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"~~“GSE” or ~~"we"~~“we” or ~~"our"~~“our” or ~~"the Company"~~“the Company” are to GSE Systems, Inc. and our subsidiaries, collectively.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, ~~2020~~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, ~~2020,~~2021, filed with the U.S. Securities and Exchange Commission on ~~April 13, 2021.~~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, ~~and~~ the recoverability of deferred tax ~~assets.~~assets, and valuation of warrants and derivative liability related to our convertible note. Actual results of these and other items not listed could differ from these estimates and those differences could be material.

COVID-19

~~GSE~~

Prior to COVID 19, most of our Performance Improvement Solutions (Performance) employees ~~began working~~worked remotely, ~~during~~and the ~~first quarter~~remainder worked in one of ~~2020 due to~~our offices. With the onset of the COVID-19 pandemic ~~and will~~in Q1 2020, all of our employees shifted to working remotely. For the most part, our employees continue to ~~do so when practical and~~work remotely but, as ~~mandated by~~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. ~~Employees~~Today, employees almost entirely work ~~from home~~remotely within our Performance Improvement Solutions ~~(“Performance”)~~ segment, except when required to be at the client site for essential project work. Our Performance contracts, which generally are considered an essential ~~service,~~services, are permitted to and mostly continue without ~~pause; however,~~pause. However, we have experienced certain delays in certain new ~~business. For~~business opportunities. At the onset of the pandemic, many of our ~~staff augmentation business, we have seen certain contracts for our Nuclear Industry Training and Consulting (“NITC” or “workforce solutions”)~~Workforce Solutions customers paused or delayed contracts as ~~clients reduce~~they shrank their own on-premise workforces to the minimum operating levels in ~~response~~order to mitigate the ~~pandemic; as~~effects of the pandemic. As a result, our ~~NITC~~Workforce Solutions segment has experienced a decline in its billable employee base ~~since~~during this time. Over the ~~start~~course of 2021, the ~~pandemic. Although we~~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 ~~thus~~resuming work on existing contracts. Therefore, our ability to recognize revenue has been delayed for some contracts. ~~Reductions in orders~~We have also experienced order reductions, cancellations, and other negative changes to orders ~~experienced at~~due to the ~~beginning of~~pandemic. As the pandemic ~~have started~~landscape has continued to ~~reverse in 2021, but not at~~develop and new risks emerge such as the ~~level expected as ongoing COVID concerns continue~~Delta variant and the Omicron variant, our business continues to ~~hinder the pace of recovery.~~be affected. We ~~continue to closely~~routinely monitor our operating expenses as a result of contract delays and order reductions; and we have made adjustments to ~~keep~~maintain our gross profit at a sustainable level.

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~~Going Concern~~

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

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

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

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

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In ~~January~~August 2020, the FASB issued ASU ~~2020-01, Investments – Equity Securities, Investments – Equity Method~~2020-06, Debt—Debt with Conversion and ~~Joint Ventures,~~Other Options (Subtopic 470-20) and Derivatives and ~~Hedging,~~Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which ~~provides clarity~~simplifies the accounting for ~~companies that hold~~certain financial instruments with characteristics of liabilities and equity, ~~securities at cost~~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 ~~first update~~improve the ~~fair value of an investment, immediately prior~~information provided to applying the Equity Method of Accounting; or clarity for companies that enter into forward contracts to purchase additional shares of an equity security that would then require the investee to account for the investment via the Equity Method.users. This ASU is applicable for public companies starting with fiscal years beginning after December 15, ~~2020~~2021 and interim periods within those fiscal years. The Company adopted ASU ~~2020-01~~2020-06 on January 1, ~~2021. This standard~~2022, using the modified retrospective approach, and because the Company did not have ~~a significant impact to our consolidated~~outstanding financial ~~statements since the Company does not currently hold any investments at cost.~~

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

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Accounting pronouncements not yet adopted

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

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

Note 3 - Basic and Diluted ~~Loss~~(Loss) Income 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 and warrants were exercised. Basic and diluted earnings per share are based on the weighted average number of outstanding shares for the period.

