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 March 31, 2022

		or

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

Commission File Number 001-14785

GSE Systems, Inc.

(Exact name of registrant as specified in its charter)

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

6940 Columbia Gateway Dr., Suite 470, Columbia MD		21046
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

Emerging growth company ☐

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.01 Par Value		GVP		The NASDAQ Capital Market

There were 21,013,206 shares of common stock, with a par value of $0.01 per share outstanding as of April 30, 2022.

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	March 31, 2022			December 31, 2021
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,448		$	3,550
Contract receivables, net		10,421			11,257
Prepaid expenses and other current assets		4,299			5,262
Total current assets		20,168			20,069

Equipment, software and leasehold improvements, net		850			839
Software development costs, net		555			532
Goodwill		13,339			13,339
Intangible assets, net		2,760			3,020
Restricted cash - long term		1,583			-
Operating lease right-of-use assets, net		1,047			1,200
Other assets		52			52
Total assets	$	40,354		$	39,051

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	-		$	1,817
Current portion of long-term note		830			-
Accounts payable		1,133			1,179
Accrued expenses		1,474			1,358
Accrued compensation		2,235			1,452
Billings in excess of revenue earned		5,180			5,029
Accrued warranty		682			667
Income taxes payable		1,781			1,654
Derivative liabilities		1,611			-
Other current liabilities		1,625			1,883
Total current liabilities		16,551			15,039

Long-term note, less current portion		2,955			-
Operating lease liabilities noncurrent		502			790
Other noncurrent liabilities		283			179
Total liabilities		20,291			16,008

Commitments and contingencies (Note 16)

Stockholders’ equity:
Preferred stock $0.01 par value; 2,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock $0.01 par value; 60,000,000 shares authorized, 22,609,043 and 22,533,005 shares issued, 21,010,132 and 20,934,094 shares outstanding, respectively		226			225
Additional paid-in capital		80,777			80,505
Accumulated deficit		(58,018	)		(54,584	)
Accumulated other comprehensive income (loss)		77			(104	)
Treasury stock at cost, 1,598,911 shares		(2,999	)		(2,999	)
Total stockholders’ equity		20,063			23,043
Total liabilities and stockholders’ equity	$	40,354		$	39,051

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

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GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

	Three months ended
	March 31, 2022			March 31, 2021

Revenue	$	12,275		$	13,104
Cost of revenue		9,848			10,176
Gross profit		2,427			2,928

Operating expenses:
Selling, general and administrative		4,507			3,734
Research and development		142			157
Restructuring charges		-			808
Depreciation		72			76
Amortization of intangible assets		260			340
Total operating expenses		4,981			5,115

Operating loss		(2,554	)		(2,187	)

Interest expense, net		(148	)		(54	)
Change in fair value of derivative instruments, net		(581	)		-
Other income, net		16			1
Loss before income taxes		(3,267	)		(2,240	)

Provision for (benefit from) income taxes		167			(35	)
Net loss	$	(3,434	)	$	(2,205	)

Net loss per common share - basic and diluted	$	(0.16	)	$	(0.11	)

Weighted average shares outstanding used to compute net loss per share - basic and diluted		20,980,046			20,628,669

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

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GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

	Three months ended
	March 31, 2022			March 31, 2021
Net loss	$	(3,434	)	$	(2,205	)
Cumulative translation adjustment		181			1,106
Comprehensive loss	$	(3,253	)	$	(1,099	)

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

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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, January 1, 2022		22,533	$	225	$	80,505		$	(54,584	)	$	(104	)		(1,599	)	$	(2,999	)	$	23,043

Stock-based compensation expense		-		-		359			-			-			-			-			359
Common stock issued for RSUs vested		76		1		(1	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(86	)		-			-			-			-			(86	)
Foreign currency translation adjustment		-		-		-			-			181			-			-			181
Net loss		-		-		-			(3,434	)		-			-			-			(3,434	)
Balance, March 31, 2022		22,609	$	226	$	80,777		$	(58,018	)	$	77			(1,599	)	$	(2,999	)	$	20,063

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

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GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

Cash flows from investing activities:
Capital expenditures		(81	)		(153	)
Capitalized software development costs		(106	)		(72	)
Net cash used in investing activities		(187	)		(225	)

Cash flows from financing activities:
Repayment of line of credit		(1,817	)		(500	)
Repayment of insurance premium		(282	)		(203	)
Proceeds from issuance of long-term note, net of debt issuance cost and original issue discount		4,782			-
Shares withheld to pay taxes		(86	)		(28	)
Net cash provided by (used in) financing activities		2,597			(731	)

