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


FORM 10-Q


(Mark One)   
☒
 
Quarterly Report Pursuant to SectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended September 30, 2017quarterly period ended March 31, 2022
 
    
  or 
    
☐
 
Transition Report Pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____ to ____
 


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


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

1332 Londontown Blvd.6940 Columbia Gateway Dr., Suite 200, Sykesville470, Columbia MD 2178421046
(Address of principal executive offices) (Zip Code)


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


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


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes [ X ]☒   No [   ]☐


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


Large accelerated filer 
☐
Accelerated filer 
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company ☐ (Do not check if a smaller reporting company) 


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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

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


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

There were 19,399,05621,013,206 shares of common stock, with a par value of $0.01 per share outstanding as of October 31, 2017.April 30, 2022.
1


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


  PAGEPage
PART I.FINANCIAL INFORMATION3
Item 1.Financial Statements:Statements (unaudited) 
 
Consolidated Balance Sheets as of September 30, 2017March 31, 2022 (unaudited) and December 31, 20162021
3
 
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017,March 31, 2022 and September 30, 20162021
4
 
Unaudited Consolidated Statements of Comprehensive Income (Loss)Loss for the Three and Nine Months Ended September 30, 2017,March 31, 2022 and September 30, 20162021
5
 
Unaudited Consolidated StatementStatements of Changes in Stockholders'Stockholders’ Equity for the NineThree Months Ended September 30, 2017March 31, 2022 and 2021
6
 
Unaudited Consolidated Statements of Cash Flows for the NineThree Months Ended September 30, 2017March 31, 2022 and September 30, 20162021
7
 
Notes to the Consolidated Financial Statements (unaudited)
8
Item 2.Management's
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2521
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4232
Item 4.
Controls and Procedures
42
33
PART II.
OTHER INFORMATION
4333
Item 1.
Legal Proceedings
4333
Item 1A.
Risk Factors
4333
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4334
Item 3.3
Defaults Upon Senior Securities
4334
Item 4.4
Mine Safety Disclosures
4334
Item 5.
Other Information
4334
Item 6.
Exhibits
Exhibits43
SIGNATURES4435


2
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)


September 30, 2017 December 31, 2016 March 31, 2022  December 31, 2021 
(unaudited)   (unaudited)    
ASSETSASSETSASSETS 
Current assets:           
Cash and cash equivalents$15,525 $21,747 $5,448  $3,550 
Restricted cash 960  1,140
Contract receivables, net 18,616  18,863  10,421   11,257 
Prepaid expenses and other current assets 2,956  2,052  4,299   5,262 
Total current assets 38,057  43,802  20,168   20,069 
             
Equipment, software, and leasehold improvements 7,149  6,759
Accumulated depreciation (5,997)  (5,527)
Equipment, software, and leasehold improvements, net 1,152  1,232
     
Equipment, software and leasehold improvements, net  850   839 
Software development costs, net 756  982  555   532 
Goodwill 7,130  5,612  13,339   13,339 
Intangible assets, net 3,654  454  2,760   3,020 
Restricted cash - long term  1,583   0 
Operating lease right-of-use assets, net  1,047   1,200 
Other assets 289  1,574  52   52 
Total assets$51,038 $53,656 $40,354  $39,051 
             
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:             
Line of credit $0  $1,817 
Current portion of long-term note  830   0 
Accounts payable$676 $923  1,133   1,179 
Accrued expenses 2,967  2,437  1,474   1,358 
Accrued compensation 3,418  2,624  2,235   1,452 
Billings in excess of revenue earned 16,131  21,444  5,180   5,029 
Accrued warranty 1,260  1,137  682   667 
Contingent consideration 1,691  2,105
Income taxes payable  1,781   1,654 
Derivative liabilities  1,611   0 
Other current liabilities 867  716  1,625   1,883 
Total current liabilities 27,010  31,386  16,551   15,039 
             
Other liabilities 1,515  1,149
Long-term note, less current portion  2,955   0 
Operating lease liabilities noncurrent  502   790 
Other noncurrent liabilities  283   179 
Total liabilities 28,525  32,535  20,291   16,008 
Commitments and contingencies     
             
Stockholders' equity:     
Preferred stock $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding -  -
Common stock $0.01 par value, 30,000,000 shares authorized, 20,977,230 and 20,433,608 shares issued and 19,378,319 and 18,834,697 shares outstanding in 2017 and 2016 210  204
Commitments and contingencies (Note 16)  0   0 
        
Stockholders’ equity:        
Preferred stock $0.01 par value; 2,000,000 shares authorized; 0 shares issued and outstanding
  0   0 
Common stock $0.01 par value; 60,000,000 shares authorized, 22,609,043 and 22,533,005 shares issued, 21,010,132 and 20,934,094 shares outstanding, respectively
  226   225 
Additional paid-in capital 76,231  75,120  80,777   80,505 
Accumulated deficit (49,471)  (49,427)  (58,018)  (54,584)
Accumulated other comprehensive loss (1,458)  (1,777)
Treasury stock at cost, 1,598,911 shares in 2017 and 2016 (2,999)  (2,999)
Total stockholders' equity 22,513  21,121
Total liabilities and stockholders' equity$51,038 $53,656
Accumulated other comprehensive income (loss)  77   (104)
Treasury stock at cost, 1,598,911 shares
  
(2,999
)
  (2,999)
Total stockholders’ equity  20,063   23,043 
Total liabilities and stockholders’ equity $40,354  $39,051 


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


3
Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)


 
Three months ended
September 30,
 
Nine months ended
September 30,
 2017 2016  2017 2016
            
Revenue$15,409 $14,428 $48,876 $39,820
            
Cost of revenue 11,185  10,430  35,513  28,329
Gross profit 4,224  3,998  13,363  11,491
            
Operating expenses:           
Selling, general and administrative 4,374  2,936  11,740  8,606
Research and development 353  381  1,103  1,010
Restructuring charges -  85  45  487
Depreciation 79  91  254  294
   Amortization of definite-lived intangible assets  50   72   148   219
Total operating expenses 4,856  3,565  13,290  10,616
            
Operating (loss) income (632)  433  73  875
            
Interest income, net 15  11  60  52
Gain (loss) on derivative instruments, net 71  (211)  226  (346)
Other income (expense), net 33  15  (4)  112
(Loss) income before income taxes (513)  248  355  693
            
Provision for income taxes 92  80  399  275
Net (loss) income$(605) $168 $(44) $418
            
            
Basic (loss) earnings per common share$(0.03) $0.01 $0.00 $0.02
            
Diluted (loss) earnings per common share$(0.03) $0.01 $0.00 $0.02
  Three months ended
 
  March 31, 2022
  March 31, 2021
 
       
Revenue $12,275  $13,104 
Cost of revenue  9,848   10,176 
Gross profit  2,427   2,928 
         
Operating expenses:        
Selling, general and administrative  4,507   3,734 
Research and development  142   157 
Restructuring charges  0   808 
Depreciation  72   76 
Amortization of intangible assets  260   340 
Total operating expenses  4,981   5,115 
         
Operating loss  (2,554)  (2,187)
         
Interest expense, net  (148)  (54)
Change in fair value of derivative instruments, net
  (581)  0 
Other income, net  16   1 
Loss before income taxes  (3,267)  (2,240)
         
Provision for (benefit from) income taxes  167   (35)
Net loss $(3,434) $(2,205)
         
Net loss per common share - basic and diluted $(0.16) $(0.11)
         
Weighted average shares outstanding used to compute net loss per share - basic and diluted  20,980,046   20,628,669 


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


4

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(in thousands)
(Unaudited)


 
Three months ended
September 30,
 
Nine months ended
September 30,
 2017 2016 2017 2016
            
            
Net (loss) income$(605) $168 $(44) $418
            
Foreign currency translation adjustment 192  (50)  319  (152)
            
Comprehensive (loss) income$(413) $118 $275 $266
  Three months ended
 
  March 31, 2022
  March 31, 2021
 
Net loss $(3,434) $(2,205)
Cumulative translation adjustment  181   1,106 
Comprehensive loss $(3,253) $(1,099)


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


5

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)(unaudited)


  
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other Comprehensive
Loss
 
Treasury
Stock
 Total
Shares  Amount    Shares Amount 
Balance, January 1, 2017 20,434 $204 $75,120 $(49,427) $(1,777) (1,599) $(2,999) $21,121
                       
