | (0.10 | ) | | $ | (0.05 | ) |
| | | | | | | | |
Weighted average shares outstanding used to compute adjusted net loss per share - basic and diluted(1) | | | 20,980,046 | | | | 20,628,669 | |
(1) During the three months ended March 31, 2022 and nine months ended September 30, 2017, the Company2021, we reported a GAAP net loss and positivean adjusted net income. Accordingly there were 421,972 and 396,883was no dilutive shares from options and RSUs included in the adjusted earnings per common share calculation for the three and nine months ended September 30, 2017, respectively, that were considered anti-dilutive in determiningwhen calculating the GAAP dilutednet loss per common share.
Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
Not required of a smaller reporting company.
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 at the reasonable assurance level because of a material weakness related to certain revenue recognition matters, as described below andeffective; we are currently in Item 9Aremediation of our Annual Report oninternal controls to address material weaknesses identified in our Form 10-K for the year ended December 31, 2016.2021, filed with the SEC on March 31, 2022.
Remediation Plan
We are committedThrough 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 un-remediated. In the remediationcourse of our assessment of the identified material weakness, as well as the continued improvement of our overall system of internal control over financial reporting. We are currently workingreporting as of March 31, 2022, we identified an additional material weakness in our control environment related to remediate the underlying causesreview of the financial statements, specifically the review of the presentation of changes in cash, cash equivalents and restricted cash on the statement of cash flow.
Our remediation of the remaining control deficiencies that ledweakness from 2021 includes 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 material weakness. Ourin the period ended March 31, 2022, remediation plan includesand testing will be performed over the following:review of financial statements with focused attention on proper presentation of elements of the financial statements, including the statement of cash flows. Remediation procedures will include developing enhanced documentation of review steps performed prior to distributing financial statements for reporting. As well as concluding the financial presentation as it relates to items noted on a list of significant and unusual transactions identified for the reporting period.
· | Documenting policies and procedures to appropriately compile contract information and ensure that such information was properly recorded and reviewed; |
· | Documenting review and approval of revenue arrangements to ensure that they were accounted in accordance with applicable U.S. GAAP, including certain software arrangements which lacked VSOE; and |
· | Documenting evidence surrounding estimates-to-complete on the Company's fixed price contracts to ensure such estimates were appropriately reviewed and approved to support percentage of completion adjustments. |
These additional review procedures and documentation have been in place and operating since the second quarter 2017, and while we believe these controls effectively remediate the identified material weakness, the identified material weakness will not be considered remediated until management has concluded the required level of testing. As we perform our testing, we may take additional measures or modify our remediation plan.
Changes in Internal Control over Financial Reporting
Except for the implementation of remediation measures described above, thereThere were no changes in the Company'sour internal controlcontrols over financial reporting that occurred during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company'sour internal control over financial reporting.
Limitation of Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
PART II
-– OTHER INFORMATION
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.
None.
The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Mine Safety Disclosures |
Not applicable.
None.
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.