Effect of exchange rate changes on cash		(12	)		(39	)
Net increase (decrease) in cash, cash equivalents and restricted cash		3,481			(2,953	)
Cash, cash equivalents and restricted cash at beginning of the period		3,550			6,702
Cash, cash equivalents and restricted cash at the end of the period	$	7,031		$	3,749

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

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

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

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GSE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

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

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

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COVID-19

Prior to COVID 19, most of our Performance Improvement Solutions (Performance) employees worked remotely, and the remainder worked in one of our offices. With the onset of the COVID-19 pandemic in Q1 2020, all of our employees shifted to working remotely. For the most part, our employees continue to work remotely but, as an essential services provider, we maintain a modest office footprint in certain locations to allow for employees to work from those offices as project needs may arise. Throughout the pandemic GSE has complied with local, state and federal directives and regulations. Today, employees almost entirely work from home within our Performance Improvement Solutions segment, except when required to be at the client site for essential project work. Our Performance contracts, which generally are considered essential services, are permitted to and mostly continue without pause. However, we have experienced certain delays in certain new business opportunities. At the onset of the pandemic, many of our Workforce Solutions customers paused or delayed contracts as they shrank their own on-premise workforces to the minimum operating levels in order to mitigate the effects of the pandemic. As a result, our Workforce Solutions segment has experienced a decline in its billable employee base during this time. Over the course of 2021, the Workforce Solutions segment began to increase as clients became more comfortable with employees returning to on-site work. We cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time and we have experienced delays in commencing new projects and resuming work on existing contracts. Therefore, our ability to recognize revenue has been delayed for some contracts. We have also experienced order reductions, cancellations, and other negative changes to orders due to the pandemic. As the pandemic landscape has continued to develop and new risks emerge such as the Delta variant and the Omicron variant, our business continues to be affected. We routinely monitor our operating expenses as a result of contract delays and order reductions; and we have made adjustments to maintain our gross profit at a sustainable level.

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

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

Accounting pronouncements not yet adopted

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

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

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

(in thousands, except for share amounts)	Three months ended
	March 31,
	2022			2021
Numerator:
Net loss attributed to common stockholders	$	(3,434	)	$	(2,205	)

Denominator:
Weighted-average shares outstanding for basic earnings per share		20,980,046			20,628,669

Effect of dilutive securities:
RSUs		-			-

Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		20,980,046			20,628,669

Shares related to dilutive securities excluded because inclusion would be anti-dilutive		149,271			43,937

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Note 4 - Coronavirus Aid, Relief and Economic Security Act

Paycheck Protection Program Loan (PPP Loan)

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

Employee Retention Credits (ERC)

Employee retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and extended through September 30, 2021. In 2021, we applied for $5.0 million in refunds from the IRS with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We recorded other income of $7.2 million related to the employee retention tax credits earned for the year ended December 31, 2021. As of March 31, 2022, we received cumulative employee retention tax credit refunds totaling $1.9 million with remaining outstanding refunds receivable of $3.1 million which was included in the other current assets balance at March 31, 2022. During the first quarter of 2022, we receive employee retention tax credit refunds of $1.1 million which included in the total of $1.9 million received. Subsequent to the quarter end, we received the employee retention tax credit refunds of $1.0 million.

Note 5 - Contract Receivables

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

The components of contract receivables were as follows:

(in thousands)	March 31, 2022			December 31, 2021

Billed receivables	$	4,955		$	6,124
Unbilled receivables		6,472			6,143
Allowance for doubtful accounts		(1,006	)		(1,010	)
Total contract receivables, net	$	10,421		$	11,257

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

During the three months ended March 31, 2022, we recorded no bad debt expense. We recorded $4 thousand bad debt expense during the three months ended March 31, 2021.

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During the month of April 2022, we invoiced $2.6 million of the unbilled receivables as of March 31, 2022.

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

As of March 31, 2022 and December 31, 2021, we had no customer that accounted for 10% of our consolidated contract receivables. On May 10, 2022, we had a customer that notified us of debt restructuring, and we are assessing any potential impact to the Company.

Note 6 - Goodwill and Intangible Assets

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

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

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

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

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:

(in thousands)
Years ended December 31:
2022 remainder	$	649
2023		640
2024		435
2025		335
2026		266
Thereafter		435
Total	$	2,760

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Note 7 - Equipment, Software and Leasehold Improvements

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

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

Depreciation expense was $72 thousand and $76 thousand for the three months ended March 31, 2022 and 2021, respectively. Capitalization-of internal-use software cost of $23 thousand and $150 thousand were recorded in software for the three months ended March 31, 2022 and 2021, respectively.