Stock-based compensation expense -  -  1,793  -  - -  -  1,793
Common stock issued for options exercised 160  2  274  -  - -  -  276
Common stock issued for RSUs vested 383  4  (4)  -  - -  -  -
Vested RSU shares withheld to pay taxes -  -  (952)  -  - -  -  (952)
Foreign currency translation adjustment -  -  -  -  319 -  -  319
Net income -  -  -  (44)  - -  -  (44)
Balance, September 30, 2017 20,977 $210 $76,231 $(49,471) $(1,458) (1,599) $(2,999) $22,513
 Common Stock         Treasury Stock   
Three Months Ended
 Shares  Amount  
Additional
Paid-in
Capital
  Accumulated
Deficit
  
Accumulated
Other
Comprehensive
Loss
  Shares  Amount  Total 
                         
Balance, January 1, 2022  22,533  $225  $80,505  $(54,584) $(104)  (1,599) $(2,999) $23,043 
                                 
Stock-based compensation expense  -   0   359   0   0   -   0   359 
Common stock issued for RSUs vested  76   1   (1)  0   0   -   0   0 
Shares withheld to pay taxes  -   0   (86)  0   0   -   0   (86)
Foreign currency translation adjustment  -   0   0   0   181   -   0   181 
Net loss  -   0   0   (3,434)  0   -   0   (3,434)
Balance, March 31, 2022
  22,609  $226  $80,777  $(58,018) $77   (1,599) $(2,999) $20,063 


Balance, January 1, 2021  22,193  $222  $79,687  $(65,191) $(1,214)  (1,599) $(2,999) $10,505 
Stock-based compensation expense  -   0   38   0   0   -   0   38 
Common stock issued for RSUs vested  41   0   0  0   0   -   0   0 
Shares withheld to pay taxes  -   0   (28)  0   0   -   0   (28)
Foreign currency translation adjustment  -   0   0   0   1,106  -   0   1,106
Net loss  -   0   0   (2,205)  0   -   0   (2,205)
Balance, March 31, 2021
  22,234  $222  $79,697  $(67,396) $(108)  (1,599) $(2,999) $9,416 

6
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

  Three months ended
 
  March 31, 2022
  March 31, 2021
 
Cash flows from operating activities:      
Net loss $(3,434) $(2,205)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation  72   76 
Amortization of intangible assets  260   340 
Amortization of capitalized software development costs  83   97 
Amortization of deferred financing costs  3   3 
Amortization of debt discount
  129   0 
Stock-based compensation expense  408   38 
Bad debt expense  0   4 
Change in fair value of derivative instruments, net
  581  0 
Deferred income taxes
  55   0 
Changes in assets and liabilities:        
Contract receivables, net  846   (1,259)
Prepaid expenses and other assets  943   (1,737)
Accounts payable, accrued compensation and accrued expenses  1,028   1,111 
Billings in excess of revenue earned  150   (340)
Accrued warranty  15   (156)
Other liabilities  (56)   2,070 
Net cash provided by (used in) operating activities  1,083   (1,958)
         
Cash flows from investing activities:        
Capital expenditures  (81)  (153)
Capitalized software development costs  (106)  (72)
Net cash used in investing activities  (187)  (225)

        
Cash flows from financing activities:        
Repayment of line of credit  (1,817)  (500)
Repayment of insurance premium
  (282)  (203)
Proceeds from issuance of long-term note, net of debt issuance cost and original issue discount
  4,782   0 
Shares withheld to pay taxes  (86)  (28)
Net cash provided by (used in) financing activities  2,597   (731)
         
Effect of exchange rate changes on cash  (12)  (39)
Net increase (decrease) in cash, cash equivalents and restricted cash  3,481   (2,953)
Cash, cash equivalents and restricted cash at beginning of the period  3,550   6,702 
Cash, cash equivalents and restricted cash at the end of the period $7,031  $3,749 

Cash and cash equivalents
 $5,448  $3,749 
Restricted cash included in other long-term assets
  1,583   0 
Total cash, cash equivalents, and restricted cash
 $7,031  $3,749 

Supplemental cash flow disclosures:
      
Non-cash financing activities
      
Discount on issuance of Convertible Note
 $750  $0 

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

6
7


GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
Nine months ended
September 30,
 2017 2016
Cash flows from operating activities:     
Net (loss) income$(44) $418
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation 254  294
Amortization of definite-lived intangible assets 148  219
Amortization of capitalized software development costs 352  296
Change in fair value of contingent consideration 436  (370)
Stock-based compensation expense 1,873  900
Bad debt expense 118  -
(Gain)/loss on derivative instruments, net (226)  346
Deferred income taxes 78  96
Loss on sale of equipment, software, and leasehold improvements -  3
Changes in assets and liabilities:     
Contract receivables, net 5,318  (3,616)
Prepaid expenses and other assets 770  (269)
Accounts payable, accrued compensation, and accrued expenses (911)  2,254
Billings in excess of revenue earned (5,204)  3,183
Accrued warranty 112  (80)
Other liabilities 359  208
Cash provided by operating activities 3,433  3,882
      
Cash flows from investing activities:     
Proceeds from sale of equipment, software and leasehold improvements -  30
Capital expenditures (64)  (53)
Capitalized software development costs (126)  (196)
Acquisition of Absolute Consulting, Inc., net of cash acquired (8,455)  -
Restrictions of cash as collateral under letters of credit -  (4)
Releases of cash as collateral under letters of credit 180  254
Cash (used in) provided by investing activities (8,465)  31
      
Cash flows from financing activities:     
Proceeds from issuance of common stock on the exercise of stock options 276  594
Contingent consideration payments to Hyperspring, LLC (850)  (1,421)
RSUs withheld to pay taxes (952)  -
Cash used in financing activities (1,526)  (827)
      
Effect of exchange rate changes on cash 336  (77)
Net (decrease) increase in cash and cash equivalents (6,222)  3,009
Cash and cash equivalents at beginning of year 21,747  11,084
Cash and cash equivalents at end of period$15,525 $14,093

The accompanying notes are an integral part of these consolidated financial statements.
7

GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)


1.
Note 1 - Summary of Significant Accounting Policies


Basis of Presentation


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

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

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

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the U.S. Securities and Exchange Commission on March 28, 2017.  Certain reclassifications have been made to prior period amounts to conform to the current presentation.  The Company reclassified research and development costs from selling, general and administrative expenses and presented them as a separate caption within operating expenses on the consolidated statements of operations. In addition, the Company also reclassified the stock-based compensation related to management/employees from cost of revenue and research and development expenses to selling, general and administrative expenses.31, 2022.

The Company has two reportable segments as follows:

●Performance Improvement Solutions (approximately 62% of revenue)

Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, as well as engineering solutions and interactive computer based tutorials/simulation focused on the process industry.  This segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve: primarily nuclear and fossil fuel power generation, as well as 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.
8

●Nuclear Industry Training and Consulting (approximately 38% of revenue)

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

On September 20, 2017, the Company acquired Absolute Consulting, Inc., now a wholly-owned subsidiary of GSE Performance Solutions, Inc., for $8.9 million. Absolute Consulting, Inc. is a provider of technical consulting and staffing solutions to the global nuclear power industry and employs approximately 200 professionals with expertise in procedures writing, engineering, technical support, project management, training, project controls, and corrective actions.  This acquisition brings a natural adjacency to GSE, fits well with our growth strategy, and benefits our customers from expanded capabilities and offerings. For reporting purposes, Absolute Consulting, Inc. was aggregated with Hyperspring into our Nuclear Industry Training and Consulting segment due to similarities in services provided including training and staff augmentation to the nuclear energy sector.  In addition, both entities will report to the same management team and share support staff such as sales, recruiting and business development. As such, 100% of the goodwill acquired was allocated to the Nuclear Industry Training and Consulting segment.

Financial information about the two business segments is provided in Note 16 of the accompanying condensed consolidated financial statements.

