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GVP GSE Systems

Filed: 16 Aug 21, 5:28pm

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

FORM 10-Q

(Mark One)   

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2021
 
    
  or 
    

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

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

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

1332 LONDONTOWN BLVD, SYKESVILLE MD 21784
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (410) 970-7874

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

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

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

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

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

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

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

There were 20,863,518 shares of common stock, with a par value of $0.01 per share outstanding as of July 31, 2021.



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

  Page
PART I.FINANCIAL INFORMATION3
Item 1.Financial Statements (unaudited)3
 3
 4
 5
 6
 8
 9
Item 2.24
Item 3.38
Item 4.39
PART II.39
Item 1.39
Item 1A.40
Item 2.41
Item 341
Item 441
Item 5.41
Item 6.42

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

  June 30, 2021  December 31, 2020 
  (unaudited)    
ASSETS 
Current assets:      
Cash and cash equivalents $3,829  $6,702 
Contract receivables, net  11,368   10,494 
Prepaid expenses and other current assets  5,287   1,554 
Total current assets  20,484   18,750 
         
Equipment, software and leasehold improvements, net  791   616 
Software development costs, net  575   630 
Goodwill  13,339   13,339 
Intangible assets, net  3,589   4,234 
Operating lease right-of-use assets, net  1,279   1,562 
Other assets  58   59 
Total assets $40,115  $39,190 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Line of credit $2,317  $3,006 
PPP Loan, current portion  10,118   5,034 
Accounts payable  1,005   570 
Accrued expenses  1,430   1,297 
Accrued compensation  2,389   1,505 
Billings in excess of revenue earned  4,693   5,285 
Accrued warranty  547   665 
Income taxes payable  1,623   1,621 
Other current liabilities  1,393   2,498 
Total current liabilities  25,515   21,481 
         
PPP Loan, noncurrent portion  0   5,034 
Operating lease liabilities noncurrent  1,315   1,831 
Other noncurrent liabilities  282   339 
Total liabilities  27,112   28,685 
         
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, 22,460,679 and 22,192,569 shares issued, 20,861,768 and 20,593,658 shares outstanding, respectively
  225   222 
Additional paid-in capital  80,024   79,687 
Accumulated deficit  (64,165)  (65,191)
Accumulated other comprehensive loss  (82)  (1,214)
Treasury stock at cost, 1,598,911 shares
  
(2,999
)
  (2,999)
Total stockholders' equity  13,003   10,505 
Total liabilities and stockholders' equity $40,115  $39,190 

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

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

  Three months ended
  Six months ended
 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
             
Revenue $13,522  $14,340  $26,626  $32,045 
Cost of revenue  10,833   10,778   21,009   24,368 
Gross profit  2,689   3,562   5,617   7,677 
Operating expenses:                
Selling, general and administrative  3,522   4,722   7,256   9,670 
Research and development  154   179   311   389 
Restructuring charges  0   0   808   10 
Loss on impairment  0   0   0   4,302 
Depreciation  71   70   147   178 
Amortization of definite-lived intangible assets  303   444   643   1,114 
Total operating expenses  4,050   5,415   9,165   15,663 
Operating loss  (1,361)  (1,853)  (3,548)  (7,986)
                 
Interest expense, net  (49)  (187)  (103)  (428)
Gain on derivative instruments, net  0   47   0   4 
Other income, net  4,637   24   4,638   53 
Income (loss) before income taxes  3,227   (1,969)  987   (8,357)
(Benefit from) provision for income taxes  (4)  180   (39)  50 
Net income (loss) $3,231  $(2,149) $1,026  $(8,407)
                 
Net income (loss) per common share - basic and diluted $0.16  $(0.11) $0.05  $(0.41)
                 
Weighted average shares outstanding used to compute net income (loss) per share - basic  20,647,426   20,407,958   20,638,116   20,375,446 
                 
Weighted average shares outstanding used to compute net income (loss) per share - diluted  20,702,003   20,407,958   20,638,116   20,375,446 

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

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

  Three months ended
  Six months ended
 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
Net income (loss) $3,231  $(2,149) $1,026  $(8,407)
Cumulative translation adjustment  26   206   1,132   20 
Comprehensive income (loss) $3,257  $(1,943) $2,158  $(8,387)

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

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


 Common Stock  
        Treasury Stock    
Six Months Ended
 Shares  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated Other
Comprehensive Loss
  Shares  Amount  Total 
                         
Balance, January 1, 2021  22,193  $222  $79,687  $(65,191) $(1,214)  (1,599) $(2,999) $10,505 
                                 
Stock-based compensation expense
  
-
   
0
   
501
   
0
   
0
   
-
   
0
   
501
 
Common stock issued for RSUs vested
  
268
   
3
   
(3
)
  
0
   
0
   
-
   
0
   
0
 
Shares withheld to pay taxes
  
-
   
0
   
(161
)
  
0
   
0
   
-
   
0
   
(161
)
Foreign currency translation adjustment
  
-
   
0
   
0
   
0
   
1,132
   
-
   
0
   
1,132
 
Net income
  
-
   
0
   
0
   
1,026
   
0
   
-
   
0
   
1,026
 
                                 
Balance, June 30, 2021  22,461  $225  $80,024  $(64,165) $(82)  (1,599) $(2,999) $13,003 
                                 
Balance, January 1, 2020  
21,839
  $218  $79,400  $(54,654) $(1,846)  (1,599) $(2,999) $20,119 
                                 
Stock-based compensation expense
  
-
   
0
   
324
   
0
   
0
   
-
   
0
   
324
 
Common stock issued for RSUs vested
  
311
   
3
   
(3
)
  
0
   
0
   
-
   
0
   
0
 
Shares withheld to pay taxes
  
-
   
0
   
(45
)
  
0
   
0
   
-
   
0
   
(45
)
Foreign currency translation adjustment
  
-
   
0
   
0
   
0
   
20
   
-
   
0
   
20
 
Net loss
  
-
   
0
   
0
   
(8,407
)
  
0
   
-
   
0
   
(8,407
)
                                 
Balance, June 30, 2020  
22,150
  $221  $79,676  $(63,061) $(1,826)  (1,599) $(2,999) $12,011 

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


 Common Stock  
        Treasury Stock    
Three Months Ended
 Shares  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated Other
Comprehensive Loss
  Shares  Amount  Total 
                         
Balance, April 1, 2021  22,234  $222  $79,697  $(67,396) $(108)  (1,599) $(2,999) $9,416 
                                 
Stock-based compensation expense
  
-
   
0
   
463
   
0
   
0
   
-
   
0
   
463
 
Common stock issued for RSUs vested
  
227
   
3
   
(2
)
  
0
   
0
   
-
   
0
   
1
 
Shares withheld to pay taxes
  
-
   
0
   
(134
)
  
0
   
0
   
-
   
0
   
(134
)
Foreign currency translation adjustment
  
-
   
0
   
0
   
0
   
26
   
-
   
0
   
26
 
Net income
  
-
   
0
   
0
   
3,231
   
0
   
-
   
0
   
3,231
 
                                 
Balance, June 30, 2021  22,461  $225  $80,024  $(64,165) $(82)  (1,599) $(2,999) $13,003 
                                 
Balance, April 1, 2020  
21,979
  $219  $79,495  $(60,912) $(2,032)  (1,599) $(2,999) $13,771 
                                 
Stock-based compensation expense
  
-
   
0
   
177
   
0
   
0
   
-
   
0
   
177
 
Common stock issued for RSUs vested
  
171
   
2
   
(2
)
  
0
   
0
   
-
   
0
   
0
 
Shares withheld to pay taxes
  
-
   
0
   
6
   
0
   
0
   
-
   
0
   
6
 
Foreign currency translation adjustment
  
-
   
0
   
0
   
0
   
206
   
-
   
0
   
206
 
Net loss
  
-
   
0
   
0
   
(2,149
)
  
0
   
-
   
0
   
(2,149
)
                                 
Balance, June 30, 2020  
22,150
  $221  $79,676  $(63,061) $(1,826)  (1,599) $(2,999) $12,011 

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

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

  Six Months ended
 
  June 30, 2021
  June 30, 2020
 
Cash flows from operating activities:      
Net income (loss) $1,026  $(8,407)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Loss on impairment  0   4,302 
Depreciation  147   178 
Amortization of intangible assets  643   1,114 
Amortization of capitalized software development costs  204   159 
Amortization of deferred financing costs  5   0 
Stock-based compensation expense  501   324 
Bad debt expense  (133)  93 
(Gain) loss on derivative instruments, net  0   (4)
Deferred income taxes  0   57 
Gain on sale of assets
  0   (5)
Changes in assets and liabilities:        
Contract receivables, net  (727)  4,656 
Prepaid expenses and other assets  (5,690)  531 
Accounts payable, accrued compensation and accrued expenses  1,510   309 
Billings in excess of revenue earned  (599)  (396)
Accrued warranty  (179)  (110)
Other liabilities  2,163   (781)
Net cash (used in) provided by operating activities  (1,129)  2,020 
         