Note 8 - Fair Value of Financial Instruments

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

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

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

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

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

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

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

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The Company used the Monte Carlo simulation model to determine the fair value of the Warrants, which required the input of subjective assumptions. The fair value of the Warrants as of March 31, 2022 was estimated with the following assumptions.

Exercise Price	$	1.94

Common Stock Price	$	1.25 - $2.08
Risk Free Rate		1.9% - 2.4%
Volatility		65%
Term (in years)	4.9 yrs - 5.0 yrs

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

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

Money market funds	$	3,008	$	-	$	-	$	3,008
Total assets	$	3,008	$	-	$	-	$	3,008

Derivative liability	$	-	$	-	$	84	$	84
Warrant liability		-		-		1,527		1,527
Cash settled performance-vesting restricted stock units		-		49		-		49
Total liabilities	$	-	$	49	$	1,611	$	1,660

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

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

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

The following table summarizes changes in the fair value of our Level 3 liabilities during the three months ended March 31, 2022.

(in thousands)	Embedded Redemption Features			Warrant		Level 3 Total

Balance at December 31, 2021	$	-		$	-	$	-
Derivative liabilities at issuance date		306			-		306
Warrant liabilities at issuance date		-			724		724
Change in fair value included in gain on derivative instruments, net		(222	)		803		581
Balance at March 31, 2022	$	84		$	1,527	$	1,611

Note 9 - Stock-Based Compensation

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

During the three months ended March 31, 2022 and 2021, we recognized $0.4 million and $38 thousand of stock-based compensation expense related to equity awards, respectively, under the fair value method.

During the three months ended March 31, 2022, we granted approximately 13,597 time-based restricted stock units (“RSUs”) with an aggregate fair value of approximately $24 thousand. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of one to three years. During the three months ended March 31, 2021, we did not grant RSUs to employees.

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

During the three months ended March 31, 2022, we granted 800,000 PRSUs including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards. Additionally, these shares are subject to a time-vesting restriction and will vest in equal portions over the next 15 quarters ending December 31, 2022. Subsequent to March 31, 2022, the market vesting criteria was achieved for the 800,000 PRSUs which will fully vest over the next 15 quarters. During the three months ended March 31, 2021, we did not grant any PRSUs to employees.

We did not grant any stock options for three months ended March 31, 2022 and 2021.

Note 10 - Debt

Convertible Note

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

	Amount

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

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

Balance of Convertible Note as of March 31, 2022	$	3,785

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

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

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

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

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

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

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

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

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

Revolving Line of Credit

During the three months ended March 31, 2022, using proceeds from the Convertible Note, we repaid in full, all outstanding indebtedness of $1.8 million owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. Certain letters of credit remain in place with Citizens. As of March 31, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

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

On November 12, 2021 we signed the Tenth Amendment and Reaffirmation Agreement with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. In addition, we agreed, by December 31, 2021, to pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.

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Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one year base warranty on the systems. The portion of our warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $682 thousand, and the remaining $81 thousand is classified as long-term within other liabilities.

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

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

Note 12 - Revenue

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

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

	Three months ended
(in thousands)	March 31, 2022		March 31, 2021
Performance Improvement Solutions
System Design and Build	$	1,412	$	1,862
Point in time		-		-
Over time		1,412		1,862

Software and Support		372		813
Point in time		45		95
Over time		327		718

Training and Consulting Services		4,613		4,406
Point in time		418		68
Over time		4,195		4,338

Workforce Solutions
Training and Consulting Services		5,878		6,023
Point in time		-		86
Over time		5,878		5,937

Total revenue	$	12,275	$	13,104

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

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

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Note 13 - Income Taxes

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

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

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

Our income effective tax rate was (5.1)% and 1.6% for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, the difference between our income tax expense at an effective tax rate of (5.1)% and a benefit at the U.S. statutory federal income tax rate of 21% a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, accruals related to uncertain tax positions for certain foreign tax contingencies, and discrete item adjustments for U.S. and foreign taxes. For the three months ended March 31, 2021, the difference between income tax benefit at an effective tax rate of 1.6% and a benefit at the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in 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 2016 and forward.

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

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on our U.S., Chinese, and Slovakian net deferred assets as of March 31, 2022. We have determined that it is not more likely than not that the Company will realize the benefits of its deferred taxes in the U.S. and foreign jurisdictions. The Company has a deferred tax liability in the amount of $148 thousand at March 31, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.