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

98
Table of Contents

COVID-19
Revenue recognition


The Company recognizes revenue through fixed price contracts
Prior to COVID 19, most of our Performance Improvement Solutions (Performance) employees worked remotely, and the remainder worked in one of our offices.  With the onset of the COVID-19 pandemic in Q1 2020, all of our employees shifted to working remotely.  For the most part, our employees continue to work remotely but, as an essential services provider, we maintain a modest office footprint in certain locations to allow for employees to work from those offices as project needs may arise.  Throughout the sale of uniquely designed/customized systems containing hardware, softwarepandemic GSE has complied with local, state and other materials which generally apply to thefederal directives and regulations. Today, employees almost entirely work from home within our Performance Improvement Solutions segment, except when required to be at the client site for essential project work. Our Performance contracts, which generally are considered essential services, are permitted to and mostly continue without pause. However, we have experienced certain delays in certain new business opportunities. At the onset of the pandemic, many of our Workforce Solutions customers paused or delayed contracts as they shrank their own on-premise workforces to the minimum operating levels in order to mitigate the effects of the pandemic. As a result, our Workforce Solutions segment has experienced a decline in its billable employee base during this time. Over the course of 2021, the Workforce Solutions segment began to increase as clients became more comfortable with employees returning to on-site work.  We cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time and material contractswe have experienced delays in commencing new projects and resuming work on existing contracts. Therefore, our ability to recognize revenue has been delayed for Nuclear Industry Trainingsome contracts. We have also experienced order reductions, cancellations, and Consulting supportother negative changes to orders due to the pandemic.  As the pandemic landscape has continued to develop and service agreements.

In accordance with Accounting Standards Codification (ASC) 605-35, Construction-Type and Production-Type Contracts (ASC 605), the Performance Improvement Solutions segment primarily accounts for revenue under fixed-price contracts using the percentage-of-completion method.  This methodology recognizes revenue and earnings as work progresses on the contract and is based on costs incurred to date compared to total estimated cost to complete the project.  Estimated contract earnings are reviewed and revised periodicallynew risks emerge such as the work progresses,Delta variant and the cumulative effect of any change in estimate is recognized in the period in which the change is identified.  Estimated losses are charged against earnings in the period such losses are identified.Omicron variant, our business continues to be affected.  We recognize revenue arising from contract claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is a legal basis of the claim.

Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues.  The reliability of these cost estimates is critical toroutinely monitor our revenue recognitionoperating expenses as a significant change in the estimates can causeresult of contract delays and order reductions; and we have made adjustments to maintain our revenue and related margins to change significantly from the amounts estimated in the early stages of the project.gross profit at a sustainable level.

As we recognize revenue under the percentage-of-completion method, we provide an accrual for estimated future warranty costs based on historical and projected claims experience.  Our long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.

Our system design contracts do not normally provide for post contract support (PCS) in terms of software upgrades, software enhancements or telephone support.  To obtain PCS, the customers must normally purchase a separate contract.  Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases.  We recognize revenue from these contracts ratably over the term of the agreements.

Revenue from the sale of software licenses without other elements in the contract and which do not require significant modifications or customization for the Company's modeling tools are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable.  We utilize written contracts to establish the terms and conditions by which product support and services are sold to customers.  Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs after a license key has been delivered to the customer.

We also recognize revenue from the sale of software licenses from contracts with multiple deliverables.  These software license sales are evaluated under ASC 985-605, Software Revenue Recognition.  Contracts with multiple element arrangements typically include, but are not limited to, components such as installation, training, licenses, and PCS listed in the contract.  The Company concluded that vendor specific objective evidence does not exist for all elements of its software license sales.  If a PCS or professional services element exists in the software license arrangement, revenue is recognized ratably over the longest service period.  If no PCS or professional services element exists in the arrangement, revenue is deferred until the last undelivered element is delivered.

We recognize revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts.  Revenue on time and material contracts is recognized as services are rendered and performed.  Under a typical time-and-materials billing arrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly.  Any unbilled amounts are typically billed the following month.  Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.  However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs.
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2.Note 2 - Recent Accounting Pronouncements


Accounting pronouncements recently adopted


In July 2015,August 2020, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU) No. 2015-11, SimplifyingASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the Measurementaccounting for certain financial instruments with characteristics of Inventory (ASU 2015-11).  ASU 2015-11 requires thatliabilities and equity, including convertible instruments and contracts on an entity measure inventory atentity’s own equity. The FASB reduced the lowernumber of costaccounting models for convertible debt and net realizable value.convertible preferred stock instruments and made certain disclosure amendments to improve the information provided to users. This ASU does not apply to inventory measured using the last-in, first-out method.  ASU 2015-11 was effectiveis applicable for annual reporting periodspublic companies starting with fiscal years beginning after December 15, 2016, including2021 and interim periods within that reporting period.  We adopted ASU 2015-11 effective January 1, 2017.  The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based Payment Accounting (ASU 2016-09).  The new guidance is intended to simplify the accounting for share based payment award transactions.  The amendments in the update include the following aspects for share based accounting: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes.  The adoption of ASU 2016-09 was required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. WeThe Company adopted ASU 2016-09 effective2020-06 on January 1, 2017. The adoption of this standard2022, using the modified retrospective approach, and because the Company did not have a significantoutstanding financial instruments in scope of the ASU, the adoption did not have an impact onto our consolidated financial position, results of operations or cash flows.statements.


Accounting pronouncements not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company for the fiscal year ending December 31, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated financial statements.  The adoption is expected to impact our revenue recognition and related disclosures.  For example, our revenue from software arrangements with multiple elements including services are currently recognized ratably due to the lack of vendor-specific objective evidence ("VSOE") of fair value.  We are currently evaluating these arrangements under the new revenue guidance to identify the distinct performance obligations and to determine the timing and pattern of recognition of each performance obligation. We are also evaluating other revenue streams, including power plant simulator design and build systems and training services. The Company will adopt the new standard on January 1, 2018 using the modified retrospective method.

In February 2016, the FASB issued ASU No. 2016-02, Leases.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available.  We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments –- Credit Losses,, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, the FASB voted to defer the deadlines for private companies and certain small public companies, including smaller reporting companies, to implement the new accounting standards on credit losses. The Companynew effective date is January 1, 2023. As a smaller reporting company, we have elected to defer adoption in line with new deadlines and are currently evaluating the effects, if any, that the adoption of this guidance will have on the Company'sour consolidated financial position, results of operations and cash flows.

In August 2016, the FASB
Management has evaluated other recently issued ASU No. 2016-15, Classificationaccounting pronouncements and does not believe that any of Certain Cash Receipts and Cash Payments (ASU 2016-15).  The new guidance addresses eight specific cash flow issues and applies to all entities that are required to present a statement of cash flows.  Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-15 on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (ASU 2016-18).  The new guidance applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.  This update is intended to reduce diversity in cash flow presentation of restricted cash and restricted cash equivalents and requires entities to include all cash and cash equivalents, both restricted and unrestricted, in the beginning-of-period and end-of-period totals presented on the statement of cash flows.  Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-18 on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the definition of a Business, which amends the current definition of a business. Under ASU 2017-01, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contributes to the ability to create outputs.  ASU 2017-01 further states that when substantially all of the fair value of gross assets acquitted is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business.  The new guidance also narrows the definition of the term "outputs" to be consistent with how it is described in ASC 606, Revenue from Contracts with Customers.  The changes to the definition of a businessthese pronouncements will likely result in more acquisitions being accounted for as asset acquisitions. ASU 2017-01 is effective for acquisitions commencing on or after June 30, 2019, with early adoption permitted.  Adoption of this guidance will be applied prospectively on or after the effective date.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04).  ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation.  Goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, limited to the carrying value of the goodwill.  ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019.  We are currently evaluating the potential impact of the adoption of ASU 2017-04 on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (ASU 2017-09). The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance on ASC 718, Compensation – Stock Compensation. Entities are required to apply modification accounting for any change to an award, except for a change that is deemed to be purely administrative in nature. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in ASC 718. The amendments in this update are effective for all entities and for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of this standard to have a significant impact on our consolidated financial position, results of operations or cash flows.statements and related disclosures.