Cash flows from investing activities:        
Capital expenditures  (322)  (1)
    Proceeds from sale of equipment
  0   11 
Capitalized software development costs  (149)  (152)
Net cash used in investing activities  (471)  (142)
         
Cash flows from financing activities:        
Proceeds from line of credit  800   3,500 
Repayment of line of credit  (1,489)  0 
Repayment of insurance premium
  (406)  0 
Repayment of long-term debt  0   (8,595)
Proceeds from Paycheck Protection Program Loan
  0   10,000 
Shares withheld to pay taxes  (161)  (45)
Deferred financing costs
  0   (70)
Net cash (used in) provided by financing activities  (1,256)  4,790 
Effect of exchange rate changes on cash  (17)  (61)
Net (decrease) increase in cash and cash equivalents  (2,873)  6,607 
Cash, cash equivalents at beginning of the period  6,702   11,691 
Cash and cash equivalents at the end of the period $3,829  $18,298 

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

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

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

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

COVID-19

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

Going Concern

In 2020 we had several projects (primarily in our NITC business segment) delayed and new orders postponed because of the COVID-19 pandemic. We amended our credit facility with Citizens Bank, N.A. (“the Bank”) in 2020 based upon expected covenant violations and have been required to curtail term debt in exchange for revised financial covenants. Scheduled term loan repayments and agreed upon curtailment required us to use $18.5 million in available cash to pay-off our term debt in 2020. We signed a Ninth Amendment and Reaffirmation Agreement (the “Ninth Amendment”) with the Bank on March 29, 2021 to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and to adjust the thresholds for future covenants to ease the risk of non-compliance experienced in previous quarters. We have experienced delays in commencing new projects and thus our ability to earn revenue has been delayed for these projects. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to June 30, 2021 and we projected breaching the Leverage and Fixed Charges ratio covenant. (See Note 10).  Our working capital position on June 30, 2021 was a deficit of $5.0 million. This working capital deficit was primarily due to the $10.1 million of current maturities on our loan pursuant to the Paycheck Protection Program at June 30, 2021. On August 5, 2021, the Company received approval from Small Business Administration (SBA) that the PPP loan including all accrued interest thereon was forgiven. (See Note 17).

The COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, issues that could result for the delta virus could cause a further decline in revenue or stress our ability to meet covenant requirements.  Jurisdictions where our businesses operate across the country are pushing toward re-opening places of business and government support, through the American Rescue Plan Act of 2021, will continue to support the broader economy. We have recorded $5.1 million employee retention tax credits made available under the CARES Act. However, the timing of these elements taking place are not predictable and may not serve to mitigate our situation or improve the Company's health. Following the Ninth Amendment, our new covenant compliance remains dependent on meeting future projections, which are subject to the variability and unknown speed and extent of post-COVID-19 recovery.

The Company's management continues to explore raising capital through its access to the public markets or entering into alternative financing arrangements. Continued negative trends in operating results could be mitigated through various cost cutting measures including adjustments to headcount or compensation, vendor augmentation or delay of investment initiatives in the Company's corporate office.

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

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

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

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

Accounting pronouncements not yet adopted

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

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

Note 3 - Basic and Diluted Loss per Share

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

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

(in thousands, except for share data) Three months ended
  Six months ended
 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
Numerator:            
     Net income (loss) attributed to common stockholders $3,231  $(2,149) $1,026  $(8,407)
                 
Denominator:                
Weighted-average shares outstanding for basic earnings per share  20,647,426   20,407,958   20,638,116   20,375,446 
                 
Effect of dilutive securities:                
Employee stock options  54,577   0   0   0 
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share  20,702,003   20,407,958   20,638,116   20,375,446 
                 
Shares related to dilutive securities excluded because inclusion would be anti-dilutive  0   74,732   20,005   56,373 

Note 4 - Coronavirus Aid, Relief and Economic Security Act

Paycheck Protection Program Loan (PPP Loan)

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. On April 23, 2020, GSE was approved for and on the next day received a $10 million loan pursuant to a Paycheck Protection Program Note (the “PPP Loan”) from Citizens Bank, N.A. pursuant to the CARES Act.  Pursuant to the CARES Act, the PPP Loan was guaranteed by the U.S. Small Business Administration (“SBA”) and eligible for forgiveness under certain circumstances. Repayment of the PPP Loan was scheduled to begin on August 9, 2021.

The aim of the PPP Loan is to provide funding for businesses for certain payroll and nonpayroll costs. Proceeds for the PPP Loan are eligible for complete forgiveness, if used at least 60% for payroll cost with up to 40% for certain other nonpayroll costs. Forgiveness for amounts less than the total amount of the PPP Loan ($10 million) is allowed, retaining 60/40 requirements, but will be limited based upon the amount of funds used for payroll costs and further reduced by a full-time employee and salary/hourly rate wage reduction limitation. GSE has relied primarily on eligible wages and expenses and is well within the ratios.

The SBA has stated that PPP loans above $2 million will be subject to audit for appropriate usage of the funds and confirmation of loan forgiveness. GSE has stated, as part of the initial application, that the receipt of such funds were required in order to maintain its employees during the pandemic, and GSE was confident in its ability to report on the proper use the funds and obtain full forgiveness. GSE has also prepared and performed extensive review in its submission of the mandated Form 3590 – PPP Loan Necessity Questionnaire and remains confident to that end.

The July 5 legislation provides for an automatic 10 month deferment, after the coverage period, on the first payment, placing it on August 9, 2021. Subsequent payments, in accordance with our loan documentation, will occur monthly in equal monthly proportions, beginning with the first full month following the deferment period and will be comprised of principal and interest, with the loan fully due on April 23, 2022. Although the first payment is not required until September 2021, the loan balance accrues at an interest rate of 1% from April 23, 2020. If the loan is forgiven, the related interest incurred is also forgiven.

We realized all possible PPP Loan forgiveness expenses through the 24 week coverage period during the 2020 fiscal year. We applied for forgiveness in Q1 of 2021 with expected response in Q2 of 2021 (although the exact timing of a response from the SBA is not free from doubt). Any balance unforgiven by the SBA and accruing 1% interest since inception will be payable starting on the date instructed by the SBA and in equal monthly payments with the final balance due by April 23, 2022. Loan forgiveness is achieved by applying for forgiveness with the Company’s lender, the Bank, with expenses eligible for forgiveness as incurred and receiving final clearance from the SBA. The Bank has successfully completed their review and provided the loan forgiveness application and support to the SBA on February 26, 2021. SBA provided through regulation that its process would take no more than 90 days. Upon receipt of the funds, a Loan Payable – PPP balance of $10 million was recorded and related interest expense is being accrued. As of June 30, 2021, GSE reported the loan balance and accrued interest as a short term payable.

The PPP Loan contains events of default and other provisions customary for a loan of this type. The Payroll Protection Program provides that (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, and (2) 100% of the principal amount of the loan is guaranteed by the Small Business Administration.

The SBA provides for certain customary events of default, including if the Company (i) fails to do anything required by the Note and other Loan Documents; (ii) does not disclose, or anyone acting on its behalf does not disclose, any material fact to the Bank or the SBA; (iii) makes, or anyone acting on its behalf makes, a materially false or misleading representation to lender or the SBA; (iv) reorganizes, merges, consolidates or otherwise changes ownership or business structure without the Bank’s prior written consent; (v) takes certain prohibited actions after the Bank makes a determination that the PPP Loan is not entitled to full forgiveness. Upon default the Bank may require immediate payment of all amounts owing under the PPP Loan or file suit and obtain judgment.

As of June 30, 2021, we had $10 million of principal remained outstanding on the PPP Loan together with accrued interest of $118 thousand as debt, which are classified as current in our consolidated balance sheets. We recorded $25 and $50 thousand of interest expense during the three and six months ended June 30, 2021.

On August 5, 2021, the Company received approval from Small Business Administration ("SBA") that the PPP loan including all accrued interest thereon was forgiven. (See Note 17).

Employee Retention Credits (ERC)

Employee retention tax credits made available under the CARES Act allow eligible employers claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. During the second quarter of 2021, we performed analysis to determine our eligibility for the Employee Retention Credit for the first quarter of 2021. We amended certain payroll tax filings and applied for a refund of $2.4 million in June 2021. For the second quarter of 2021, we have applied for a refund of $1.8 million from the IRS with the timely filing of Form 941 and have already recognized a benefit of $0.9 million in value from unremitted payroll taxes as allowable. We believe we are also eligible to receive the employee retention credit in the third quarter of 2021 and we are reducing our payroll taxes as permitted under the Coronavirus Aid, Relief and Economic Security Act.