Note 14 - Leases

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

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

		As of
Operating Leases	Classification	March 31, 2022		December 31, 2021

Leased Assets
Operating lease - right of use assets	Long term assets	$	1,047	$	1,200

Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,227		1,205
Operating lease liabilities	Long term liabilities		502		790
		$	1,729	$	1,995

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

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

		Three months ended
Lease Cost	Classification	March 31, 2022			March 31, 2021

Operating lease cost ⁽¹⁾	Selling, general and administrative expenses	$	186		$	192
Short-term leases costs ⁽²⁾	Selling, general and administrative expenses		15			16
Sublease income⁽³⁾	Selling, general and administrative expenses		(18	)		(32	)
Net lease cost			183		$	176

(1) Includes variable lease costs which are immaterial.

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

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

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

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

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

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

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

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

Note 15 - Segment Information

We have two reportable business segments.

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

The Workforce Solutions segment provides specialized workforce solutions primarily to the nuclear industry, working at clients’ facilities. This business is managed through our Hyperspring, LLC (“Hyperspring”) and Absolute Consulting, Inc. (“Absolute”) subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of our products and services 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 tax expense (benefit). Inter-segment revenue is eliminated in consolidation and is not significant.

(in thousands)	Three months ended
	March 31, 2022			March 31, 2021
Revenue:
Performance Improvement Solutions	$	6,397		$	7,081
Workforce Solutions		5,878			6,023
Total revenue	$	12,275		$	13,104

Operating loss
Performance Improvement Solutions	$	2,395		$	(1,403	)
Workforce Solutions		(159	)		(784	)
Loss on impairment		-			-
Operating loss		(2,554	)		(2,187	)

Interest expense, net		(148	)		(54	)
Change in fair value of derivative instruments, net		(581	)		-
Other income, net		16			1
Loss before income taxes	$	(3,267	)	$	(2,240	)

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Note 16 - Commitments and Contingencies

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

Item 2.

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

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

Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve, namely the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although these delays and reductions impacted us, as an essential services provider to an essential industrial base, we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. Additionally, staffing shortages have resulted in new opportunities for our Workforce Solutions segment. In 2021, the effects of the pandemic still impacted the end markets we serve, but those effects have been mitigated by a number of factors, including the following: the pandemic largely has had a targeted effect on the population; a number of vaccines in the market being distributed and, despite logistical challenges, making substantial progress for those in most need; the economy of the United States has not had as much disruption as was initially feared, which has benefited our end markets; and most importantly our end markets seem poised to contract with us for essential services that had been delayed as a result of the pandemic. As we begin 2022, we have publicly announced a number of significant contract wins, which we hope will be a harbinger of a more attractive business environment for the power industries we serve.

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

In 2021, we participated in the Employee Retention Credit (ERC) program available under the CARES Act. The Company recognized total cumulative ERC credits of $7.2 million. We applied for $5.0 million in refunds from the IRS with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. For the three months ended March 31, 2022 we received refunds of $1.1 million with a remaining receivable of $3.1 million at March 31, 2022. Subsequent to March 31, 2022 we received an additional $1.0 million in ERC refunds.

On September 9, 2021, President Biden released the COVID-19 Action Plan, Path Out of the Pandemic (the “Plan”), with the stated goal of getting more people vaccinated. As part of the Plan, Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (the “Order”), creates the Safer Federal Workforce Task Force (the “Task Force”), which released guidance for U.S. Government contractors and their subcontractors. This guidance included mandatory vaccination of all employees working on or for a government contract, either directly or indirectly, by January 4, 2022 (subject to medical and religious exemptions). As a part of the Plan and Order, President Biden also directed, the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) requiring that all employers with at least 100 employees ensure that their U.S.-based employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week. On November 4, 2021, OSHA issued this ETS, however the implementation of the ETS was blocked by federal appeals courts, pending resolution of ongoing litigation challenging the constitutionality of the ETS, and the ETS was withdrawn by OSHA on January 25, 2022. OSHA, however has not withdrawn the proposed rule that would effectuate the same mandate, and it cannot be known whether OSHA may reissue the ETS or otherwise issue new emergency temporary standards imposing similar mandates. We have already received notice by both government customers and prime contractors serving government customers regarding the vaccination requirement and its application to our business with those customers. As an employer of more than 100 employees, we would also be subject to the ETS or a similar mandate should it become effective. It is possible that additional jurisdictions where we do business may impose similar mandates that would apply to our employees. In addition, certain of our customers may require vaccines for those of our employees who provide on-site service at their facilities. We will continue to monitor the status of these or other mandates or regulations and their application to us and our business.