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3.Basic and Diluted Earnings per Common Share

Note 3 - Basic and Diluted Loss per Share

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


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

(in thousands, except for share amounts)Three months ended Nine months ended
 September 30, September 30,
 2017 2016 2017 2016
Numerator:           
Net (loss) income$(605) $168 $(44) $418
            
Denominator:           
Weighted-average shares outstanding for basic (loss) income per share 19,280,770  18,230,148  19,204,778  18,052,019
            
Effect of dilutive securities:           
Stock options and restricted stock units -  239,969  -  235,851
Adjusted weighted-average shares outstanding and assumed conversions for diluted (loss) income per share 19,280,770  18,470,117  19,204,778  18,287,870
            
Shares related to dilutive securities excluded because inclusion would be anti-dilutive 534,833  734,833  550,218  741,862
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(in thousands, except for share amounts)  Three months ended 
 
 March 31, 
  2022
  2021
 
Numerator:      
Net loss attributed to common stockholders $(3,434) $(2,205)
         
Denominator:        
Weighted-average shares outstanding for basic earnings per share  20,980,046   20,628,669 
         
Effect of dilutive securities:        
RSUs  0   0 
         
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share  20,980,046   20,628,669 
         
Shares related to dilutive securities excluded because inclusion would be anti-dilutive  149,271   43,937 

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Note 4 - Coronavirus Aid, Relief and Economic Security Act
4.Acquisition

Paycheck Protection Program Loan (PPP Loan)

On September 20, 2017, GSE, through its wholly-owned subsidiary GSE Performance Solutions, Inc. ("Performance Solutions"March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), acquired 100% to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the “PPP Loan”) under the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”). The application for receipt of the capital stockPPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan was serviced by Citizens Bank, N.A. (the “Citizens”). The PPP Loan bore interest at a rate of Absolute Consulting, Inc. ("Absolute")1% per annum and would mature on April 23, 2022, with the first payment deferred until September 2021. We used the proceeds of the PPP Loan for $8.8 million pursuantpayroll and related costs, rent and utilities. Pursuant to the Stock Purchase Agreementregulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to Citizens substantiating that we were entitled to the PPP Loan and among Performance Solutionsused the proceeds of the PPP Loan as permitted under the CARES Act. Citizens reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the sellersSBA with Citizens’ determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of Absolute. The purchase pricethe PPP Loan was subjectformally forgiven by the SBA. We recognized other income of $10.1 million related to this forgiveness during the third quarter of fiscal 2021.

Employee Retention Credits (ERC)

Employee retention tax credits, made available under the CARES Act, allow eligible employers to claim a customary working capital adjustment resultingrefundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and extended through September 30, 2021. In 2021, we applied for $5.0 million in total consideration of $8.9 million (subject to post-closing adjustment). An indemnification escrow of $1.0 million was fundedrefunds from the cash paidIRS with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We recorded other income of $7.2 million related to the sellers and is available to GSE and Performance Solutions to satisfy indemnification claims until September 20, 2019. The acquisition of Absolute was completed on an all-cash transaction basis.
Absolute is a provider of technical consulting and staffing solutions toemployee retention tax credits earned for the global nuclear power industry. Located in Navarre, Florida, Absolute has established long-term relationships with blue-chip customers primarily in the nuclear power industry. The acquisition of Absolute is expected to strengthen the Company's global leadership in nuclear training and consulting solutions, add new capacities to our technical consulting and staffing solutions offerings and bring highly complementary customers, while deepening relationships with existing clients.
The following table summarizes the consideration paid to acquire Absolute and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition of Absolute, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value.year ended December 31, 2021. As of September 30, 2017,March 31, 2022, we received cumulative employee retention tax credit refunds totaling $1.9 million with remaining outstanding refunds receivable of $3.1 million which was included in the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets property, and equipment, intangible assets, accrued expenses, accrued compensation and the residual amount allocated to goodwill. The following amounts except for Cash are all reflected in the Consolidated Statement of Cash Flow within the "Acquisition of Absolute Consulting, Inc., net of cash acquired" line caption.
(in thousands) 
   
Total purchase price$8,910
   
Purchase price allocation:  
Cash$455
Contract receivables 5,121
Prepaid expenses and other current assets 70
Property, and equipment, net 102
Intangible assets 3,340
Accounts payable, accrued expenses, and other liabilities (78)
Accrued compensation (1,618)
Total identifiable net assets 7,392
Goodwill 1,518
Net assets acquired$8,910
The goodwill is primarily attributable to the additional capacities to offer broader solutions to new and existing customers and the expected enhanced cost and growth synergies as a result of the acquisition. The total amount of goodwill that is expected to be tax deductible is $1.5 million. All of the $1.5 million of goodwill was assigned to our Nuclear Industry Training and Consulting segment. As discussed above, the goodwill amount is provisional pending receipt of the final valuations for various assets and liabilities.

The fair value of the assets acquired includes gross trade receivables of $5.1 million, of which the Company expects to collect in full. GSE did not acquire any other class of receivable as a result of the acquisition of Absolute.
The Company identified $3.3 million of other intangible assets, including customer relationships, trademarks/names and non-compete agreements, with amortization periods of three to five years. The fair values of the intangible assets are provisional pending receipt of the final valuations for those assets.
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Unaudited Pro Forma Financial Information
The acquired business contributed revenue of $1.2 million and earnings of $36,000 to GSE for the period from September 20, 2017 to September 30, 2017. The following unaudited pro forma summary presents consolidated information of GSE as if the business combination had occurred on January 1, 2016. The unaudited pro forma financial information was prepared based on historical financial information.
These pro forma amounts have been calculated after applying GSE's accounting policies and adjusting the results of Absolute to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from January 1, 2016, with the consequential tax effects. In 2017, GSE has incurred $0.5 million of acquisition-related costs. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma earnings for the nine months ended September 30, 2016, in the table below. The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 1, 2016, nor is it intended to be an indication of future operating results.

 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
 (unaudited and in thousands)
Revenue$23,055 $24,097 $77,470 $70,175
Net (loss) income (293)  241  448  (69)

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5.Contingent Consideration

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, "Business Combination", contingent consideration is required to be recognizedbalance at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates, and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

As of September 30, 2017 and DecemberMarch 31, 2016, contingent consideration, related to our acquisition of Hyperspring via an earnout,  included in current liabilities totaled $1.7 million and $2.1 million, respectively. The Company made a payment of $0.9 million and $1.4 million in2022. During the first quarter of 2017 and 2016, respectively, related2022, we receive employee retention tax credit refunds of $1.1 million which included in the total of $1.9 million received. Subsequent to the liability-classified contingent consideration arrangements. Asquarter end, we received the employee retention tax credit refunds of November 14, 2017, we will not record contingent consideration adjustments for the Hyperspring acquisition due to the expiration of the earnout period.$1.0 million.


6.Contract Receivables

Note 5 - Contract Receivables

Contract receivables represent balancesour unconditional rights to consideration due from a broad base of bothour domestic and international customers. AllWe expect to collect all contract receivables are considered to be collectible within the next twelve months.  Recoverable costs and accrued profit not yet billed represent costs incurred and associated profit accrued on contracts that will become billable upon future milestones or completion of contracts.


The components of contract receivables arewere as follows:

(in thousands)September 30, December 31,
 2017 2016
    
Billed receivables$12,039 $13,325
Recoverable costs and accrued profit not yet billed 6,715  5,555
Allowance for doubtful accounts (138)  (17)
Total contract receivables, net$18,616 $18,863


(in thousands) March 31, 2022  December 31, 2021 
       
Billed receivables $4,955  $6,124 
Unbilled receivables  6,472   6,143 
Allowance for doubtful accounts  (1,006)  (1,010)
Total contract receivables, net $10,421  $11,257 

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

During the three months ended March 31,2022, we recorded 0 bad debt expense. We recorded $4 thousand bad debt expense during the three months ended March 31,2021.

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During October 2017, the Companymonth of April 2022, we invoiced $4.6$2.6 million of the unbilled amountsreceivables as of  March 31, 2022.

Our foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the balanceoutstanding foreign exchange contracts are remeasured at September 30, 2017.the end of each period into our functional currency, using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is included in other income, net in the consolidated statements of operations. As of March 31, 2022 and 2021, we recognized a gain on remeasurement of these foreign exchange contracts of $3 thousand and $33 thousand, respectively.


As of September 30, 2017, the CompanyMarch 31, 2022 and December 31, 2021, we had one0 customer that accounted for 26.3%10% of the Company'sour consolidated contract receivables. AsOn May 10, 2022, we had a customer that notified us of Decemberdebt restructuring, and we are assessing any potential impact to the Company.

Note 6 - Goodwill and Intangible Assets

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. Management concluded that there were no triggering events that occurred during the three months ended March 31, 2016,2022 and 2021.