Note 5 - Contract Receivables
 
Contract receivables represent our unconditional rights to consideration due from our domestic and international customers. We expect to collect all contract receivables within the next twelve months.

The components of contract receivables were as follows:

(in thousands) June 30, 2021  December 31, 2020 
       
Billed receivables $4,004  $5,694 
Unbilled receivables  7,577   5,160 
Allowance for doubtful accounts  (213)  (360)
Total contract receivables, net $11,368  $10,494 

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

During the six months ended June 30, 2021 and 2020, we recorded bad debt (recovery) expense of $(133) thousand and $93 thousand, respectively.

During the month of July 2021, we invoiced $2.9 million of the unbilled amounts as of the three months ended June 30, 2021.

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

Note 6 - Goodwill and Intangible Assets

During the three months ended March 31, 2020, we recognized an impairment charge of $4.3 million certain intangible assets as a result of the affect of the COVID-19 pandemic on our operations. This analysis did not evidence impairment of goodwill.

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

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. The Company’s intangible assets impairment analysis includes the use of undiscounted cash flow and discounted cash flow models that requires management to make assumptions regarding estimates of growth rates used to forecast revenue, operating margin and terminal value as well as determining the appropriate risk adjusted discount rates and other factors that impact fair value determinations.

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

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

(in thousands) As of June 30, 2021 
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  Net 
Amortized intangible assets:         
Customer relationships $8,628  $(6,005) $2,623 
Trade names  1,689   (1,064)  625 
Developed technology  471   (471)  0 
Non-contractual customer relationships  433   (433)  0 
Noncompete agreement  527   (383)  144 
Alliance agreement  527   (330)  197 
Others  167   (167)  0 
Total $12,442  $(8,853) $3,589 

(in thousands) As of December 31, 2020 
  
Gross Carrying
Amount
  
Accumulated
Amortization
  
Impact of
Impairment
  Net 
Amortized intangible assets:            
Customer relationships $11,730  $(5,504) $(3,102) $3,124 
Trade names  2,467   (1,020)  (778)  669 
Developed technology  471   (471)  0   0 
Non-contractual customer relationships  433   (433)  0   0 
Noncompete agreement  949   (336)  (422)  191 
Alliance agreement  527   (277)  0   250 
Others  167   (167)  0   0 
Total $16,744  $(8,208) $(4,302) $4,234 

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.4 million for the  three months ended June 30, 2021 and 2020 and $0.6 million and $1.1 million for the six months ended June 30, 2021 and 2020, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:
 
(in thousands)   
Years ended December 31:   
2021 remainder
 $569 
2022  911 
2023  640 
2024  435 
2025  335 
Thereafter  699 
Total $3,589 

Note 7 -  Equipment, Software and Leasehold Improvements

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

(in thousands)      
  June 30, 2021
  December 31, 2020
 
Computer and equipment $2,226  $2,229 
Software  2,010   1,695 
Leasehold improvements  659   660 
Furniture and fixtures  839   848 
   5,734   5,432 
Accumulated depreciation  (4,943)  (4,816)
Equipment, software and leasehold improvements, net $791  $616 

Depreciation expense was $147 thousand and $178 thousand for the six months ended June 30, 2021 and 2020, respectively. Capitalization of internal-use software cost of $165 thousand and $315 thousand were recorded in software for the three and six months ended June 30, 2021.

Note 8 - Fair Value of Financial Instruments
 
ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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

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

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

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

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

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

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

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

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

(in thousands) 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
             
Money market funds $435  $0  $0  $435 
Total assets $435  $0  $0  $435 

Note 9 - Stock-Based Compensation

We recognize compensation expense for all equity-based compensation awards issued to employees and directors that are expected to vest. Stock compensation is calculated based upon the fair value of awards as of the grant date. During the three months ended June 30, 2021 and 2020, we recognized $0.5 million in stock-based compensation expense and $0.2 million of stock-based compensation expense related to equity awards, respectively. We recognized $0.5 million and $0.3 million of stock-based compensation expense related to equity awards for the six months ended June 30, 2021 and 2020, respectively, under the fair value method. In addition to the equity-based compensation expense recognized, the Company recognized stock-based compensation related to the change in the fair value of cash-settled restricted stock units (RSUs) $0 thousand and $6 thousand for the six months ended June 30,2021 and 2020, respectively. There was 0 change in the fair value of cash settled RSUs for the three months ended June 30, 2021 and 2020.

During the three and six months ended June 30, 2021, we granted approximately 804,661 time-based RSUs with an aggregate fair value of approximately $1.4 million, respectively. During the three and six months ended June 30, 2020, we granted approximately 10,000 and 40,000 time-based RSUs with an aggregate fair value of $10 thousand and $31 thousand, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of 8 quarters, and the remainder vest annually in equal amounts over the course of one to three years.
GSE’s 1995 long-term incentive program ("LTIP") provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and employees. Vesting of the performance-vesting restricted stock units ("PRSU") is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the Company's Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.
During the three and six months ended June 30, 2021, we did 0t grant any performance-based RSUs to employees.
During the three months ended June 30, 2020, we did 0t grant any performance-based RSUs to employees and during the six months ended June 30, 2020, we granted approximately 510,000 performance-based RSUs to key employees with an aggregate fair-value of $0.6 million. These awards vest over three years based upon achieving certain financial metrics achieved during fiscal 2022 for revenue and Adjusted EBITDA. The Company did 0t grant any stock options for three and six months ended June 30, 2021 and 2020.

Note 10 - Debt

On December 29, 2016, we entered a 3-year $5.0 million revolving line of credit facility with the Bank to fund general working capital needs and acquisitions. On May 11, 2018, we entered into the Amended and Restated Credit and Security Agreement (the “Credit Agreement” or the “Credit Facility”) to (a) expand the $5.0 million revolving line of credit (the “RLOC”) to include a letter of credit sub-facility and not be subject to a borrowing base and (b) to add a $25 million term loan facility, available to finance permitted acquisitions over the following 18 months. The credit facility was subject to certain financial covenants and reporting requirements  and was scheduled to mature on May 11, 2023 and accrue interest at the USD LIBOR, plus a margin that varies depending on our overall leverage ratio. The RLOC had required monthly payments of only interest, with principal due at maturity, while our term loan draws required monthly payments of principal and interest based on an amortization schedule. Our obligations under the Credit Agreement are guaranteed by our wholly owned subsidiaries, Hyperspring, Absolute, True North, DP Engineering and by any future material domestic subsidiaries (collectively, “the Guarantors”).

During 2020, the COVID-19 pandemic impacted our operations and our projected ability to comply with certain financial covenants. As such, we amended the credit facility at various dates in 2020 to revise our fixed charge ratio and leverage ratio requirements as well as our Adjusted EBITDA requirement.

In exchange for relaxed covenants or waivers of covenants for certain periods, we were required to curtail our term debt. During 2020, we repaid approximately $18.5 million of term debt and we were required to maintain certain levels or USA liquidity, which are tested bi-weekly.

On March 29, 2021, due to a projected violation of Q1 2021 leverage ratio, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021, with our bank to waive 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 and starting on September 30, 2021 as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022 and (v) 2.00 to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter. We are also required to maintain a minimum of $2.5 million in aggregate USA liquidity. As part of the amendment, we agreed, at closing, (i) to make a $0.5 million pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75 thousand to reduce the RLOC. We incurred $25 thousand fees related to this amendment during the year ended December 31, 2020.

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

Revolving Line of Credit (“RLOC”)

During the six months ended June 30, 2021, we paid for $1.5 million and had a draw of $0.8 million on our RLOC. As of June 30, 2021, we had outstanding borrowings of $2.3 million under the RLOC and 3 letters of credit totaling $933 thousand outstanding to certain of our customers. The total borrowing capacity under RLOC was $3.8 million as of June 30, 2021. After consideration of letters of credit, and the $0.5 million reserved for issuance of new letters of credit, there was 0 amount available for borrowing under the RLOC.

We intend to continue using the RLOC for short-term working capital needs when capacity is available and the issuance of letters of credit in connection with business operations provided, we remain in compliance with our covenants. As discussed above, we signed the Ninth Amendment on our credit facility as such our covenants have been waived through June 30, 2021. Letter of credit issuance fees range between 1.25% and 2.00% of the value of the letter of credit, depending on our overall leverage ratio. We pay a fee for unused RLOC quarterly based on the average daily unused balance.

Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one base warranty on the systems. The portion of our warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $547 thousand, and the remaining $197 thousand is classified as long-term within other liabilities.