General Business Environment

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

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Performance Improvement Solutions (approximately 52% of revenue for the three months ended March 31, 2022)

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

Our engineering solutions include the following: (1) in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, and thermal performance; (2) in-service inspection for specialty engineering including ASME Section XI; (3) software solutions; and (4) mechanical design, civil/structural design, electrical, instrumentation and controls design, digital controls/cyber security, and fire protection for nuclear power plant

design modifications. Our GSE True North Consulting and GSE DP Engineering businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements and are included in our Performance Improvement Solutions segment due to their service offerings. GSE has been providing these engineering solutions and services since 1995.

Workforce Solutions (approximately 48% of revenue for the three months ended March 31, 2022)

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. We are 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 Department of Energy, US Navy and related defense sectors. As a result of this effort and established leadership position in key sectors, we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2022, we will keenly focus on organic growth in the sectors we serve by: cross selling and upselling in our existing markets as we focus on delivering significant value to our customers in a manner of excellence; create new and compelling solutions in-house as a result of advancing our technology offerings in sponsorship with industry early adopters focused on critical business need; develop new services as a result of combining our expertise; expand into compelling adjacent markets such as clean energy as they may arise with renewed sales focus.

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Cross sell and upsell into existing markets:

For the past several years, we have devoted considerable time and effort to diversify the Company’s solutions capabilities for the nuclear power sector via a rollup of essential services providers to the industry. To ensure efficient and streamlined operations for the business, we have brought all of the engineering services together into one organization under one leader, and the Workforce Solutions teams together as one team under one leader. The business units operate uniformly within their respective structure. As such, the opportunity to cross-sell the capabilities across the entire customer base is greatly enhanced. This further differentiates us as a unique provider to industry vs. providers of specific niche services. The unified go-to-market efforts, such as cross-selling capability should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. As a result of a rejuvenated marketing effort, we are equipped to take this new approach to market. In particular, with the US government rejoining the Paris Climate Agreement and driving to decarbonize the energy grid by 2035, and create a carbon neutral economy by 2050, decarbonization of the energy sector will require significant investment for decades to come. As a key provider of essential services to the power sector, with a focus on decarbonization, we are poised to benefit from and exploit this investment.

Organic growth through new and compelling technology:

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

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

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

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

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

Additionally, enhancements to training content and delivery continue through the EnVision On-Demand platform, allowing our customers to access training content from anywhere in synchronous and asynchronous modes, thus increasing their efficiency and reducing infrastructure costs. We intend to continue to make pragmatic and measured investments in R&D that first and foremost are driven by the market and complement our growth strategy. Such investments in R&D may result in on-going enhancement of existing solutions as well as the creation of new solutions to serve our target markets, ensuring that we add greater value that is easier to use, at lower total cost of ownership than any alternative available to customers. We have pioneered a number of industry standards and intend to continue to be one of the most innovative companies in our industry. During the three months ended March 31, 2022 and 2021, we have made R&D investments totaling $0.1 million and $0.2 million, respectively.

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

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

Our experienced employees and management team are our most valuable resources. 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 March 31, 2022, we had approximately 302 employees, which includes approximately 194 employees in our Performance segment and approximately 108 employees in our Workforce Solutions segment.

Backlog

As of March 31, 2022, we had approximately $40.1 million of total gross revenue backlog, which included $31.9 million of Performance backlog and $8.2 million of Workforce Solutions backlog. With respect to our backlog, it includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. Our backlog includes future expected revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client. We calculate backlog without regard to possible project reductions or expansions or potential cancellations unless and until such changes may occur.

Backlog is expressed in terms of gross revenue and, therefore, may include significant estimated amounts of third-party or pass-through costs to subcontractors and other parties. Because backlog is not a U.S. GAAP measurement, our computation of backlog may not necessarily be comparable to that of our industry peers.

Product and Services

Performance Improvement Solutions

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

•

optimization of existing generation assets

•

design support and deployment of advanced reactor designs

•

integration with renewable power sources

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Optimizing Existing Generation Assets

As the existing fleet of nuclear reactors age and competitive pressures increase, we find ever increasing significance in being able to provide value to their continued operation. Maximizing power production through a 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, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. Going forward, we also envision many of the optimization techniques and strategies currently emphasized for the existing reactor fleet incorporated with new-build prototypes as they begin to add value and assume a larger component of our clean, carbon free, power requirements.