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

(in thousands, except for share data)	Three months ended					Six months ended					Three months ended					Six months ended
	June 30, 2021		June 30, 2020			June 30, 2021		June 30, 2020			June 30, 2022			June 30, 2021		June 30, 2022			June 30, 2021
Numerator:
Net income (loss) attributed to common stockholders	$	3,231	$	(2,149	)	$	1,026	$	(8,407	)
Net (loss) income attributed to common stockholders											$	(1,401	)	$	3,231	$	(4,835	)	$	1,026

Denominator:
Weighted-average shares outstanding for basic earnings per share		20,647,426		20,407,958			20,638,116		20,375,446			21,033,447			20,647,426		21,006,910			20,638,116

Effect of dilutive securities:
Employee stock options		54,577		0			0		0
Employee RSUs												0			54,577		0			0
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		20,702,003		20,407,958			20,638,116		20,375,446			21,033,447			20,702,003		21,006,910			20,638,116

Shares related to dilutive securities excluded because inclusion would be anti-dilutive		0		74,732			20,005		56,373
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive												3,185,552			0		2,181,846			20,005

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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 ~~(“CARES~~(the “CARES Act”) to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. OnWe applied for and, on April 23, 2020, ~~GSE was approved for and on the next day~~ received a ~~$10~~payroll protection program loan in the amount of $10.0 million ~~loan pursuant to a Paycheck Protection Program Note~~ (the “PPP Loan”) ~~from Citizens Bank, N.A. pursuant to the CARES Act. Pursuant to~~under the CARES Act, ~~the PPP Loan was guaranteed~~as administered by the U.S. Small Business Administration ~~(“SBA”~~(the “SBA”). The application for receipt of the PPP Loan required us to certify, in good faith, that the 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 ~~eligible~~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 ~~under certain circumstances. Repayment~~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 ~~scheduled~~formally forgiven by the SBA. We recognized other income of $10.1 million related to ~~begin on August 9,~~this forgiveness during the third quarter of fiscal 2021.

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

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

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

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

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

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

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

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

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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, ~~after December 31,~~initially from March 27, 2020 ~~through~~until June 30, 2021, and extended through September 30, 2021. ~~During the second quarter of~~In 2021, we ~~performed analysis to determine our eligibility for the Employee Retention Credit for the first quarter of 2021. We amended certain payroll tax filings and~~ applied for ~~a refund of $2.4~~$5.0 million in ~~June 2021. For the second quarter of 2021, we have applied for a refund of $1.8 million~~refunds from the ~~IRS~~Internal Revenue Service with ~~the timely~~ filing of ~~Form 941~~our 941s and ~~have already recognized a benefit of $0.9~~achieved $2.2 million in ~~value~~credits from unremitted payroll taxes as ~~allowable.~~allowed. We ~~believe we are also eligible~~recorded other income of $7.2 million related to ~~receive~~ the employee retention tax credits earned for the year ended December 31, 2021. During the three months ended June 30, 2022, we have received employee retention tax credit refunds from the Internal Revenue Service in the ~~third quarter~~amount of ~~2021 and~~$1.6 million. As of June 30, 2022, we ~~are reducing our payroll taxes as permitted under~~received cumulative employee retention tax credit refunds totaling $3.6 million of the ~~Coronavirus Aid, Relief and Economic Security Act.~~$5.0 million in refunds sought, with remaining outstanding refunds receivable of $1.4 million which was included in the other current assets balance at June 30, 2022.

Note 5 - Contract Receivables

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

The components of contract receivables were as follows:

(in thousands)	June 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021

Billed receivables	$	4,004		$	5,694		$	4,543		$	6,124
Unbilled receivables		7,577			5,160			6,056			6,143
Allowance for doubtful accounts		(213	)		(360	)		(1,064	)		(1,010	)
Total contract receivables, net	$	11,368		$	10,494		$	9,535		$	11,257

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Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce the ~~Company's~~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 June 30, 2022 and 2021, we recorded net bad debt expense (recovery) of $97 thousand and $(137) thousand, respectively. During the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, we recorded net bad debt expense (recovery) ~~expense~~ of ~~$(133)~~$97 thousand and ~~$93~~$(133) thousand, respectively.

During the month of July ~~2021,~~2022, we invoiced ~~$2.9~~$4.3 million of the unbilled ~~amounts~~receivables as of ~~the three months ended~~ June 30, ~~2021.~~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 June 30, 2022 and 2021, we recognized a loss on remeasurement of these foreign exchange contracts of $54 thousand and $12 thousand, respectively.

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had no0 customer that accounted ~~over~~for 10% of our consolidated contract receivables.

Note 6 - Goodwill and Intangible Assets

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

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

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

. Management concluded that there were no triggering events that occurred during the ~~three and~~ six months ended June 30, 2022 and 2021.