The following table shows the Company did not have any customers that accountedgross carrying amount and accumulated amortization of definite-lived intangible assets:

(in thousands) As of March 31, 2022 
  Gross Carrying Amount  Accumulated Amortization  Net 
Amortized intangible assets:         
Customer relationships $8,628  $(6,622) $2,006 
Trade names  1,689   (1,130)  559 
Developed technology  471   (471)  0 
Non-contractual customer relationships  433   (433)  0 
Noncompete agreement  527   (451)  76 
Alliance agreement  527   (408)  119 
Others  167   (167)  0 
Total $12,442  $(9,682) $2,760 

(in thousands) As of December 31, 2021 
  
Gross Carrying
Amount
  
Accumulated
Amortization
  Net 
Amortized intangible assets:         
Customer relationships $8,628  $(6,432) $2,196 
Trade names  1,689   (1,108)  581 
Developed technology  471   (471)  0 
Non-contractual customer relationships  433   (433)  0 
Noncompete agreement  527   (429)  98 
Alliance agreement  527   (382)  145 
Others  167   (167)  0 
Total $12,442  $(9,422) $3,020 

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.3 million for more than 10%the three months ended March 31, 2022 and 2021, respectively. The following table shows the estimated amortization expense of the Company's consolidated contract receivables.

On March 29, 2017, Westinghouse, a customer of our Performance Improvement Solutions segment, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Courtdefinite-lived intangible assets for the Southern Districtnext five years and thereafter:
(in thousands)   
Years ended December 31:   
2022 remainder
 $649 
2023  640 
2024
  435 
2025  335 
2026  266 
Thereafter  435 
Total $2,760 

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Note 7 - Equipment, Software 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 simulatorLeasehold Improvements

Equipment, 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 aleasehold improvements, 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.
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7. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(in thousands)September 30, December 31,
 2017 2016
      
Inventory$1,159 $-
Income taxes receivable 268  446
Prepaid expenses 451  422
Other current assets 1,078  1,184
Total prepaid expenses and other current assets$2,956 $2,052

At September 30, 2017, prepaid expenses
(in thousands)      
  March 31, 2022
  December 31, 2021
 
Computer and equipment $2,328  $2,270 
Software  2,173   2,150 
Leasehold improvements  659   659 
Furniture and fixtures  839   839 
   5,999   5,918 
Accumulated depreciation  (5,149)  (5,079)
Equipment, software and leasehold improvements, net $850  $839 

Depreciation expense was $72 thousand and other current assets are comprised primarily of inventory that is being purchased to support the construction of three major nuclear simulation projects related to a significant contract that was executed during the first quarter of 2016. Inventory is recorded at the lower of cost or market value in accordance with ASC 330, Inventory.  At December 31, 2016, inventory related to the simulation projects was classified as a long-term asset within other assets on the consolidated balance sheets. The earliest completion date of these projects is expected to occur in the second quarter of 2018.
8.Software Development Costs, Net

Certain computer software development costs are capitalized in the accompanying consolidated balance sheets.  Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product is commercially available for general release to customers.  Amortization of capitalized computer software development costs is included in cost of revenue and is determined using the straight-line method over the remaining estimated economic life of the product, typically three years.  On an annual basis, and more frequently as conditions indicate, the Company assesses the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expected to be generated by the sale of the product.  If the undiscounted cash flows are not sufficient to recover the unamortized software costs, the Company will write down the carrying amount of such asset to its estimated fair value based on the future discounted cash flows. The excess of any unamortized computer software costs over the related fair value is written down and charged to operations.

Software development costs capitalized were $38,000 and $126,000$76 thousand for the three and nine months ended September 30, 2017, respectively,March 31, 2022 and $10,0002021, respectively. Capitalization-of internal-use software cost of $23 thousand and $196,000$150 thousand were recorded in software for the  three and nine months ended September 30, 2016, respectively.  Total amortization expense was $118,000March 31, 2022 and $352,000 for the three and nine months ended September 30, 2017, respectively, and $111,000 and $296,000 for the three and nine months ended September 30, 2016,2021, respectively.
17


9.Goodwill and Intangible Assets

The Company's intangible assets include amounts recognized in connection with business acquisitions, including customer relationships, trade names, non-compete agreements, contract backlog, and software.

The Company reviews goodwill for impairment annually asNote 8 - Fair Value of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company tests goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, which are the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includes Hyperspring and Absolute).  As of the report date, the Company is still evaluating the impact of the Absolute acquisition on our reporting units. As of September 30, 2017, and December 31, 2016, goodwill of $7.1 million and $5.6 million, respectively, is related to the Nuclear Industry Training and Consulting segment.  The increase of $1.5 million in the carrying amount of goodwill during the nine months ended September 30, 2017 was due to the acquisition of Absolute. No events or circumstances occurred during the current reporting period that would indicate impairment of such goodwill and indefinite-lived intangible assets.Financial Instruments

As discussed in Note 4, we recognized finite-lived intangible assets of $3.3 million upon acquisition of Absolute on September 20, 2017. Amortization of finite-lived intangible assets is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for contract backlog and contractual customer relationships which are recognized in proportion to the related projected revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. The Company does not have any intangible assets with indefinite useful lives, other than goodwill. There were no indications of impairment of intangible assets during the current reporting period.
10.Fair Value of Financial Instruments

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


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


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


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


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

The Company considers
As of March 31, 2022 and December 31, 2021, we considered the recorded value of certain of itsour financial assets and liabilities, which consist primarily of cash and cash equivalents, accountscontract receivable and accounts payable, to approximate fair value based upon their short-term nature.

Our convertible debt issued in February 2022 (See Note 11) includes certain embedded redemption features that are required to be bifurcated as embedded derivatives and measured at fair value on a recurring basis. We estimate the fair value using a Monte Carlo simulation based on estimates of our future stock price and assumptions about the possible redemption scenarios.

13
The Company used the Monte Carlo simulation model to determine the fair value of the respective assets and liabilities at September 30, 2017, and December 31, 2016, based uponWarrants, which required the short-term natureinput of subjective assumptions. The fair value of the assets and liabilities.Warrants as of March 31, 2022 was estimated with the following assumptions.

Exercise Price $1.94 
     
Common Stock Price
 $1.25 - $2.08 
Risk Free Rate  1.9% - 2.4%
Volatility  65%

Term (in years) 4.9 yrs - 5.0 yrs
 
For the three and nine months ended September 30, 2017, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at September 30, 2017.

18

The following table presents assets and liabilities measured at fair value at September 30, 2017:March 31, 2022:

(in thousands)
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
            
Money market funds$3,238 $- $- $3,238
Foreign exchange contracts -  280  -  280
Total assets$3,238 $280 $- $3,518
            
Foreign exchange contracts$- $- $- $-
Contingent consideration -  -  (1,691)  (1,691)
Total liabilities$- $- $(1,691) $(1,691)

Money market funds at both September 30, 2017 and December 31, 2016 are included in cash and cash equivalents in the respective consolidated balance sheets.

(in thousands) 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
             
Money market funds $3,008  $0  $0  $3,008 
Total assets $3,008  $0  $0  $3,008 
                 
Derivative liability $0  $0  $84  $84 
Warrant liability
  0   0   1,527   1,527 
Cash settled performance-vesting restricted stock units
  0   49   0   49 
 Total liabilities $0  $49  $1,611  $1,660 

The following table presents assets and liabilities measured at fair value at December 31, 2016:2021:

(in thousands)
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
        
Money market funds$16,435 $- $- $16,435
Foreign exchange contracts -  141  -  141
Total assets$16,435 $141 $- $16,576
            
Foreign exchange contracts$- $(20) $- $(20)
Contingent consideration -  -  (2,105)  (2,105)
Total liabilities$- $(20) $(2,105) $(2,125)


(in thousands) 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
             
Money market funds $15  $0  $0  $15 
Total assets $15  $0  $0  $15 

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the nine months ended September 30, 2017:

(in thousands) 
  
   
Balance, January 1, 2017$2,105
Payments made on contingent liabilities (850)
Change in fair value 436
Balance, September 30, 2017$1,691

19

11.Derivative Instruments

The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates.  It is the Company's policy to use such derivative financial instruments to protect against market risk arising in the normal course of business to reduce the impact of these exposures. The Company minimizes credit exposure by limiting counterparties to nationally recognized financial institutions.