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

(in thousands)   
Balance at January 1, 2021 $922 
Current period provision  (124)
Current period claims  (54)
Currency adjustment  0
Balance at June 30, 2021
 $744 

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 and NITC (workforce solutions) segments. We recognize revenue from SDB and software contracts mainly through our Performance segment. We recognize training and consulting service contracts through both segments.
The following table represents a disaggregation of revenue by type of goods or services for three and six months ended June 30, 2021 and 2020, along with the reporting segment for each category:

(in thousands) Three months ended  Six months ended 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
Performance Improvement Solutions segment            
System Design and Build
 
$
1,227
  
$
3,249
  
$
3,089
  
$
7,062
 
Point in time  
0
   
0
   
0
   
0
 
Over time  
1,227
   
3,249
   
3,089
   
7,062
 
                 
Software and Support
  
766
   
723
   
1,579
   
1,633
 
Point in time  
127
   
444
   
222
   
1,084
 
Over time  
639
   
279
   
1,357
   
549
 
                 
Training and Consulting Services
  
4,869
   
4,300
   
9,275
   
9,288
 
Point in time  
16
   
19
   
84
   
48
 
Over time  
4,853
   
4,281
   
9,191
   
9,240
 
                 
Nuclear Industry Training and Consulting segment                
Training and Consulting Services
  
6,660
   
6,068
   
12,683
   
14,062
 
Point in time  
163
   
0
   
249
   
0
 
Over time  
6,497
   
6,068
   
12,434
   
14,062
 
                 
Total revenue 
$
13,522
  
$
14,340
  
$
26,626
  
$
32,045
 

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

(in thousands)
 Three months ended  Six months ended 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period $1,115  $939  $3,304  $4,701 
Note 13 - Income Taxes

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

(in thousands) Three months ended  Six months ended 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
Income (loss) before income taxes $3,227  $(1,969) $987  $(8,357)
(Benefit from) provision for income taxes  (4)  180   (39)  50 
Effective tax rate  (0.1)%  (9.1)%  (4.0)%  (0.6)%

Our income tax benefit for the interim periods presented is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit for the six months ended June 30, 2021 was comprised mainly of foreign tax benefit and state tax expense. Total income tax expense for the six months ended June 30, 2020 was comprised mainly of foreign and state tax expense.
Our effective income tax rate was (0.1)% and (4.0)% for the three and six months ended June 30, 2021, respectively. For the three and six months ended June 30, 2021, the difference between our income tax benefit at an effective tax rate of (0.1)% and (4.0)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, and discrete item adjustments for U.S. and foreign taxes. For the three and six months ended June 30, 2020, the difference between our income tax expense at an effective tax rate of (9.1)% and (0.6)%, respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. and China subsidiaries, and discrete item adjustments for U.S. and foreign taxes.

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

An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense. The Company has an estimated $0.8 million of tax benefit that will be realized in the third quarter of 2021 upon the expiration of the statute of limitations of the tax year in which the uncertain tax position was taken.

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

Note 14 - Leases

According to ASC 842 Leases (Topic 842), for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Leases generally have remaining terms of one to six, whereas leases with an initial term of twelve months or less are not recognized on our consolidated balance sheet. We recognize lease expense for minimum lease payments on a straight-line basis over the term of the lease. We maintain leases of office facilities and equipment, and certain leases include options to renew or terminate. Renewal options are exercisable based upon our discretion and vary based on the nature of each lease, with renewal periods generally ranging from one to five. The term of the lease includes renewal periods, only if we are reasonably certain that we will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, we consider several factors, including but not limited to, the cost of moving to another location, the cost of disruption to our operations, the purpose or location of the leased asset and the terms associated with extending the lease.

Operating lease Right-of-Use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets represent the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. Our real estate leases, which are comprised primarily of office spaces, represent most of our remaining lease liability. Most of our lease payments are fixed, although an immaterial portion of payments are variable in nature. These lease payments vary based on changes in facts and circumstances related to the use of the ROU asset and are recorded as incurred. We use an incremental borrowing rate based on rates available at commencement in determining the present value of future payments.

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

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

    As of 
Operating Leases Classification June 30, 2021
  December 31, 2020
 
         
Leased Assets        
Operating lease - right of use assets 
Long term assets
 $1,279  $1,562 
           
Lease Liabilities          
Operating lease liabilities - Current 
Other current liabilities
  1,099   1,138 
Operating lease liabilities 
Long term liabilities
  1,315   1,831 
     $
2,414  $2,969 

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

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

      Three months ended  Six months ended 
Lease Cost
 Classification June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
               
Operating lease cost (1)
 
Selling, general and administrative expenses
 
$
177
  
$
321
  
$
369
  
$
418
 
Short-term leases costs (2)
 
Selling, general and administrative expenses
  
14
   
1
   
30
   
1
 
Sublease income (3)
 
Selling, general and administrative expenses
  
(32
)
  
(32
)
  
(64
)
  
(64
)
Net lease cost
 
 
 
$
159
  
$
290
  
$
335
  
$
355
 

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

 (in thousands) 
Gross Future
Minimum Lease
Payments
 
2021 remainder $613 
2022  1,171 
2023  638 
2024  122 
2025  10 
Thereafter  3
 
Total lease payments $2,557 
Less: Interest  143 
Present value of lease payments $2,414 

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

Lease Term and Discount Rate June 30, 2021
  December 31, 2020
 
Weighted-average remaining lease term (years) Operating leases  2.24   2.64 

        
Weighted-average discount rate Operating leases  5.00%  5.00%

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

(in thousands) Six months ended
 
Cash paid for amounts included in measurement of liabilities June 30, 2021
  June 30, 2020
 
Operating cash flows used in operating leases $639  $675 

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. Example engineering services include, but are not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for ASME code and ASME Section XI. The Company provides these services across all market segments through our Performance, True North consulting, and DP Engineering subsidiaries. Example training applications include turnkey and custom training services. Contract terms are typically less than two.

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

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

  Three months ended  Six months ended 
(in thousands) June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
             
Revenue:            
Performance $6,862  $8,273  $13,943  $17,984 
   NITC  6,660   6,067   12,683   14,061 
Total revenue  13,522   14,340   26,626   32,045 
                 
Operating loss                
   Performance  (1,131)  (695)  (2,534)  (1,967)
   NITC  (230)  (297)  (1,014)  (856)
   Litigation  0   (861)  0   (861)
   Loss on impairment  0   0   0   (4,302)
                 
Operating loss  (1,361)  (1,853)  (3,548)  (7,986)
                 
Interest expense, net  (49)  (187)  (103)  (428)
Gain on derivative instruments, net  0   47   0   4 
Other income, net  4,637   24   4,638   53 
Income (loss) before income taxes $3,227  $(1,969) $987  $(8,357)

Note 16 - Commitments and Contingencies

Joyce v. Absolute Consulting, Inc.

On March 29, 2019, a former employee of Absolute Consulting, Inc., filed a putative class action against Absolute and the Company, Joyce v. Absolute Consulting Inc., case number 1:19 cv 00868 RDB, in the United States District Court for the District of Maryland. The lawsuit alleged that the plaintiff and certain other employees were not properly compensated for overtime hours worked. The Company was subsequently dismissed from the case, leaving Absolute as the sole defendant.

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

On September 29, 2020, the Company received $952 thousand from a general escrow account, originally set up as part of the Company’s purchase of Absolute during fiscal 2017. The Company presented the loss on Joyce legal settlement and the benefit from the proceeds from the release of escrow from the Absolute transaction in selling, general and administrative expenses, in the amount of $477 thousand for the year ended December 31, 2020.

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

Note 17 - Subsequent Events

On August 2, 2021, the Company breached the Minimum Liquidity Covenant on the outstanding RLOC per the 9th amendment to the credit facility. On August 13, 2021, the Company executed a waiver agreement with the Bank for the aforementioned breach, as well as, for the for the minimum liquidity covenant for the measurement period ended August 15, 2021. As such, the Bank waives the right to declare default on any outstanding balances based solely on the Covenant Violations.



On August 5, 2021, the Company received the official notification of forgiveness from the SBA with a forgiveness payment date of July 30, 2021. The forgiveness of the PPP Loan will be recognized during the Company’s third fiscal quarter ending September 30, 2021.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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


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

GSE is a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that systematically help clients fill key vacancies in the organization on a short-term basis, primarily in procedures, engineering, technical support and training focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries.

Early in 2020 as the pandemic unfolded, the end markets that GSE serves, namely the power industries, delayed the essential services and dramatically cut back on non-essential services. Although this impacted GSE, as an essential services provider to an essential industrial base, GSE benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. As GSE enters into 2021, the effects of the pandemic are still impacting the end markets we serve, but those effects may be mitigated for a number of factors, including the following: the pandemic largely has had a targeted effect on the population; there now are a number of vaccines in the market being distributed and, despite logistical challenges, making solid progress for those in most need; the economy of the United States has not had as much disruption as was initially feared which has benefited our end markets; and most importantly the end markets of GSE seem poised to spend to catch up on essential services that had been delayed as a result of the pandemic. In the end of 2020 and the beginning of 2021, we have had a number of significant contract wins that have been publicly announced, which we hope will be a harbinger of a more solid 2021 business environment.