Renewable Integration

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

Engineering Solutions for Decarbonization

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

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

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

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

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

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

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

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

•

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

•

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

•

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

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

Workforce Solutions

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

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In addition to the core training and staffing business lines in the nuclear sector, we continue to see significant organic growth opportunity with our Workforce Solutions segment by expanding our service offerings to meet the evolving needs of the energy industry as well as other opportunities that support decarbonization and major infrastructure projects. Due to the experience within our team, we are well positioned to expand our Workforce Solutions segment offerings through our existing relationships and industry knowledge. This growth is occurring both with existing and new customers. We are placing a greater emphasis on cross-selling the services offered by our Workforce Solutions segment with our Performance Improvement Solutions segment. The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and our success is showing with contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies dedicated to clean energy solutions. We have continued to better position us to support these opportunities with strategic hires and staff alignment. As the recent increases in employment transition have demonstrated, companies must also be able to adapt quickly to evolving staffing needs. This has certainly been demonstrated with companies adjusting and allowing more employees to work from home, but it’s not the only answer. Employees are making changes in their professional lives for many reasons, and our workforce solutions offer our customers added support and more flexibility to support ever changing needs. In fact, Workforce Solutions is uniquely positioned for growth in these types of employment environments. Our flexible solutions, and specialized industry experience position us both for current and future staffing needs.

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

Results of Operations

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

	Three months ended
(in thousands)	March 31, 2022						March 31, 2021
	$			%			$			%
Revenue	$	12,275			100.0	%	$	13,104			100.0	%
Cost of revenue		9,848			80.2	%		10,176			77.7	%
Gross profit		2,427			19.8	%		2,928			22.3	%

Operating expenses:
Selling, general and administrative		4,507			36.5	%		3,734			28.5	%
Research and development		142			1.2	%		157			1.2	%
Restructuring charges		-			0.0	%		808			6.2	%
Loss on impairment		-			0.0	%		-			0.0	%
Depreciation		72			0.6	%		76			0.6	%
Amortization of intangible assets		260			2.1	%		340			2.6	%
Total operating expenses		4,981			40.6	%		5,115			39.0	%
Operating loss		2,554			(20.9	)%		(2,187	)		(16.8	)%
Interest expense, net		(148	)		(1.2	)%		(54	)		(0.4	)%
Change in fair value of derivative instruments, net		(581	)		(4.9	)%		-			0.0	%
Other income, net		16			0.1	%		1			0.0	%
Loss before income taxes		(3,267	)		(26.6	)%		(2,240	)		(17.1	)%
Provision for (benefit from) income taxes		167			1.4	%		(35	)		(0.3	)%
Net loss	$	(3,434	)		(28.0	)%	$	(2,205	)		(16.8	)%

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Revenue

Revenue for the three months ended March 31, 2022 totaled $12.3 million, which was 6% less than the $13.1 million of revenue for the three months ended March 31, 2021.

	Three months ended
(in thousands)	March 31, 2022		March 31, 2021		Change
Revenue:					$			%
Performance Improvement Solutions	$	6,397	$	7,081		(684	)		(10	)%
Workforce Solutions		5,878		6,023		(145	)		(2	)%
Total revenue	$	12,275	$	13,104		(829	)		(6	)%

Performance Improvement Solutions revenue decreased 10% from $7.1 million to $6.4 million for the three months ended March 31, 2022 and 2021, respectively. The decrease of revenue was primarily due to a decline in software license sales as well as software maintenance renewals. We recorded total Performance Improvement Solutions orders of $6.4 million and $5.6 million for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022, Workforce Solutions revenue decreased 2% to $5.9 million compared to revenue of $6.0 million for the three months ended March 31, 2021. The decrease in revenue was due to a minor reduction in staffing needs from our major customers. We recorded total new orders of $4.7 million and $7.4 million for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, our backlog was $40.1 million, of which, $31.9 million was attributed to the Performance segment and $8.2 million was attributed to the Workforce Solutions segment. As of December 31, 2021, our backlog was $41.3 million with $31.8 million attributed to our Performance segment and $9.5 million to Workforce Solutions.

Gross Profit

Gross profit was $2.4 million or 19.8% of revenue and $2.9 million or 22.3% of revenue for the three months ended March 31, 2022 and 2021, respectively.

	Three months ended
	March 31, 2022					March 31, 2021
(in thousands)	$		%			$		%
Gross profit:
Performance Improvement Solutions	$	1,815		28.4	%	$	2,192		31.0	%
Workforce Solutions		612		10.4	%		736		12.2	%
Total gross profit	$	2,427		19.8	%	$	2,928		22.3	%

The Performance Improvement Solutions segment’s gross profit decreased by $0.4 million during three months ended March 31, 2022 over three months ended March 31, 2021. The decrease is primarily related to lower revenue and a shift in product mix to lower margin projects.