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.  At December 31, 2016, the Company had contracts outstanding of approximately 281.4 million Japanese Yen, 0.1 million Euro, 0.6 million Australian Dollars, and 0.5 million Canadian Dollars at fixed rates.

The Company has not designated the foreign exchange contracts as hedges and recorded the estimated net fair values of the contracts on the consolidated balance sheets as follows:

 September 30, December 31,
(in thousands)2017 2016
      
Asset derivatives     
Prepaid expenses and other current assets$133 $57
Other assets 147  84
  280  141
Liability derivatives     
Other current liabilities -  (20)
  -  (20)
      
Net fair value$280 $121

Thesummarizes changes in the fair value of our Level 3 liabilities during the foreign exchange contracts are included in gain (loss)three months ended March 31, 2022.

(in thousands) 
Embedded
Redemption Features
  Warrant  Level 3 Total
 
          
Balance at December 31, 2021 $0  $0  $0 
Derivative liabilities at issuance date  306   0   306 
Warrant liabilities at issuance date
  0   724   724 
Change in fair value included in gain on derivative instruments, net  (222)  803   581 
Balance at March 31, 2022 $84  $1,527  $1,611 

Note 9 - Stock-Based Compensation

We recognize compensation expense on derivative instruments, net,a pro rata straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. We recognize the cumulative effect of a change in the consolidated statementsnumber of operations.

The foreign currency denominated contract receivables, billingsawards expected to vest in excess of revenue earned, and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of the period.  The gain or loss resulting from such remeasurement is also included in gain (loss) on derivative instruments, net,compensation expense in the consolidated statementsperiod of operations.

For the three and nine months ended September 30, 2017 and 2016, the Company recognized a net gain (loss) on its derivative instruments as outlined below:

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)2017 2016 2017 2016
            
Foreign exchange contracts-change in fair value$74 $(125) $145 $(302)
Remeasurement of related contract receivables, billings in excess of revenue earned, and subcontractor accruals (3)  (86)  81  (44)
            
Gain (loss) on derivative instruments, net$71 $(211) $226 $(346)

20

12.Stock-Based Compensation

The Company recognizes compensation expense for all equity-based compensation awards issued to employees and directors that are expected to vest. Compensation costchange. We have not capitalized any portion of our stock-based compensation. Our forfeiture rate is based on actuals.

During the fair value of awards as of the grant date. The Companythree months ended March 31, 2022 and 2021, we recognized $0.5$0.4 million and $0.4 million$38 thousand of stock-based compensation expense related to equity awards, forrespectively, under the fair value method.

During the three months ended September 30, 2017 and 2016, respectively, and recognized $1.8 million and $0.9 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 2017 and 2016, respectively. In addition to the equity-based compensation expense recognized, the Company also recognized $92,000 and $80,000 of stock-based compensation related to the change in the fair value of cash-settledMarch 31, 2022, we granted approximately 13,597 time-based restricted stock units ("RSUs"(“RSUs”) during the three and nine months ended September 30, 2017, respectively.

For the three and nine months ended September 30, 2017, the Company did not grant market-based RSUs. For the three and nine months ended September 30, 2016, the Company granted 1,162,500 and 1,322,500 market-based RSUs with an aggregate fair value of $1.6 million and $1.9 million, respectively. In accordance with ASC 718, Compensation - Stock Compensation, the RSUs are considered market-based because they vest upon the achievement of a specified price of the Company's shares. The fair value of the RSUs is expensed ratably over the requisite service period, which ranges between one and five years.

The market-based RSUs granted during 2016 include 450,000 RSUs, which were canceled and reissued in accordance with the Chief Executive Officer's amended employment agreement dated July 1, 2016 and approved by the Board of Directors. The aggregate fair value of the RSUs reissued totaled $469,000.

Additionally, on July 1, 2016, the Board of Directors approved an amendment to the market-based RSU agreements with other employees, which reduced the time period from 90 to 30 consecutive trading days during which the volume weighted-average price ("VWAP") target must be attained in order for the RSUs to vest. This change resulted in an increase in the fair value of the RSUs granted of approximately $250,000, which will be expensed ratably over the remaining requisite service period.

During the three months ended September 30, 2017, the Company did not grant time-based RSUs. For the nine months ended September 30, 2017, the Company granted 396,677 time-based RSUs with an aggregate fair value of $1.4 million.$24 thousand. A portion of the time-based RSUs vested immediately, a portion will vest quarterly in equal amounts over the course of eight8 quarters, a portion will vest one year after grant, and the remainder will vest annually in equal amounts over the course of one to three years. ForDuring the three and nine months ended September 30, 2016,March 31, 2021, we did 0t grant RSUs to employees.

14
GSE’s 1995 long-term incentive program (“LTIP”) provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and employees. Vesting of the performance-vesting restricted stock units (“PRSU”) is contingent upon the employee’s continued employment and the Company’s achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the Company’s Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSUs on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.

During the three months ended March 31, 2022, we granted 800,000 PRSUs including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards. Additionally, these shares are subject to a time-vesting restriction and will vest in equal portions over the next 15 quarters ending December 31, 2022. Subsequent to March 31, 2022, the market vestingcriteriawas achieved for the 800,000 PRSUs which will fully vest over the next 15 quarters. During the three months ended March 31, 2021, we did 0t grant any PRSUs to employees.

We did 0t grant any stock options for three months ended March 31, 2022 and 2021.

Note 10 - Debt

Convertible Note

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

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

    
Fair value of Warrant Liabilities on issuance
  (724)
Fair value of Conversion Feature on issuance
  (306)
Allocated OID costs to Convertible Note
  (96)
Interest expense accrued on Convertible Note as of March 31, 2022
  129 
     
Balance of Convertible Note as of March 31, 2022
 $3,785 

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

The Convertible Note is convertible into our common stock at any time after the earlier of six months from issuance of the Convertible Note or the date of an effective registration statement filed with the SEC covering the underlying shares. The conversion price of the Convertible Note is initially equal to $1.94 per share, subject to customary adjustments. The Convertible Note matures in February of 2024, although we are permitted to prepay the Convertible Note, provided that Lind Global shall have the option to convert up to one third of the outstanding principal of the Convertible Note at a price per share equal to the lessor of the Repayment Share price or the conversion price (as described below). The Convertible Note is guaranteed by each of our subsidiaries and is secured by a first priority lien on all of our assets. The Convertible Note is not subject to any financial covenants and events of default under the Convertible Note are limited to events related to payment, certain events pertaining to the underlying shares of common stock and other customary events including, but not limited to, bankruptcy or insolvency. Upon the occurrence of an event of default, the Convertible Note will become immediately due and payable, subject to any cure periods described in the Convertible Note, and the customer may demand that all or a portion of the outstanding principal amount be converted into shares of common stock at the lower of the then current conversion price and 80% of the average of the 3 lowest daily volume-weighted average price (“VWAPs”) during the 20 days prior to delivery of the conversion notice. If there is a change of control of the Company, granted 70,000Lind Global has the right to require us to prepay the outstanding principal amount of the Convertible Note.

15
A portion of the proceeds of the Convertible Note were used to repay, in full, all outstanding indebtedness owed to Citizens Bank, N.A. (“Citizens”), and 204,824 time-based RSUsthe Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens was terminated. We will continue to maintain a cash management account and certain letters of credit with Citizens and, accordingly, have entered into a certain Cash Management Agreement with Citizens, as well as certain Cash Pledge Agreements in amounts corresponding to the current outstanding letters of credits with customers.

The Warrant entitles Lind Global to purchase up to 1,283,732 shares of our common stock until February 23, 2027, at an aggregateexercise price of $1.94 per share, subject to customary adjustments described therein.  The Warrant is recorded at fair value upon issuance of $172,300$0.7 million and $471,650, respectively. is classified as a current liability to be remeasured at each reporting period (see Note 8). The discount created by allocating proceeds to the Warrant results in a debt discount to be amortized as additional interest expense over the term of the Convertible Note.

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

The direct and incremental costs incurred are allocated to the Convertible Note and the Warrant based on a systematic and rational approach. The costs allocated to the Warrant have been expensed ratablyas incurred while those allocated to the Convertible Note have been capitalized and will be amortized as interest expense over the requisite service period.

life of the Convertible Note based on the effective interest rate. The Company did not grant stock options duringwill record ongoing changes to the three or nine month periods ended September 30, 2017. The Company did not grant any options during the three month period ended September 30, 2016, and granted 40,000 stock options during the nine month period ended September 30, 2016. The fair value of the options granted duringderivative liabilities as other non-operating income (expense).