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

(in thousands)	As of June 30, 2021							As of June 30, 2022
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Amortized intangible assets:
Customer relationships	$	8,628	$	(6,005	)	$	2,623	$	8,628	$	(6,788	)	$	1,840
Trade names		1,689		(1,064	)		625		1,689		(1,151	)		538
Developed technology		471		(471	)		0		471		(471	)		0
Non-contractual customer relationships		433		(433	)		0		433		(433	)		0
Noncompete agreement		527		(383	)		144		527		(467	)		60
Alliance agreement		527		(330	)		197		527		(435	)		92
Others		167		(167	)		0		167		(167	)		0
Total	$	12,442	$	(8,853	)	$	3,589	$	12,442	$	(9,912	)	$	2,530

(in thousands)	As of December 31, 2020										As of December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Impact of Impairment			Net		Gross Carrying Amount		Accumulated Amortization			Net
Amortized intangible assets:
Customer relationships	$	11,730	$	(5,504	)	$	(3,102	)	$	3,124	$	8,628	$	(6,432	)	$	2,196
Trade names		2,467		(1,020	)		(778	)		669		1,689		(1,108	)		581
Developed technology		471		(471	)		0			0		471		(471	)		0
Non-contractual customer relationships		433		(433	)		0			0		433		(433	)		0
Noncompete agreement		949		(336	)		(422	)		191		527		(429	)		98
Alliance agreement		527		(277	)		0			250		527		(382	)		145
Others		167		(167	)		0			0		167		(167	)		0
Total	$	16,744	$	(8,208	)	$	(4,302	)	$	4,234	$	12,442	$	(9,422	)	$	3,020

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Amortization expense related to definite-lived intangible assets totaled ~~$0.3~~$0.2 million and ~~$0.4~~$0.3 million for the three months ended June 30, 2022 and 2021 and ~~2020~~$0.5 million and $0.6 ~~million and $1.1~~ million for the six months ended June 30, 2022 and 2021, ~~and 2020,~~ respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:

(in thousands)
Years ended December 31:
2021 remainder	$	569
2022		911
2022 remainder			$	419
2023		640		640
2024		435		435
2025		335		335
2026				266
Thereafter		699		435
Total	$	3,589	$	2,530

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Note 7 - Equipment, Software and Leasehold Improvements

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

(in thousands)
	June 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Computer and equipment	$	2,226		$	2,229		$	2,325		$	2,270
Software		2,010			1,695			2,226			2,150
Leasehold improvements		659			660			659			659
Furniture and fixtures		839			848			839			839
		5,734			5,432			6,049			5,918
Accumulated depreciation		(4,943	)		(4,816	)		(5,220	)		(5,079	)
Equipment, software and leasehold improvements, net	$	791		$	616		$	829		$	839

Depreciation expense was ~~$147~~$144 thousand and ~~$178~~$147 thousand for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Capitalization of internal-use software cost of $53 thousand and $165 thousand were recorded in software for the three months ended June 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $76 thousand and $315 thousand were recorded in software for the ~~three and~~ six months ended June 30, ~~2021.~~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.

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

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~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 10) 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.

~~For~~

The Company used the ~~six months ended~~Monte Carlo simulation model to determine the fair value of the Warrants and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of June 30, ~~2021, we did not have any transfers into or out of Level 3.~~2022 was estimated with the following assumptions.

Exercise Price	$	1.94

Common Stock Price	$	1.25
Risk Free Rate		3.0%
Volatility		65%
Term (in years)	4.7 yrs

The following table presents assets and liabilities measured at fair value at June 30, ~~2021:~~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 $ 15 $ 0 $ 0 $ 15
Total assets 15 0 0 15

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

Derivative liability	$	0	$	0	$	204	$	204
Warrant liability		0		0		712		712
Cash settled performance-vesting restricted stock units		0		76		0		76
Total liabilities	$	0	$	76	$	916	$	992

~~Table of Contents~~

The following table presents assets and liabilities measured at fair value at December 31, ~~2020:~~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		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Money market funds	$	435	$	0	$	0	$	435	$	15	$	0	$	0	$	15
Total assets	$	435	$	0	$	0	$	435	$	15	$	0	$	0	$	15

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The following table summarizes changes in the fair value of our Level 3 liabilities during the six months ended June 30, 2022.