On April 23, 2020, we received $10 million in funds under the Paycheck Protection Program (PPP), a part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The loan was serviced by Citizens Bank (the “Bank”), and the application for these funds required us to, in good faith, certify that the current economic uncertainty made the loan necessary to support our ongoing operations. We used funds for payroll and related costs, rent and utilities. The receipt of these funds, and the forgiveness of the PPP Loan attendant to these funds, is dependent on our ability to adhere to the forgiveness criteria. The PPP Loan bears interest at a rate of 1% per annum and matures on April 23, 2022, with the first payment deferred until September 2021. Under the terms of the PPP Loan, certain amounts may be forgiven if they are used in accordance with the CARES Act. On August 5, 2021, the Company received approval from Small Business Administration (“SBA”) that the PPP loan including all accrued interest thereon was forgiven. (See Note 17).

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

During the second quarter of 2021, we performed analysis to determine our eligibility for the Employee Retention Credit for the first quarter of 2021. We amended certain payroll tax filings and applied for a refund of $2.4 million dollars in April 2021. For the second quarter of 2021, we have applied for a refund of $1.8 million dollars from the IRS with the timely filing of Form 941 and have already recognized a benefit of $0.9 million dollars in value from unremitted payroll taxes as allowable. We believe we are also eligible to receive the employee retention credit in the third quarter of 2021 and we are reducing our payroll taxes as permitted under the Coronavirus Aid, Relief and Economic Security Act.

General Business Environment

We operate through two reportable business segments: Performance Improvement Solutions and Nuclear Industry Training and Consulting (NITC). The NITC segment is referred to as workforce solutions to account for the increasing activity outside of our core nuclear industry focus. Each segment focuses on delivering solutions to customers within our target markets. Marketing and communications, accounting, finance, legal, human resources, corporate development, information systems and other administrative services are organized at the corporate level. Business development and sales resources are generally aligned with each segment to support existing customer accounts and new customer development. The business units collaborate to facilitate cross-selling and the development of new solutions. The following is a description of our business segments:

Performance Improvement Solutions (approximately 52% of revenue at June 30, 2021)

Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, technical engineering services for ASME programs, power plant thermal performance optimization, and interactive computer based tutorials/simulation focused on the process industry. The Performance Solutions segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve primarily nuclear and fossil fuel power generation and the process industries. Our simulation solutions include the following: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, including operator training systems, for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industry processes and control systems to newly hired employees and for ongoing workforce development and training. GSE and its predecessors have been providing these services since 1976.

Our engineering solutions include the following: (1) in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, and thermal performance; (2) in-service inspection for specialty engineering including ASME Section XI; (3) software solutions; and (4) mechanical design, civil/structural design, electrical, instrumentation and controls design, digital controls/cyber security, and fire protection for nuclear power plant
design modifications. Our GSE True North Consulting and GSE DP Engineering businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements and are included in our Performance Improvement Solutions segment due to their service offerings. GSE has been providing these engineering solutions and services since 1995.

Nuclear Industry Training and Consulting (approximately 48% of revenue at June 30, 2021)

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

Business Strategy

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

Our objective has been to create a leading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies. GSE is now one of the leading, publicly traded engineering and technology companies serving the zero-carbon energy sector of nuclear power and adjacent nuclear markets in DOE, US Navy and related defense sectors. As a result of this effort and established leadership position in key sectors, GSE is positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2021, we will focus on organic growth in the sectors we serve by: cross selling and upselling in our existing markets as we focus on delivering significant value to our customers in a manner of excellence; creating new and compelling solutions in-house as a result of advancing our technology offerings in sponsorship with industry early adopters focused on critical business need; developing new services as a result of combining the expertise of the Company;  and expanding into compelling adjacent markets such as clean energy as they may arise with renewed sales focus.

Cross sell and upsell into existing markets:

GSE has spent the past several years executing an acquisition strategy to rollup providers of essential services to the industry. To ensure efficient and streamlined operations for the business, the Company has consolidated all of the engineering services together into one organization with one leader; and the NITC teams together as one team under one leader. The business units operating uniformly within their respective structure. As such, the opportunity to cross-sell the capabilities across the entire customer base is greatly enhanced. This further differentiates GSE as a unique provider to industry vs. providers of specific niche services. The unified go-to market efforts, such as cross-selling capability should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. As a result of a rejuvenated marketing effort, the Company is equipped to take this new approach to market. In particular, with the US government rejoining the Paris Climate Agreement and driving to decarbonize the energy grid by 2035, and creating a carbon neutral economy by 2050, decarbonization of the energy sector will require significant investment for decades to come. As a key provider of essential services to the power sector, with a focus on decarbonization, GSE is poised to benefit from and exploit this investment.

Organic growth through new and compelling technology:

While the company was managing through the pandemic, in parallel the leadership was working to investigate compelling opportunities by which new offerings that uniquely result from the combination of capabilities across GSE could create significant value for the industry and advance the efforts of decarbonizing the power sector. As a result, the Company has identified a robust pipeline of new and compelling technology solutions to develop and take to market. Net new solutions would create new revenue streams with the potential of on-going annuities through license revenue, software maintenance and services revenue. As the Company has demonstrated in the past few years, small wins over time accrue into meaningful revenue on an on-going basis. This is a key element of our organic growth thesis: focusing on creating and bringing to market compelling technology solutions.

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

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

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

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

We intend to continue to make pragmatic and measured investments in R&D that first and foremost are driven by the market and complement our growth strategy. Such investments in R&D may result in on-going enhancement of existing solutions as well as the creation of new solutions to serve our target markets, ensuring that we add greater value that is easier to use, at lower total cost of ownership than any alternative available to customers. GSE has pioneered a number of industry standards and intends to continue to be one of the most innovative companies in our industry.

- Strengthen and develop our talent while delivering high-quality solutions. Over the past several years GSE has assembled a unique and highly experienced group of talented individuals through organic growth and strategic acquisition. Our Engineering team comprised of design, simulation, regulatory compliance, and performance optimization capabilities is unique to the industry and capable of addressing the entire power generation life cycle.

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

We have developed a strong reputation for quality services based upon our industry-recognized depth of experience, ability to attract and retain quality professionals, and exceptional expertise across multiple service sectors. As we continue to integrate and leverage our individual company components assembled over the past several years, our capabilities and reputation will further strengthen.

Employees

As of June 30, 2021, we had approximately 381 employees, which includes approximately 194 employees in our Performance segment and approximately 187 employees in our NITC segment.

Backlog

As of June 30, 2021, we had approximately $37.5 million of total gross revenue backlog, which included $27.7 million of Performance backlog and $9.8 million of NITC 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 GAAP measurement, our computation of backlog may not necessarily be comparable to that of our industry peers.

Product and Services

- Performance Improvement Solutions

Our engineering team, comprised of design, simulation, regulatory compliance, and performance optimization capabilities is unique to the industry and capable of addressing the entire power generation life cycle. As we move forward in alignment with client and industry goals targeting clean energy production and overall decarbonization we are positioned to be at the forefront in three critical areas:

• optimization of existing generation assets
• design support and deployment of advanced reactor designs
• integration with renewable power sources

Optimizing Existing Generation Assets

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

Advanced Reactor Designs & Deployment

Designers of first-of-a-kind plants or existing plants need a highly accurate dynamic simulation platform to model a wide variety of design assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in deployment of new technology, often involving the integration of disparate technologies for the first time, a high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, GSE was chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. Going forward we also envision many of the optimization techniques and strategies currently emphasized for the existing reactor fleet incorporated with new-build prototypes as they begin to add value and assume a larger component of our clean, carbon free, power requirements.

Renewable Integration

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

Engineering Solutions for Decarbonization

With overall decarbonization as our primary focus, we will blend our current and future efforts in those areas described above to best support that goal positioning our engineering team as recognized leaders in the pursuit of Clean Energy. An overview highlighting many areas of our current and planned involvement as well as the associated benefits is summarized below:

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

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

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

GSE’s simulation solutions not only address industry training needs, but are used for Simulation Assisted Engineering, the process of using simulation to virtually test and commission plant designs prior to construction. Because new builds and upgrades to existing plants result in deployment of new technology, GSE’s high-fidelity simulator enables designers to model the interaction between systems in advance of construction. This technique reduces design costs, accelerates design approvals, de-risks projects, and provides clients with a tool to sell their new plant designs to both customers and regulators. In essence, enabling our customers to get to market faster.