The Workforce Solutions segment’s gross profit decreased by $0.1 million during three months ended March 31, 2022 over three months ended March 31, 2021. The decrease in gross profit was primarily driven by a product mix shift in the Workforce Solutions business that had new contracts undertaken at lower margins compared to prior year.

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

SG&A expenses totaled $4.5 million and $3.7 million for the three months ended March 31, 2022 and 2021, respectively. Fluctuations in the components of SG&A spending were as follows.

			Three months ended
(in thousands)	March 31, 2022		%			March 31, 2021		%

Selling, general and administrative expenses:
Corporate charges	$	3,482		77.3	%	$	2,758		73.9	%
Business development		839		18.6	%		767		20.5	%
Facility operation & maintenance (O&M)		177		3.9	%		200		5.4	%
Bad debt expense		-		0.0	%		4		0.1	%
Other		9		0.2	%		5		0.1	%
Total	$	4,507		100.0	%	$	3,734		100.0	%

Corporate charges

During the three months ended March 31, 2022, corporate charges increased by $0.7 million over the same period of the prior year. The increase was primarily due to an increase of stock compensation expense of $0.3 million and an increase in corporate bonus accrual of $0.3 million in Q1 2022.

Business development expenses

Business development expense increased $0.1 million during the three months ended March 31, 2022 over the same period of the prior fiscal year. The increase was primarily due to higher commission costs and recruiting fees in Q1 2022.

Facility operation & maintenance (“O&M”)

Facility O&M expenses decreased $23 thousand for three months ended March 31, 2022, respectively, compared to the same period in 2021. The decrease in facility O&M during fiscal 2022 was mainly due to lease terminations in the first half of 2021.

Bad debt expense

We recorded no bad debt expense during the three months ended March 31, 2022. We recorded $4 thousand of bad debt expense during the three months ended March 31, 2021.

Research and development

Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled $142 thousand and $157 thousand for the three months ended March 31, 2022 and 2021, respectively.

Restructuring

We recorded no restructuring charges during the three months ended March 31, 2022. We recorded $808 thousand restructuring charges during the three months ended March 31, 2021. The decrease was mainly due to final charges related to the liquidation of our Sweden operations in Q1 2021, pursuant to our foreign restructuring plan.

Depreciation

We recorded depreciation expense of $72 thousand and $76 thousand for the three months ended March 31, 2022 and 2021, respectively. The reduction of $4 thousand for the three months ended March 31, 2022 over the same period in 2021 was due primarily to additional assets becoming fully depreciated.

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled $0.3 million for both the three months ended March 31, 2022 and 2021.

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Interest expense, net

Interest expense totaled $148 thousand and $54 thousand for the three months ended March 31, 2022 and 2021, respectively. The increase was mainly due to an increase in total indebtedness compared to Q1 2021.

Change in fair value of derivative instruments, net

For the three months ended March 31, 2022, we recognized a net loss of $0.6 million related to the change of fair value of the embedded derivative liability related to the Convertible Note and warrant liability.

Other income, net

For the three months ended March 31, 2022 and 2021, we recognized other income, net of $16 thousand and $1 thousand, respectively.

Income taxes expense (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 expense of $167 thousand for the three months ended March 31, 2022 was comprised mainly of current foreign and state tax expense and deferred federal and state tax expense related to the portion of goodwill which cannot be offset by deferred tax assets. Total income tax benefit of $(35) thousand for the three months ended March 31, 2021 was comprised mainly of foreign and state tax benefit.

Our income effective tax rate was (5.1)% and 1.6% for the three months ended March 31, 2022 and 2021, respectively. The difference between our income tax expense at an effective tax rate of (5.1)% and a benefit at the U.S. statutory federal income tax rate of 21% was primarily due a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, accruals related to uncertain tax positions for certain foreign tax contingencies, and discrete item adjustments for U.S. and foreign taxes. For the three months ended March 31, 2021, the difference between the income tax benefit at an effective tax rate of 1.6% and a benefit at the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. and China subsidiaries, 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 March 31, 2022. In addition, in the quarter ending March 31, 2022, we established mark-to-market liabilities related to certain common stock purchase warrants and certain embedded features included in our convertible debt. The fair values of these are estimated upon issuance and at each reporting period thereafter. For all 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 March 31, 2022, our cash, cash equivalents and restricted cash totaled $7.0 million, compared to $3.6 million as of December 31, 2021.