The Convertible Note was evaluated as a potentially dilutive security in both periods of loss and income for diluted earnings per share purposes. The Warrant is considered a participating security and was not included in the ninecalculation of basic earnings per share for the period ended March 31, 2022 as Company reflected net loss for this period. The Warrant will be included in the calculation of basic earnings per share in periods of net income.

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

The Company incurred total interest expense related to the Convertible Note, including the amortization of the various discounts, of $129 thousand for the three months ended September 30, 2016 was $46,000.March 31, 2022.


21

13.Debt

Revolving Line of Credit


During the three months ended March 31, 2022, using proceeds from the Convertible Note, we repaid in full, all outstanding indebtedness of $1.8 million owed to Citizens, Bank

The Company entered into a three-year, $5.0 million revolving lineand the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. Certain letters of credit facility ("RLOC")remain in place with Citizens Bank on December 29, 2016, to fund general working capital needs, including acquisitions. Working capital advances bear interestCitizens. As of one-month LIBOR plus 2.25% per annum and letterMarch 31, 2022, we had 4 letters of credit fees are 1.25% per annum. The Company istotaling $1.1 million outstanding to certain customers which were secured with restricted cash.

On March 29, 2021, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021. Pursuant to the Ninth Amendment and Reaffirmation Agreement, the Bank waived the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and we agreed, for each quarter thereafter, that the fixed charge coverage ratio shall not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio starting on September 30, 2021. We were also required to maintain a restricted cash collateral accountminimum of $2.5 million in aggregate USA liquidity. As part of the amendment, we agreed, at Citizens Bankclosing, (i) to make a $500,000 pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75,000 to reduce the RLOC. We incurred $25,000 fees related to this amendment during the year ended December 31, 2021.

On November 12, 2021 we signed the Tenth Amendment and Reaffirmation Agreement with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding lettersprincipal amount of credit and working capital advances. 

The maximum availability under the RLOC is subjectshall accrue at the interest rate in effect for the RLOC from time to a borrowing base equal to 80% of eligible accounts receivable,time, but the interest due and is reduced for any issued and outstanding letters of credit and working capital advances.  At September 30, 2017, there were no outstanding borrowingspayable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and six letters(ii) the seventy-five (75) basis points of credit totaling $1.7 million. We have two lettersaccrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of credit with Citizen Bank totaling $0.4 million, which have expired and are pending release by the bank and customer. The amount available at September 30, 2017, after considerationpayment in full 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, the Company had three letters of credit with BB&T totaling $0.9 million, which have expired and are pending releaseRLOC. In addition, we agreed, by the bank and customer.  At September 30, 2017 and December 31, 2016,2021, to pay the cash collateral account with BB&T totaled $1.0 million and $1.1 million, respectively. The balances were classified as restricted cash onBank $250,000 to be applied to the consolidated balance sheets.principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.
 
16
14.Product Warranty

The Company accrues
Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. The Company's long-termOur System Design and Build contracts generally provide forinclude a one-yearone year base warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems. The portion of theour warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.3 million, while$682 thousand, and the remaining $0.5 million$81 thousand is classified as long-term within other liabilities.

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

(in thousands) 
  
Balance, January 1, 2017$1,478
Current period provision 474
Current period claims (194)
Currency adjustment 11
Balance at September 30, 2017$1,769


(in thousands)   
Balance at January 1, 2022 $748 
Current period recovery
  31
Current period claims  (11)
Currency adjustment  (5)
Balance at March 31, 2022
 $763 

22

15.Income Taxes
Note 12 - Revenue


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

The following table presentsrepresents a disaggregation of revenue by type of goods or services for the three months ended March 31, 2022 and 2021, along with the reportable segment for each category:

 
 Three months ended
 
(in thousands) March 31, 2022
  March 31, 2021
 
Performance Improvement Solutions
      
System Design and Build $1,412  $1,862 
Point in time  0   0 
Over time  1,412   1,862 
   
   
 
Software and Support  372   813 
Point in time  45   95 
Over time  327   718 
   
   
 
Training and Consulting Services  4,613   4,406 
Point in time  418   68 
Over time  4,195   4,338 
   
   
 
Workforce Solutions
  
   
 
Training and Consulting Services  5,878   6,023 
Point in time  0   86 
Over time  5,878   5,937 
   
   
 
Total revenue $12,275  $13,104 

The following table reflects the revenue recognized in the reporting periods that were included in contract liabilities from contracts with customers:

(in thousands) Three months ended
 
  March 31, 2022
  March 31, 2021
 
Revenue recognized in the period from amounts included in Billings in Excess of Revenue Earned at the beginning of the period $1,456  $2,189 

17
Note 13 - Income Taxes

The following table shows the provision for (benefit from) income taxes and theour effective tax rates:

(in thousands)
 
Three months ended
September 30,
 
Nine months ended
September 30,
 2017 2016  2017 2016
            
Provision for income taxes$92 $80 $399 $275
Effective tax rate (17.9)%  32.3%  112.4 %  39.7%

The Company's
(in thousands)Three months ended
 
 March 31, 2022
 March 31, 2021
 
Income (loss) before income taxes $(3,267) $(2,240)
Provision for income taxes  167  (35)
Effective tax rate  (5.1)%  1.6%

Our income tax provisionexpense or benefit for the interim periods presented 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 isfor the three months ended March 31, 2022 was comprised mainly of current foreign and state tax expense, as well as deferred federal and state tax expense related to the portion of goodwill which cannot be offset by deferred tax assets. Total income tax benefit for the three months ended March 31, 2021 was comprised mainly of foreign tax benefit, partially offset by state tax expense.

Our income effective tax rate was (5.1)% and 1.6% for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, the difference between our income tax expense Alternative Minimum Tax, state taxes,at an effective tax rate of (5.1)% and deferreda benefit at the U.S. statutory federal income tax rate of 21% a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense relatingrelated to disqualified 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 income tax amortizationbenefit at an effective tax rate of goodwill.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 tax valuation allowance in our U.S. and China subsidiaries, and discrete item adjustments for U.S. and foreign taxes.


Because of itsour net operating loss carryforwards, the Company iswe are subject to U.S. federal and state income tax examinations from the year 1997 forward.  The Company is2000 and forward and are subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 2014 forward for China,2016 and 2015 forward for both India and the UK.forward.


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

The Company recognizes
We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. The Company hasWe have evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on itsour U.S., Swedish, U.K.,Chinese, and ChineseSlovakian net deferred assets as of September 30, 2017.  The Company hasMarch 31, 2022. We have determined that it is not more likely than not that itthe Company will realize the benefits of its deferred taxes in India.  In 2016, the U.S. and foreign jurisdictions. The Company paid income taxeshas a deferred tax liability in India and expectsthe amount of $148 thousand at March 31, 2022 related to do so again in 2017.the portion of Goodwill which cannot be offset by deferred tax assets.

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Note 14 - Leases

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

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

    As of 
Operating Leases Classification March 31, 2022
  December 31, 2021
 
         
Leased Assets        
Operating lease - right of use assets 
Long term assets
 $1,047  $1,200 
           
Lease Liabilities          
Operating lease liabilities - Current 
Other current liabilities
  1,227   1,205 
Operating lease liabilities 
Long term liabilities
  502   790 
     
$1,729  $1,995 

18

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


The table below summarizes lease income and expense recorded in the consolidated statements of operations incurred during three months ended March 31, 2022 and 2021, (in thousands):

  
 Three months ended 
Lease Cost
 Classification 
March 31,
2022
  
March 31,
2021
 
         
Operating lease cost (1)
 
Selling, general and administrative expenses
 
$
186
  
$
192
 
Short-term leases costs (2)
 
Selling, general and administrative expenses
  
15
   
16
 
Sublease income (3)
 
Selling, general and administrative expenses
  
(18
)
  
(32
)
Net lease cost
 
 
 
183
  
$
176
 

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

The Company has twois obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of March 31, 2022 are as follows (in thousands):

(in thousands) 
Gross Future
Minimum Lease
Payments
 
2022 remainder $993 
2023  675 
2024  122 
2025  10 
2026  0 
Total lease payments $1,800 
Less: Interest  71 
Present value of lease payments $1,729 

19
We calculated the weighted-average remaining lease term, presented in years below and the weighted-average discount rate for our operating leases. As noted in our lease accounting policy, we use the incremental borrowing rate as the lease discount rate.