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

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

All of these technologies leverage the vast experience and industry expertise of GSE’s engineering organization. Our Engineering team helps our clients throughout the entire plant lifecycle. GSE is the engineer of choice in areas such as:

•  Design engineering for plant mechanical, electrical, I&C, civil and structural, fire protection and cyber systems
•  Engineering Programs addressing ASME codes, balance of plant programs other regulatory programs and
    economic driven programs such as plant thermal performance
•  Simulation engineering for nuclear, thermal and process plant training and virtual commissioning

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

- Workforce Solutions: Nuclear Industry Training and Consulting

As our customers’ experienced employees retire, access to industry experts to operate and train existing and new employees how to operate nuclear plants is essential to ensure safe, ongoing plant operation. In addition, operating and training needs change over time and sometimes our clients require fixed priced, discrete projects or specialized courses in contrast to straight staff augmentation. The industry needs operating personnel, including procedure writers, engineers, operators and instructors who can step in and use, as well as update the client’s operating methods, procedures, training material and more. Finding technical professionals and instructors, who know the subject, can perform the work or teach it to others and can adapt to the client’s culture is critical. GSE provides qualified professionals, instructors and turnkey projects/courses that work within the client’s system and complement the operating or training methods they already have in place. Examples of our training program courses include senior reactor operator certification, generic fundamentals training, and simulation supervisor training. GSE also provides expert support through workforce solutions, consulting, or turnkey projects for procedure writing, technical engineers, project managers, training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability. Our workforce solutions include traditional staffing services, such as temporary and direct hire, as well as customized approaches in which we work with our customers to evaluate their specific needs and put together a strategic plan specifically to meet their unique needs. Workforce solutions is not only a complement to our other service offerings; it often leads the way as the preferred method for many of our clients to execute entire projects and/or supplement their own staff during project peak periods or with specialized skill sets that are often hard to find. Our staffing experts give our customers the ability to ramp up quickly, eliminate risks, and provide more flexible options as situations often demand.

In addition to the core training and staffing business lines in the nuclear sector, we have significant organic growth opportunity with our workforce solutions and consulting services by expanding our service offerings to meet the evolving needs of the energy industry as well as other opportunities that support decarbonization and major infrastructure projects. Due to the experience within our team, we are already well positioned to offer expanded workforce solutions through our existing relationships and industry knowledge. This growth is occurring both with existing and new customers. We are placing a greater emphasis on cross-selling the services offered by our NITC organization with our Engineering and Performance group. NITC is expanding our footprint with companies dedicated to the support of decarbonization, and we have already been awarded contracts to support engineering, manufacturing, and construction projects with companies focused on clean energy solutions. Further the U.S. government has already announced intentions to increase spending in key areas such as communication, clean energy, manufacturing, transportation, and environmental projects. We anticipated these developments and have made key hires to better position GSE to support those opportunities. As the pandemic has shown, we must also be able to adapt quickly to evolving staffing needs. This has certainly been demonstrated with companies adjusting and allowing more employees to work from home. Our workforce solutions offer our customers more flexibility to support ever changing needs. This flexibility combined with our ability to support all of these areas position GSE both for current and future staffing needs.

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

Results of Operations

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

  Three Months Ended  Six Months Ended 
(in thousands) June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
  $  
%  $  
%  $
  
%  $  
% 
Revenue $13,522   100.0% $14,340   100.0% $26,626   100.0% $32,045   100.0%
Cost of revenue  10,833   80.1%  10,778   75.2%  21,009   78.9%  24,368   76.0%
Gross profit  2,689   19.9%  3,562   24.8%  5,617   21.1%  7,677   24.0%
                                 
Operating expenses:                                
Selling, general and administrative  3,522   26.0%  4,722   32.9%  7,256   27.3%  9,670   30.2%
Research and development  154   1.1%  179   1.2%  311   1.2%  389   1.2%
Restructuring charges  -   0.0%  -   0.0%  808   3.0%  10   0.0%
Loss on impairment  -   0.0%  -   0.0%  -   0.0%  4,302   13.4%
Depreciation  71   0.5%  70   0.5%  147   0.6%  178   0.6%
Amortization of definite-lived intangible assets  303   2.2%  444   3.1%  643   2.4%  1,114   3.5%
Total operating expenses  4,050   30.0%  5,415   37.8%  9,165   34.4%  15,663   48.9%
Operating loss  (1,361)  (10.1)%  (1,853)  (12.9)%  (3,548)  (13.4)%  (7,986)  (25.0)%
Interest expense, net  (49)  (0.4)%  (187)  (1.3)%  (103)  (0.4)%  (428)  (1.3)%
Gain on derivative instruments, net  -   0.0%  47   0.3%  -   0.0%  4   0.0%
Other income, net  4,637   34.3%  24   0.2%  4,638   17.4%  53   0.2%
Income (loss) before income taxes  3,227   23.9%  (1,969)  (13.7)%  987   3.7%  (8,357)  (26.1)%
(Benefit from) provision for income taxes  (4)  0.0%  180   1.3%  (39)  (0.1)%  50   0.2%
Net income (loss) $3,231   23.9% $(2,149)  (15.0)% $1,026   3.9% $(8,407)  (26.2)%

Revenue

Revenue for the three months ended June 30, 2021 totaled $13.5 million, which was 6% less than the $14.3 million of revenue for the three months ended June 30, 2020. Revenue for the six months ended June 30, 2021 totaled $26.6 million, which was 17% less than the $32.0 million of revenue for the six months ended June 30, 2020.

  Three Months Ended  Six Months Ended 
(in thousands) 
June 30,
2021
  
June 30,
2020
  Change  
June 30,
2021
  
June 30,
2020
  Change 
Revenue:        $  
%         $  
% 
Performance $6,862  $8,273   (1,411)  (17)% $13,943  $17,984   (4,041)  (22)%
NITC  6,660   6,067   593   10%  12,683   14,061   (1,378)  (10)%
Total revenue $13,522  $14,340   (818)  (6)% $26,626  $32,045   (5,419)  (17)%

Performance Improvement Solutions revenue decreased by 17% from $8.3 million  to $6.9 million for the three months ended June 30, 2021 and 2020, respectively. The decrease in revenue was primarily due to lower orders on the simulator part of the business, but offsetting with improvements in specialized engineering and consulting services. We recorded total Performance Improvement Solutions orders of $5.8 million and $7.1 million for the three months ended June 30, 2021 and 2020, respectively.

Performance Improvement Solutions revenue decreased by 22% from $18.0 million to $13.9 million for the six months ended June 30, 2021 and 2020, respectively. The decrease of revenue was primarily due to several significant SDB projects ended in the prior fiscal year and delays in commencing new contracts remotely due to the COVID-19 pandemic. We recorded total Performance Improvement Solutions orders of $11.4 million and $12.5 million for the six months ended June 30, 2021 and 2020, respectively.

For the three months ended June 30, 2021, Nuclear Industry Training and Consulting (workforce solutions) revenue increased by 10% to $6.7 million compared to revenue of $6.1 million for the three months ended June 30, 2020. The increase was primarily due to a large new customer contract which started in Q1 2021. We recorded total new orders of $5.0 million and $(0.3) million for the three months ended June 30, 2021 and 2020, respectively

For the six months ended June 30, 2021, Nuclear Industry Training and Consulting (workforce solutions) revenue decreased by 10% to $12.7 million compared to revenue of $14.1 million for the six months ended June 30, 2020. The decrease in revenue was primarily due to stoppage of existing projects and ending of some large projects resulting in a reduction in demand for staffing from our major customers. We recorded total new orders of $12.4 million and $14.0 million for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, our backlog was $37.5 million, of which, $27.7 million was attributed to the Performance segment and $9.8 million was attributed to the Nuclear Industry Training and Consulting (workforce solutions) segment. As of December 31, 2020, our backlog was $40.4 million with $30.3 million attributed to our Performance segment and $10.1 million to Nuclear Industry Training and Consulting (workforce solutions).

Gross Profit

Gross profit was $2.7  million or 19.9% of revenue and $3.6 million or 24.8% of revenue for the three months ended June 30, 2021 and 2020 , respectively. Gross profit was $5.6 million or 21.1% of revenue and $7.7 million or 24.0% of revenue for the six months ended June 30, 2021 and 2020, respectively.