(in thousands)	Embedded Redemption Features			Warrant			Level 3 Total
Balance at December 31, 2021	$	0		$	0		$	0
Derivative liabilities at issuance date		306			0			306
Warrant liabilities at issuance date		0			724			724
Change in fair value included in gain on derivative instruments, net		(102	)		(12	)		(114	)
Balance at June 30, 2022	$	204		$	712		$	916

Note 9 - Stock-Based Compensation

We recognize compensation expense on a pro rata straight-line basis over the requisite service period for ~~all equity-based~~stock-based compensation awards ~~issued to employees~~with both graded and ~~directors that are~~cliff vesting terms. We recognize the cumulative effect of a change in the number of awards expected to ~~vest. Stock~~vest in compensation expense in the period of change. We have not capitalized any portion of our stock-based compensation. Our forfeiture rate is ~~calculated~~ based ~~upon the fair value of awards as of the grant date.~~ on actuals.

During the three months ended June 30,~~2021~~ 2022 and ~~2020~~,2021, we recognized ~~$0.5~~$0.7 million ~~in stock-based compensation expense~~ and ~~$0.2~~$0.5 million of stock-based compensation expense related to equity awards, respectively. We recognized ~~$0.5~~$1.0 million and ~~$0.3~~$0.5 million of stock-based compensation expense related to equity awards for the six months ended June 30,~~2021~~ 2022 and ~~2020,~~2021, respectively, under the fair value method. ~~In addition to~~

During the ~~equity-based compensation expense recognized, the Company recognized stock-based compensation related to the change in the fair value of cash-settled restricted stock units (RSUs) $0 thousand~~three and ~~$6 thousand for the~~ six months ended June ~~30,2021 and 2020, respectively.~~ ~~There was 0 change in the fair value of cash settled RSUs for the three months ended June~~ 30, ~~2021 and 2020.~~

~~During the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended June~~ ~~30,2021~~,2022, we granted approximately ~~804,661~~946,653 and 960,250 time-based ~~RSUs~~restricted stock units (“RSUs”) with an aggregate fair value of approximately $1.4 million and $1.5 million, respectively. During the three and six months ended June 30, ~~2020,~~2021, we granted approximately ~~10,000~~ ~~and 40,000~~804,661 time-based RSUs with an aggregate fair value of ~~$10 thousand and $31 thousand,~~approximately $1.4 million, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of 8 quarters, and the remainder vest annually in equal amounts over the course of one to three years.

GSE’s 1995 long-term incentive program ~~("LTIP"~~(“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"~~(“PRSU”) is contingent upon the ~~employee's~~employee’s continued employment and the ~~Company's~~Company’s achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the ~~Company's~~Company’s Board of Directors. We recognize compensation expense, net of estimated forfeitures, for ~~PRSU's~~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~~ ~~and~~ six months ended June 30, 2022, we granted 800,000 PRSUs ~~30,~~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, 2025. The market vesting ~~2021, we did 0t grant any performance-based RSUs to employees.~~

~~During the~~ ~~three~~ ~~months ended June~~ ~~30,~~criteria ~~2020, we did 0t grant any performance-based RSUs to employees and during~~was achieved in April 2022 for the ~~six~~ ~~months ended June~~ ~~30,2020, we granted approximately~~ ~~510,000~~ ~~performance-based RSUs to key employees with an aggregate fair-value of $0.6 million. These awards~~800,000 PRSUs which will fully vest over the next 14 quarters~~three years~~ ~~based upon achieving certain financial metrics achieved during fiscal 2022 for revenue and Adjusted EBITDA. The Company did 0t grant any stock options for~~. During the three and six months ended June 30, 2021, ~~and 2020.~~we did 0t grant any PRSUs to employees.

We did 0t grant any stock options for the six months ended June 30, 2022 and 2021.