Lease Term and Discount Rate March 31, 2022
  December 31, 2021
 
Weighted-average remaining lease term (years)
 
  
 
Operating leases  1.58
   1.80
 
Weighted-average discount rate
        
Operating leases
  5.00%


5.00%

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

(in thousands) Three months ended
 
Cash paid for amounts included in measurement of liabilities March 31, 2022
  March 31, 2021
 
Operating cash flows used in operating leases $299  $327 

Note 15 - Segment Information

We have 2 reportable business segments.

The Performance Improvement Solutions segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Examples of engineering services include, but are not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for American Society of Mechanical Engineers (“ASME”) code and ASME Section XI. We provide these services across all market segments through our GSE Performance Solutions, Inc. (“GSE Performance”), True North Consulting, LLC (“True North”) and DP Engineering Ltd., Co. (“DP Engineering”) subsidiaries. Example training applications include turnkey and custom training services, while engineering services include plant design verification and validation. The Company provides these services across all market segments.  Contractsservices. Contract terms are typically range from nine months to 24 months.  The Company and its predecessors have been providing these services since 1976.less than two years.


The Nuclear Industry Training and ConsultingWorkforce Solutions segment provides specialized workforce solutions primarily to the nuclear industry, working at clients'clients’ facilities. This business is managed through our Hyperspring, LLC (“Hyperspring”) and newly acquired Absolute Consulting, Inc. (“Absolute”) subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE productour products and serviceservices portfolio.  The Company and its predecessors have been providing these services since 1997.

On September 20, 2017, the Company acquired Absolute Consulting, Inc., now a wholly-owned subsidiary of GSE Performance Solutions, Inc., for $8.9 million.  Absolute Consulting, Inc. is a provider of technical consulting and staffing solutions to the global nuclear power industry and employs approximately 200 professionals with expertise in procedures writing, engineering, technical support, project management, training, project controls, and corrective actions.  This acquisition brings a natural adjacency to GSE, fits well with our growth strategy, and benefits our customers from expanded capabilities and offerings.  For reporting purposes, Absolute Consulting, Inc. was aggregated with Hyperspring into our Nuclear Industry Training and Consulting segment due to similarities in services provided including training and staff augmentation to the nuclear energy sector.  In addition, both entities will report to the same management team and share support staff such as sales, recruiting and business development.  As such, 100% of the goodwill acquired was allocated to the Nuclear Industry Training and Consulting segment.

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

(in thousands)
 
Three months ended
September 30,
 
Nine months ended
September 30,
 2017 2016�� 2017 2016
            
Revenue:           
Performance Improvement Solutions$8,737 $10,215 $30,093 $27,382
Nuclear Industry Training and Consulting 6,672  4,213  18,783  12,438
  15,409  14,428  48,876  39,820
            
Operating income:           
Performance Improvement Solutions (1,545)  (413)  (1,885)  (890)
Nuclear Industry Training and Consulting 1,052  321  2,394  1,395
Change in fair value of contingent consideration, net (139)  525  (436)  370
            
Operating (loss) income (632)  433  73  875
            
Interest income, net 15  11  60  52
Gain (loss) on derivative instruments, net 71  (211)  226  (346)
Other income (expense), net 33  15  (4)  112
(Loss) income before income taxes$(513) $248 $355 $693


(in thousands) Three months ended
 
  March 31, 2022
  March 31, 2021
 
Revenue:      
Performance Improvement Solutions $6,397  $7,081 
Workforce Solutions
  
5,878
   6,023 
Total revenue $12,275  $13,104 
         
Operating loss        
Performance Improvement Solutions $2,395 $(1,403)
Workforce Solutions
  (159)  (784)
Loss on impairment  0   0 
Operating loss  (2,554)  (2,187)
         
Interest expense, net  (148)  (54)
Change in fair value of derivative instruments, net
  (581)  0 
Other income, net  16   1 
Loss before income taxes $(3,267) $(2,240)

24
20
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Note 16 - Commitments and Contingencies

GSE is
Per ASC 450 Accounting for Contingencies, the Company reviews potential items and areas where a world leaderloss contingency could arise. In the opinion of management, we are not a party to any legal proceeding, the outcome of which, in real-time high-fidelity simulation, providing a wide range of simulation, training, and engineering solutions to the global 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 services that systematically help clients fill key vacanciesmanagement’s opinion, individually or in the organizationaggregate, would have a material effect on a short-term basis, primarily in training professionals focused on regulatory compliance and certification in the nuclear power industry.our consolidated results of operations, financial position or cash flows, other than as noted above. We expense legal defense costs as incurred.

On September 20, 2017, the Company acquired Absolute Consulting, Inc., now a wholly-owned subsidiary of GSE Performance Solutions, Inc., for $8.9 million (subject to a customary post-closing working capital adjustment). Absolute Consulting, Inc. is a provider of technical consulting and staffing solutions to the global nuclear power industry and employs approximately 200 professionals with expertise in procedures writing, engineering, technical support, project management, training, project controls, and corrective actions.  This acquisition brings a natural adjacency to GSE, fits well with our growth strategy, and benefits our customers from expanded capabilities and offerings.

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:


21
Table of Contents
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.
26

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.

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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.
27
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.

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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.


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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.

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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.
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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

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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.

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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.
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.
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.
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 performance
Nuclear 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.


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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.
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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)%

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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.
34

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.

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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.




36
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.

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Table of Contents
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)
37

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..
39

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 taxes92 80 399 275
Depreciation and amortization247 276 754 809
EBITDA(281) 513 1,049 1,450
Loss (gain) from the change in fair value of contingent consideration139 (525) 436 (370)
Restructuring charges- 85 45 487
Stock-based compensation expense627 412 1,873 900
Consulting support for finance restructuring- 232 - 310
Acquisition-related expense454 - 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)


4031
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 consideration139 (525) 436 (370)
Restructuring charges- 85 45 487
Stock-based compensation expense627 412 1,873 900
Consulting support for finance restructuring- 232 - 310
Acquisition-related expense454 - 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.


41

Item 3.Quantitative and Qualitative Disclosure about Market Risk


Not required of a smaller reporting company.


32
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.



42
PART II -– OTHER INFORMATION


Item 1.Legal Proceedings


We are, from time to time, involved in ordinary routine litigation incidental to the conduct of our business. Neither we nor any of our subsidiaries are a party to, nor is any of our property the subject of, any material pending legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business, financial condition or results of operations.
None.

Item 1A.Risk Factors


The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.


33
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds


None


Item 3.Defaults Upon Senior Securities


None


Item 4.Mine Safety Disclosures


Not applicable.


Item 5.Other Information


None.


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Table of Contents
Item 6.Exhibits


2.1
Stock Purchase Agreement, among GSE Systems, Inc., through its wholly owned subsidiary GSE Performance Solutions, Inc., Richard and Cynthia Linton (and certain trusts owned thereby), and Absolute Consulting, Inc., dated as of September 20, 2017. Incorporated herein by reference to Exhibit 2.1 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on September 20, 2017.
 
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002, filed herewith.
   
 
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
   
 
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
   
 
Eighth Amendment
101.INS*XBRL Instance Document
   
 
101.SCH*
XBRL Taxonomy Extension Schema
   
 
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
   
 
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
   
 
101.LAB*
XBRL Taxonomy Extension Label Linkbase
   
 
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase




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Table of Contents
SIGNATURES


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


Date: May 16, 2022
GSE SYSTEMS, INC.
/S/ KYLE J. LOUDERMILK
Kyle J. Loudermilk
Chief Executive Officer
(Principal Executive Officer)
/S/ EMMETT A. PEPE
Emmett A. Pepe
Chief Financial Officer
(Principal Financial and Accounting Officer)



Date:  November 14, 201736
GSE SYSTEMS, INC.

/S/ KYLE J. LOUDERMILK
Kyle J. Loudermilk
Chief Executive Officer
(Principal Executive Officer)



/S/ EMMETT A. PEPE
Emmett A. Pepe
Chief Financial Officer
(Principal Financial and Accounting Officer)

44