(in thousands) Three Months Ended  Six Months Ended 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
   $  
%   $  
%  $
  
%  $
  
% 
Gross profit:                            
Performance Improvement Solutions $1,760   25.6% $2,730   33.0% $3,952   28.3% $5,758   32.0%
Nuclear Industry Training and Consulting  929   13.9%  832   13.7%  1,665   13.1%  1,919   13.6%
Total gross profit $2,689   19.9% $3,562   24.8% $5,617   21.1% $7,677   24.0%

The Performance Improvement Solutions segment’s gross profit decreased by $970 thousand during three months ended June 30, 2021 over three months ended June 30, 2020. The Performance Improvement Solutions segment’s gross profit decreased by $1.8 million during six months ended June 30, 2021 over six months ended June 30, 2020. The decrease is primarily related to lower revenue, underutilization of staff and several significant SDB projects completed in the prior year that were not replaced with new orders.

The Nuclear Industry Training and Consulting (workforce solutions) segment’s gross profit increased by $97 thousand during three months ended June 30, 20201 over three months ended June 30, 2020. The Nuclear Industry Training and Consulting (workforce solutions) segment’s gross profit decreased by $254 thousand during six months ended June 30, 2021 over six months ended June 30, 2020. The decrease in gross profit was primarily driven by a decrease in revenue in the NITC business and new contracts undertaken at lower margins, partially offset by a reduction in direct costs.

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

Selling, general and administrative (SG&A) expenses totaled $3.5 million and $4.7 million for the three months ended June 30, 2021 and 2020, respectively. Selling, general and administrative (SG&A) expenses totaled $7.3 million and $9.7 million for the six months ended June 30, 2021 and 2020, respectively. Fluctuations in the components of SG&A spending were as follows.

  Three months ended  Six Months ended 
(in thousands) June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
             
Corporate charges $2,632  $2,792  $5,390  $6,471 
Business development  749   810   1,516   1,746 
Facility operation & maintenance (O&M)  268   255   468   491 
Provision for loss on legal settlement  -   861   -   861 
Bad debt (recovery) expense  (137)  -   (133)  93 
Other  10   4   15   8 
Total $3,522  $4,722  $7,256  $9,670 

Corporate charges

During the three months ended June 30, 2021, corporate charges decreased by $0.2 million over the same period of the prior year. During the six months ended June 30, 2021 corporate charges decreased by $1.1 million over the same period of the prior year. The decrease was primarily due to a reduction of external legal, audit and temporary worker’s fees of $0.9 million during the six months ended June 30, 2021.

Business development expenses

Business development expense decreased $0.1 million during the three months ended June 30, 2021 over the same period of the prior fiscal year. Business development expense decreased $0.2 million during the six months ended June 30, 2021 over the same period of the prior fiscal year. The decrease was primarily due to lower commission costs and reduced headcount during the six months ended June 30, 2021.

Facility operation & maintenance (“O&M”)

Facility O&M expenses increased $13 thousand for three months ended June 30, 2021, compared to the same period in 2020. The increase was mainly due to a utility fee during the three months ended June 30, 2021. Facility O&M expenses decreased $23 thousand for six months ended June 30, 2021, compared to the same period in 2020. The decrease in facility O&M during fiscal 2021 was mainly due to lease terminations in the first half of 2020.

Bad debt (recovery) expense

We recorded $(133) thousand and $93 thousand of bad debt (recovery) expense during the six months ended June 30, 2021 and 2020, respectively. The bad debt recovery as of June 30, 2021 was driven by payment received for previously recorded bad debt.

Research and development

Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled $154 thousand and $179 thousand for the three months ended June 30, 2021 and 2020, respectively. Research and development costs totaled $311 thousand and $389 thousand for the six months ended June 30, 2021 and 2020, respectively. The decrease was mainly due to lower headcount.

Restructuring

There was no restructuring cost recorded during three months ended June 30, 2021 and 2020. During the six months ended June 30, 2021 and 2020, we recorded restructuring charges of $808 thousand and $10 thousand, respectively. The increase was mainly due to final charges related to the liquidation of our Sweden operations during the period, pursuant to our foreign restructuring plan.

Loss on impairment of goodwill and definite-lived intangible assets

No impairment was recorded during the three and six months ended June 30, 2021. We recognized a $4.3 million intangible asset impairment during the three and six months ended June 30, 2020.

Depreciation

We recorded depreciation expense of $71 thousand and $70 thousand for the three months ended June 30, 2021 and 2020, respectively. Depreciation expense was $147 thousand and $178 thousand for the six months ended June 30, 2021 and 2020, respectively. The reduction of $31 thousand for the six months ended June 30, 2021 over the same period in 2020 was due primarily to assets becoming fully depreciated in 2021.

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.4 million for the three months ended June 30, 2021 and 2020 and $0.6 million and $1.1 million for the six months ended June 30, 2021 and 2020, respectively. The decrease in amortization expense was primarily due to the reduction in the carrying value of DP Engineering’s intangible assets due to the $4.3 million impairment in Q1 2020.

Interest expense, net

Interest expense totaled $49 thousand and $187 thousand for the three months ended June 30, 2021 and 2020, respectively. Interest expense totaled $103 thousand and $428 thousand for the six months ended June 30, 2021 and 2020, respectively. The decrease for the three and six month periods was due to a reduction in total indebtedness compared to six months ended June 30, 2020.

Other income, net

For the three months ended June 30, 2021 and 2020, we recognized other income, net of $4.6 million and $24 thousand, respectively. For the six months ended June 30, 2021 and 2020, we recognized other income, net of $4.6 million and $53 thousand, respectively. The increase was primarily due to the recording of $5.1 million Employee Retention Credit during the period offset by a VAT write-off of $0.5 million, We paid a VAT taxes for subcontractor equipment purchase and had pursued the collection of this VAT refund for a couple of years. In May of 2021, we were informed by our tax advisor that this VAT refund was no longer collectable.

Income taxes benefit

Income tax expense (benefit) for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit of $4 thousand and tax expense of $180 thousand for the three months ended June 30, 2021 and 2020, respectively, were comprised mainly of foreign tax benefit or expense and state tax expense. Total income tax (benefit) expense of $(39) thousand and tax expense of $50 thousand for the six months ended June 30, 2021 and 2020, respectively, were comprised mainly of foreign tax benefit or expense and state tax expense.

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

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, Management makes several estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired, valuation of long-lived assets to be disposed, valuation of stock-based compensation awards and the recoverability of deferred tax assets. These critical accounting policies and estimates are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our most recent Annual Report on Form 10-K, filed with the SEC on April 13, 2021. For all accounting policies described in this document, management cautions that future events rarely develop exactly as forecasted and even our best estimates may require adjustment as facts and circumstances change.

Liquidity and Capital Resources

As of June 30, 2021, our cash and cash equivalents totaled $3.8 million, compared to $6.7 million as of December 31, 2020.

For the six months ended June 30, 2021 and 2020, net cash used in operating activities was $1.1 million and net cash provided by operating activities was $2.0 million, respectively. The decrease of $3.1 million in cash flows used in operating activities was primarily driven by lower than expected orders resulting in less billing in the first half of 2021 and increased collections due to large milestone payments of large projects in the prior year.
.
Net cash used in investing activities totaled $0.5 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. The increase in the cash outflow for investing activities year over year was primarily driven by the increase of capital expenditures during the six months ended June 30, 2021.

For the six months ended June 30, 2021 and 2020, net cash used in financing activities was $1.3 million and net cash provided by financing activities was $4.8 million, respectively. The decrease in cash used in financing activities of $6.0 million was driven by a repayment on term loans of $8.6 million offset by a draw on the line of credit of $3.5 million during the six months ended June 30, 2020.

Paycheck Protection Program Loan (“PPP Loan”)

We entered into the PPP Loan agreement with the Bank, which was approved and funded on April 23, 2020, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 23, 2022, and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments were automatically deferred for ten months after the last day of our covered period, or through August 9, 2021, principal and interest payments would have been due for any portion of the loan balance that was not forgiven.

The PPP Loan contains events of default and other provisions customary for a loan of this type, including: (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100% of the principal amount of the loan is guaranteed by the Small Business Administration (“SBA”) and (3) an amount up to the full principal amount may qualify for loan forgiveness in accordance with the terms of CARES Act. We have accumulated forgivable expenses beyond our loan amount and provided all prescribed support with our application for forgiveness with our Bank. Our Bank has reviewed our application for forgiveness and associated documentation and forwarded it on February 26, 2021 to the SBA with their determination that the loan is fully forgivable.

As of June 30, 2021, we classified $10.1 million of the PPP loan as current in our consolidated balance sheets. We recorded $50 thousand of interest expense during the three months ended June 30, 2021.

On August 5, 2021, the Company received approval from Small Business Administration (“SBA”) that the PPP loan including all accrued interest thereon was forgiven. The forgiveness of the PPP Loan will be recognized during the Company’s third fiscal quarter ending September 30, 2021. (See Note 17).

Credit Facilities

On December 29, 2016, we entered into a 3-year $5.0 million revolving line of credit facility (“RLOC”) with the Bank to fund general working capital needs and provide funding for acquisitions. The credit facility agreement was subject to certain financial covenants and reporting requirements. The Bank amended the agreement with us several times for acquisition lending and covenant violations.