As of March 31, 2022, we have a long-term restricted cash of $1.6 million. We had $1.1 million of restricted cash to secure four letters of credit with various customers and $0.5 million to secure our corporate credit card program.

For the three months ended March 31, 2022 and 2021, net cash provided by operating activities were both $1.1 million and net cash used in operating activities were $2.0 million, respectively. The increase in cash flows provided by operating activities was primarily driven by an ERC refund increased collections in the first quarter of 2022 and slower billing in the first quarter of 2021.

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Net cash used in investing activities totaled both $0.2 million for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022 and 2021, net cash provided by financing activities was $2.6 million and net cash used in financing activities was $0.7 million, respectively. The increase in cash provided by financing activities of $3.3 million was primarily driven by $4.8 million of proceeds received from issuance of Convertible Note, offset by a $1.8 million repayment of the line of credit during the three months ended March 31, 2022.

Paycheck Protection Program Loan

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

Credit Facilities

On February 23, 2022, the Company issued a Convertible Note (further described in Note 10 to Consolidated Financial Statements). The proceeds received from the Convertible Note were used to repay in full, all outstanding indebtedness of $1.8 million owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. As of March 31, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

Non-GAAP Financial Measures

Adjusted EBITDA

References to “EBITDA” mean net (loss) income, before taking into account interest expense (income), provision for income taxes, depreciation and amortization. References to Adjusted EBITDA exclude the impact of restructuring charges, stock-based compensation expense and change in fair value of derivative instruments. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate our results because it excludes certain items that are not directly related to our 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:

(in thousands)

	Three months ended
	March 31, 2022			March 31, 2021
Net loss	$	(3,434	)	$	(2,205	)
Interest expense, net		148			54
Provision for income taxes		167			(35	)
Depreciation and amortization		415			513
EBITDA		(2,704	)		(1,673	)
Restructuring charges		-			808
Stock-based compensation expense		408			38
Change in fair value of derivative instruments, net		581			-
Adjusted EBITDA	$	(1,715	)	$	(827	)

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

References to Adjusted net (loss) income exclude the impact of restructuring charges, stock-based compensation expense, change in fair value of derivative instruments and amortization of intangible assets related to acquisitions. Adjusted Net Income and adjusted earnings per share (adjusted EPS) are not measures of financial performance under GAAP. Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, are useful to investors to evaluate our results because they exclude certain items that are not directly related to our 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. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to GAAP net income, the most directly comparable GAAP financial measure, is as follows:

(in thousands)	Three months ended
	March 31, 2022			March 31, 2021

Net loss	$	(3,434	)	$	(2,205	)
Restructuring charges		-			808
Stock-based compensation expense		408			38
Change in fair value of derivative instruments, net		581			-
Amortization of intangible assets related to acquisitions		260			340
Adjusted net loss	$	(2,185	)	$	(1,019	)

Adjusted loss per common share – Diluted	$	(0.10	)	$	(0.05	)

Weighted average shares outstanding used to compute adjusted net loss per share - basic and diluted⁽¹⁾		20,980,046			20,628,669

⁽¹⁾ During the three months ended March 31, 2022 and 2021, we reported a GAAP net loss and an adjusted net income. Accordingly there was no dilutive shares from RSUs included in the adjusted earnings per share calculation that were considered anti-dilutive when calculating the net loss per share.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Through management's evaluation of controls as of December 31,2021 it was determined that the material weakness related to management's review of reconciliations over unbilled receivables and billings in excess of revenue earned were un-remediated. In the course of our assessment of the internal control over financial reporting as of March 31, 2022, we identified an additional material weakness in our control environment related to the review of the financial statements, specifically the review of the presentation of changes in cash, cash equivalents and restricted cash on the statement of cash flow.

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

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

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

Item 1A.

Risk Factors

The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

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Item 6.

Exhibits

	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002, filed herewith.

	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

	32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

		Eighth Amendment

	101.INS*	XBRL Instance Document

	101.SCH*	XBRL Taxonomy Extension Schema

	101.CAL*	XBRL Taxonomy Extension Calculation Linkbase

	101.DEF*	XBRL Taxonomy Extension Definition Linkbase

	101.LAB*	XBRL Taxonomy Extension Label Linkbase

	101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

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

Date: May 16, 2022
	GSE SYSTEMS, INC.

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

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

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	3
	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021	4
	Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021	6
	Unaudited Consolidated Statements of Cash Flows for Three Months Ended March 31, 2022 and 2021	7
	Notes to the Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION	33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3	Defaults Upon Senior Securities	34
Item 4	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35