10-Q 1 brhc10024691_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2021

		or

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

Commission File Number 001-14785

GSE Systems, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Emerging growth company ☐

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

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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $.001 Par Value		GVP		The NASDAQ Capital Market

There were 20,637,447 shares of common stock, with a par value of $0.01 per share outstanding as of April 30, 2021.

GSE SYSTEMS INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	3
	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and March 31, 2020	4
	Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2021 and March 31, 2020	5
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and March 31, 2020	6
	Unaudited Consolidated Statements of Cash Flows for Three Months Ended March 31, 2021 and March 31, 2020	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3	Defaults Upon Senior Securities	42
Item 4	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	SIGNATURES	44

	March 31, 2021			December 31, 2020
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,749		$	6,702
Contract receivables, net		11,749			10,494
Prepaid expenses and other current assets		1,478			1,554
Total current assets		16,976			18,750

Equipment, software and leasehold improvements, net		694			616
Software development costs, net		605			630
Goodwill		13,339			13,339
Intangible assets, net		3,893			4,234
Operating lease right-of-use assets, net		1,413			1,562
Other assets		59			59
Total assets	$	36,979		$	39,190

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	2,506		$	3,006
PPP Loan, current portion		8,832			5,034
Accounts payable		739			570
Accrued expenses		1,462			1,297
Accrued compensation		2,257			1,505
Billings in excess of revenue earned		4,947			5,285
Accrued warranty		587			665
Income taxes payable		1,549			1,621
Other current liabilities		1,596			2,498
Total current liabilities		24,475			21,481

PPP Loan, noncurrent portion		1,260			5,034
Operating lease liabilities noncurrent		1,565			1,831
Other noncurrent liabilities		263			339
Total liabilities		27,563			28,685

Commitments and contingencies (Note 16)

Stockholders’ equity:
Preferred stock $.01 par value; 2,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock $0.01 par value; 60,000,000 shares authorized, 22,233,283 and 22,192,569 shares issued, 20,634,372 and 20,593,658 shares outstanding, respectively		222			222
Additional paid-in capital		79,697			79,687
Accumulated deficit		(67,396	)		(65,191	)
Accumulated other comprehensive loss		(108	)		(1,214	)
Treasury stock at cost, 1,598,911 shares		(2,999	)		(2,999	)
Total stockholders’ equity		9,416			10,505
Total liabilities and stockholders’ equity	$	36,979		$	39,190

	Three months ended
	March 31, 2021			March 31, 2020

Revenue	$	13,104		$	17,705
Cost of revenue		10,176			13,590
Gross profit		2,928			4,115
Operating expenses:
Selling, general and administrative		3,734			4,948
Research and development		157			210
Restructuring charges		808			10
Loss on impairment		-			4,302
Depreciation		76			108
Amortization of definite-lived intangible assets		340			670
Total operating expenses		5,115			10,248
Operating loss		(2,187	)		(6,133	)
Interest expense, net		(54	)		(241	)
Gain (loss) on derivative instruments, net		-			(43	)
Other income, net		1			29
Loss before income taxes		(2,240	)		(6,388	)
Provision for income taxes		(35	)		(130	)
Net loss	$	(2,205	)	$	(6,258	)
Net loss per common share - basic and diluted	$	(0.11	)	$	(0.31	)
Weighted average shares outstanding used to compute net loss per share - basic and diluted		20,628,669			20,342,933

	Common Stock				Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Treasury Stock						Total
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			Amount			Total

Balance, January 1, 2021		22,193	$	222	$	79,687		$	(65,191	)	$	(1,214	)		(1,599	)	$	(2,999	)	$	10,505
Stock-based compensation expense		-		-		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