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Note 10 - Debt

Convertible Note

On ~~December 29, 2016,~~February 23, 2022, we entered into a ~~3-year $5.0~~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 ~~revolving line~~(the “Convertible Note”) and a common stock purchase warrant to acquire 1,283,732 shares of ~~credit facility~~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 June 30, 2022		482

Balance of Convertible Note as of June 30, 2022	$	4,138

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

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

A portion of the proceeds of the Convertible Note were used to repay, in full, all outstanding indebtedness owed to Citizens Bank, ~~to fund general working capital needs~~N.A. (“Citizens”), and ~~acquisitions. On May 11, 2018, we entered into~~ the Amended and Restated Credit and Security Agreement ~~(the “Credit Agreement” or the “Credit Facility”)~~between us, our subsidiaries, and Citizens was terminated. We will continue to ~~(a) expand the $5.0 million revolving line~~maintain a cash management account and certain letters of credit ~~(the “RLOC”)~~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 ~~include a letter~~the current outstanding letters of ~~credit sub-facility and not be~~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 ~~borrowing base and (b)~~current liability to ~~add~~be remeasured at each reporting period (see Note 8). The discount created by allocating proceeds to the Warrant results in a ~~$25 million term loan facility, available~~debt discount to ~~finance permitted acquisitions~~be amortized as additional interest expense over the ~~following 18 months. The credit facility was subject to certain financial covenants and reporting requirements and was scheduled to mature on May 11, 2023 and accrue interest at~~term of the USD LIBOR, plus a margin that varies depending on our overall leverage ratio. The RLOC had required monthly payments of only interest, with principal due at maturity, while our term loan draws required monthly payments of principal and interest based on an amortization schedule. Our obligations under the Credit Agreement are guaranteed by our wholly owned subsidiaries, Hyperspring, Absolute, True North, DP Engineering and by any future material domestic subsidiaries (collectively, “the Guarantors”).

Convertible Note.

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~~During 2020,~~The Company evaluated the ~~COVID-19 pandemic impacted our operations~~Convertible Note and ~~our projected ability~~concluded that certain embedded redemption features are required to ~~comply with~~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 ~~financial covenants.~~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, ~~we amended~~ the ~~credit facility at various dates in 2020~~initial proceeds (approximately $4.8 million, net of original issue discounts and other payments to ~~revise our fixed charge ratio and leverage ratio requirements as well as our Adjusted EBITDA requirement.~~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).

~~In exchange~~The Convertible Note was evaluated as a potentially dilutive security in both periods of loss and income for ~~relaxed covenants or waivers~~diluted earnings per share purposes. The Warrant is considered a participating security and was not included in the calculation of ~~covenants~~basic earnings per share for ~~certain~~the period ended June 30, 2022 as Company reflected net loss for this period. The Warrant will be included in the calculation of basic earnings per share in periods ~~we were required~~of net income.

The issuance costs with respect to ~~curtail our term debt. During 2020, we repaid approximately $18.5 million of term debt and we were required to maintain certain levels or USA liquidity,~~the Convertible Note, which are ~~tested bi-weekly.~~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 $353 thousand and $482 thousand for the three and six months ended June 30, 2022, respectively.

Revolving Line of Credit

On March 29, 2021, ~~due to a projected violation of Q1 2021 leverage ratio,~~ we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, ~~2021, with our bank~~2021. Pursuant to ~~waive~~the Ninth Amendment and Reaffirmation Agreement, the Bank waived the fixed charge coverage ratio and leverage ratio for the quarters ~~ending~~ended March 31 and June 30, 2021, and we agreed, for each quarter thereafter, that the fixed charge coverage ratio shall not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio ~~and~~ starting on September 30, 2021 as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022 and (v) 2.00 to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter.2021. We ~~are~~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 ~~$0.5 million~~$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 thousand~~$75,000 to reduce the RLOC. We incurred ~~$25 thousand~~$25,000 fees related to this amendment during the year ended December 31, ~~2020.~~2021.

~~We have experienced delays in commencing new projects~~

On November 12, 2021, we signed the Tenth Amendment and ~~thus~~Reaffirmation Agreement with our ~~ability~~bank to ~~recognize revenue has been delayed~~waive the fixed charge coverage ratio and leverage ratio for ~~some contracts. Reductions in orders~~the quarters ending September 30 and ~~other negative changes to orders experienced~~December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the ~~beginning~~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 ~~pandemic have started~~RLOC. In addition, we agreed, by December 31, 2021, to ~~reverse in~~ ~~2021, but not at~~pay the ~~level expected as ongoing COVID concerns continue~~Bank $250,000 to ~~hinder~~be applied to the ~~pace~~principal amount outstanding under the RLOC. We incurred $15 thousand of ~~recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent~~amendment fee related to ~~June 30, 2021 and projected breaching the Leverage and Fixed Charges ratio covenant.~~

~~Revolving Line of Credit~~ ~~(“RLOC”)~~

this amendment.