On March 29, 2021, due to a projected violation of Q1 2021 leverage ratio, we signed the Ninth Amendment and Reaffirmation Agreement dated March 29, 2021 (the “Ninth Amendment”), with the Bank to waive 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 would not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio (starting on September 30, 2021) as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022 and (iv) 2.00 to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter. We are also required to maintain a minimum of $2.5 million in aggregate USA liquidity pursuant to the Ninth Amendment. As part of the amendment, we agreed, at closing, (i) to make a $0.5 million pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75 thousand to reduce the RLOC. We incurred $25 thousand of amendment fees related to this amendment during the year ended December 31, 2020.

Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started  to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to June 30, 2021 and are projected to breach the Leverage and Fixed Charges ratio as of Q3 2021.

The PPP Loan does not factor into the expenses or liabilities used in the calculation of our debt covenants, unless we determine that more than $1 million of the original PPP Loan balance will not be forgiven.  The Bank agreed to remove its collateral agreement with the Company’s subsidiaries as part of the repayment of our outstanding term loans during the year ended December 31, 2020.

During the six months ended June 30, 2021, we paid down $1.5 million and had a draw of $0.8 million on our RLOC. As of June 30, 2021, we had outstanding borrowings of $2.3 million under the RLOC and three letters of credit totaling $933 thousand outstanding to certain of our customers. The total borrowing capacity under RLOC was $3.8 million as of June 30, 2021. After consideration of letters of credit and the $0.5 million reserved for issuance of new letters of credit, there was no amount available for borrowing under the RLOC.

We intend to continue using the RLOC for short-term working capital needs when capacity is available and the issuance of letters of credit in connection with business operations provided, we remain in compliance with our covenants. As discussed in Note 10, we entered into a 9th Amendment on our credit facility, as such our covenants have been waived through June 30, 2021. Letter of credit issuance fees range between 1.25% and 2.00% of the value of the letter of credit, depending on our overall leverage ratio. We pay an unused RLOC fee quarterly based on the average daily unused balance.

Going Concern Consideration

In 2020 we had several projects (primarily in our NITC business segment) delayed and new orders postponed because of the COVID-19 pandemic. We amended our credit facility with Citizens Bank, N.A. (“the Bank”) in 2020 based upon expected covenant violations and have been required to curtail term debt in exchange for revised financial covenants. Scheduled term loan repayments and agreed upon curtailment required us to use $18.5 million in available cash to pay-off our term debt in 2020. We signed a Ninth Amendment and Reaffirmation Agreement (the “Ninth Amendment”) with the Bank on March 29, 2021 to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and to adjust the thresholds for future covenants to ease the risk of non-compliance experienced in previous quarters (See Note 10). Our working capital position on June 30, 2021 was a deficit of $5.0 million. This working capital deficit was primarily due to the $10.1 million of current maturities on our PPP loan at June 30, 2021. On August 5, 2021, the Company received approval from Small Business Administration (“SBA”) that the PPP loan including all accrued interest thereon was forgiven. (See Note 17)

COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, a further decline will stress our ability to meet covenant requirements. Further continuance of delays in commencing work on outstanding orders or a continued loss of orders, and further disruption of our business because of worker illness or mandated shutdowns may also exacerbate the situation. Jurisdictions where our businesses operate across the country are pushing toward re-opening places of business and government support, through the American Rescue Plan Act of 2021, will continue to support the broader economy. However, the timing of these elements taking place are not predictable and may not serve to mitigate our situation or improve our specific company’s health. Following the Ninth Amendment, our new covenant compliance remains dependent on meeting future projections, which are subject to the variability and unknown speed and extent of post-COVID-19 recovery.

Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to June 30, 2021 and projected breaching the Leverage and Fixed Charges ratio covenant.

The Company’s management continues to explore raising capital through its access to the public markets or entering into alternative finance arrangements. Continued negative trends in operating results could be mitigated through various cost cutting measures including adjustments to headcount or compensation, vendor augmentation or delay of investment initiatives in the Company’s corporate office.

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

Non-GAAP Financial Measures

Adjusted EBITDA

References to “EBITDA” mean net (loss) income, before considering interest expense (income), provision for income taxes, depreciation and amortization. References to Adjusted EBITDA excludes provision for legal settlement, loss on impairment, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, acquisition-related expense and VAT write-off. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (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’s results because it excludes certain items that are not directly related to the Company’s core operating performance that may, or could, have a disproportionate positive or negative impact on our results for any particular period. Investors should recognize that EBITDA and Adjusted EBITDA might not be comparable to similarly-titled measures of other companies. This measure should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation G follows:

  Three Months Ended  Six Months Ended 
  June 30, 2021  June 30, 2020  June 30, 2021  
June 30,
2020
 
Net income (loss) $3,231  $(2,149) $1,026  $(8,407)
Interest expense, net  
49
   
187
   103   428 
Provision for income taxes  
(4
)
  
180
   (39)  50 
Depreciation and amortization  481   598   994   1,451 
EBITDA  
3,757
   
(1,184
)
  2,084   (6,478)
Provision for legal settlement  
-
   
861
   -   861 
Loss on impairment  
-
   
-
   -   4,302 
Employee retention credit  
(5,075
)
  
-
   (5,075)  - 
Restructuring charges  
-
   
-
   808   10 
Stock-based compensation expense  
463
   
177
   501   324 
Change in fair value of derivative instruments  
-
   
(47
)
  -   (4)
Acquisition-related expense  
-
   
7
   -   188 
VAT write-off  
450
   
-
   450   - 
Adjusted EBITDA $(405) $(186) $(1,232) $(797)

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

References to Adjusted Net (Loss) Income excludes the impact of provision for legal settlement, loss on impairment, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, acquisition-related expenses and amortization of intangible assets related to acquisitions, and VAT write-off. Adjusted Net (Loss) Income and Adjusted (Loss) Earnings per Share (adjusted EPS) are not measures of financial performance under generally accepted accounting principles (GAAP). Management believes adjusted net (loss) income and adjusted (loss) earnings per share, in addition to other GAAP measures, are useful to investors to evaluate the Company’s results because they exclude certain items that are not directly related to the Company’s core operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results for any particular period, such as stock-based compensation expense. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net (loss) income and adjusted (loss) earnings per share to GAAP net loss, the most directly comparable GAAP financial measure, is as follows:

(in thousands) Three Months Ended  Six Months Ended 
  June 30, 2021  June 30, 2020  
June 30,
2021
  
June 30,
2020
 
             
Net income (loss) $3,231  $(2,149) $1,026  $(8,407)
Provision for legal settlement  -   861   -   861 
Loss on impairment  -   -   -   4,302 
Employee retention credit  (5,075)  -   (5,075)  - 
Restructuring charges  -   -   808   10 
Stock-based compensation expense  463   177   501   324 
Change in fair value of derivative instruments  -   (47)  -   (4)
Acquisition-related expense  -   7   -   188 
VAT write-off  450   -   450   - 
Amortization of intangible assets related to acquisitions  303   444   643   1,114 
Adjusted net loss $(628) $(707) $(1,647) $(1,612)
                 
Adjusted net loss per common share – diluted $(0.03) $(0.03) $(0.08) $(0.08)
                 
Weighted average shares outstanding used to compute adjusted net loss per share - diluted(1)
  20,647,426   20,407,958   20,638,116   20,375,446 

(1) During the three and six months ended June 30, 2021, we reported a GAAP net income and an adjusted net loss. Accordingly there were 54,577 of dilutive shares that were excluded in the adjusted net loss per share calculation that were included when calculating the diluted net income per common share for the three months ended June 30, 2021.

(1) During the three and six months ended June 30, 2020, we reported a GAAP net loss and an adjusted net loss. Accordingly, there were 74,732 and 56,373 dilutive shares from RSUs that were excluded from the adjusted net loss calculation during fiscal 2020.

Item 3.Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report and our annual report, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective; we are currently in remediation of our internal controls to address material weaknesses identified in our Form 10-K for the year ended December 31, 2020.

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

Changes in Internal Control over Financial Reporting

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

Limitation of Effectiveness of Controls

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

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

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

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

Item 1a.Risk Factors

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

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

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
 
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.

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

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

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

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

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

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

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

None

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.Exhibits

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

SIGNATURES

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

Date: August 16, 2021 
 GSE SYSTEMS, INC.
  
 /S/ KYLE J. LOUDERMILK
 Kyle J. Loudermilk
 Chief Executive Officer
 (Principal Executive Officer)
  
 /S/ EMMETT A. PEPE
 Emmett A. Pepe
 Chief Financial Officer
 (Principal Financial and Accounting Officer)


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