Balance, January 1, 2020	21,839	$	218	$	79,400		$	(54,654	)	$	(1,846	)	(1,599	)	$	(2,999	)	$	20,119
Stock-based compensation expense	-		-		147			-			-		-			-			147
Common stock issued for RSUs vested	140		1		(1	)		-			-		-			-			-
Shares withheld to pay taxes	-		-		(51	)		-			-		-			-			(51	)
Foreign currency translation adjustment	-		-		-			-			(186	)	-			-			(186	)
Net loss	-		-		-			(6,258	)		-		-			-			(6,258	)
Balance, March 31, 2020	21,979	$	219	$	79,495		$	(60,912	)	$	(2,032	)	(1,599	)	$	(2,999	)	$	13,771

(in thousands, except for share amounts)	Three months ended March 31,
	2021			2020
Numerator:
Net (loss) income attributed to common stockholders	$	(2,205	)	$	(6,258	)
Denominator:
Weighted-average shares outstanding for basic earnings per share		20,628,669			20,342,933
Effect of dilutive securities:
Employee stock options and warrants		-			-
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		20,628,669			20,342,933
Shares related to dilutive securities excluded because inclusion would be anti-dilutive		43,937			59,421

(in thousands)	March 31, 2021			December 31, 2020

Billed receivables	$	5,202		$	5,694
Unbilled receivable		6,906			5,160
Allowance for doubtful accounts		(359	)		(360	)
Total contract receivables, net	$	11,749		$	10,494

(in thousands)	As of March 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Net
Amortized intangible assets:
Customer relationships	$	8,628	$	(5,772	)	$	2,856
Trade names		1,689		(1,042	)		647
Developed technology		471		(471	)		-
Non-contractual customer relationships		433		(433	)		-
Noncompete agreement		527		(360	)		167
Alliance agreement		527		(304	)		223
Others		167		(167	)		-
Total	$	12,442	$	(8,549	)	$	3,893

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

(in thousands)
Years ended December 31:
2021	$	874
2022		910
2023		640
2024		435
2025		334
Thereafter		700
Total	$	3,893

(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

	Three months ended
	March 31, 2021		March 31, 2020
Performance Improvement Solutions segment
System Design and Build	$	1,862	$	3,813
Point in time		-		-
Over time		1,862		3,813

Software and Support		813		910
Point in time		95		640
Over time		718		270

Training and Consulting Services		4,406		4,988
Point in time		68		29
Over time		4,338		4,959

Nuclear Industry Training and Consulting segment
Training and Consulting Services		6,023		7,994
Point in time		86		-
Over time		5,937		7,994

Total revenue	$	13,104	$	17,705

(in thousands)	Gross Future Minimum Lease Payments
2021 remainder	$	941
2022		1,166
2023		631
2024		116
2025		3
Total lease payments	$	2,857
Less: Interest		171
Present value of lease payments	$	2,686

Lease Term and Discount Rate	March 31, 2021			December 31, 2020
Weighted-average remaining lease term (years)
Operating leases		2.42			2.64
Weighted-average discount rate
Operating leases		5.00	%		5.00	%

(in thousands)
Balance at January 1, 2021	$	922
Current period provision		(119	)
Current period claims		(36	)
Currency adjustment		(1	)
Balance at March 31, 2021	$	766

		As of
Operating Leases	Classification	March 31, 2021		December 31, 2020

Leased Assets
Operating lease - right of use assets	Long term assets	$	1,413	$	1,562

Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,121		1,138
Operating lease liabilities	Long term liabilities		1,565		1,831
		$	2,686	$	2,969

		Three months ended
Lease Cost	Classification	March 31, 2021			March 31, 2020

Operating lease cost ⁽¹⁾	Selling, general and administrative expenses	$	192		$	321
Short-term leases costs ⁽²⁾	Selling, general and administrative expenses		16			1
Sublease income⁽³⁾	Selling, general and administrative expenses		(32	)		(32	)
Net lease cost		$	176		$	290

(in thousands)	Three months ended
Cash paid for amounts included in measurement of liabilities	March 31, 2021		March 31, 2020
Operating cash flows used in operating leases	$	327

SEC Form 10-Q filed by GSE Systems, Inc.