During the six months ended June 30, ~~2021,~~2022, using proceeds from the Convertible Note, we ~~paid for $1.5~~repaid in full, all outstanding indebtedness of $1.8 million owed to Citizens, and ~~had a draw~~the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. Certain letters of ~~$0.8 million on our RLOC.~~credit remain in place with Citizens. As of June 30, ~~2021,~~2022, we had ~~outstanding borrowings of $2.3 million under the RLOC and 3~~4 letters of credit totaling ~~$933 thousand~~$1.1 million outstanding to certain customers which were secured with restricted cash.

Table of our customers. The total borrowing capacity under RLOC was $3.8 million as of June 30, 2021. After consideration of letters of credit, and the $0.5 million reserved for issuance of new letters of credit, there was 0 amount available for borrowing under the RLOC.Contents

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

Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one 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 ~~$547~~$507 thousand, and the remaining ~~$197~~$98 thousand is classified as long-term within other non current liabilities.

~~Table of Contents~~

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

(in thousands)
Balance at January 1, 2021	$	922
Current period provision		(124	)
Balance at January 1, 2022				$	748
Current period recovery					(31	)
Current period claims		(54	)		(98	)
Currency adjustment		0			(14	)
Balance at June 30, 2021	$	744
Balance at June 30, 2022				$	605

Note 12 - Revenue

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

The following table represents a disaggregation of revenue by type of goods or services for ~~three and~~the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, along with the reporting segment for each category:

(in thousands)	Three months ended				Six months ended				Three months ended				Six months ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Performance Improvement Solutions segment
System Design and Build	$	1,227	$	3,249	$	3,089	$	7,062	$	2,042	$	1,227	$	3,443	$	3,089
Point in time		0		0		0		0
Over time		1,227		3,249		3,089		7,062		2,042		1,227		3,443		3,089

Software and Support		766		723		1,579		1,633		1,178		766		1,937		1,579
Point in time		127		444		222		1,084		87		127		175		222
Over time		639		279		1,357		549		1,091		639		1,762		1,357

Training and Consulting Services		4,869		4,300		9,275		9,288		4,733		4,869		8,970		9,275
Point in time		16		19		84		48		727		16		1,145		84
Over time		4,853		4,281		9,191		9,240		4,006		4,853		7,825		9,191

Nuclear Industry Training and Consulting segment
Workforce Solutions
Training and Consulting Services		6,660		6,068		12,683		14,062		4,792		6,660		10,670		12,683
Point in time		163		0		249		0		0		163		0		249
Over time		6,497		6,068		12,434		14,062		4,792		6,497		10,670		12,434

Total revenue	$	13,522	$	14,340	$	26,626	$	32,045	$	12,745	$	13,522	$	25,020	$	26,626

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

(in thousands)	Three months ended				Six months ended				Three months ended				Six months ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period	$	1,115	$	939	$	3,304	$	4,701	$	1,036	$	1,115	$	2,492	$	3,304

Note 13 - Income Taxes

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

(in thousands)	Three months ended						Six months ended						Three months ended						Six months ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Income (loss) before income taxes	$	3,227		$	(1,969	)	$	987		$	(8,357	)
(Loss) income before income taxes													$	(1,458	)	$	3,227		$	(4,725	)	$	987
(Benefit from) provision for income taxes		(4	)		180			(39	)		50			(57	)		(4	)		110			(39	)
Effective tax rate		(0.1	)%		(9.1	)%		(4.0	)%		(0.6	)%		3.9	%		(0.1	)%		(2.3	)%		(4.0	)%

Our income tax ~~benefit~~expense for the interim periods presented is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax ~~benefit~~expense for the six months ended June 30, 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 six months ended June 30, 2021 was comprised mainly of foreign tax benefit and state tax expense. ~~Total income tax expense for the six months ended June 30, 2020 was comprised mainly of foreign and state tax expense.~~

Our effective income tax rate was ~~(0.1)%~~3.9% and ~~(4.0)~~(2.3)% for the three and six months ended June 30, ~~2021,~~2022, respectively. For the three and six months ended June 30, 2022, the difference between our income tax expense and (benefit) at an effective tax rate of 3.9% and (2.3)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes. For the three and six months ended June 30, 2021, the difference between our income tax benefit at an effective ~~tax~~ rate of (0.1)% and (4.0)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, and discrete item adjustments for U.S. and foreign taxes. For the three and six months ended June 30, 2020, the difference between our income tax expense at an effective tax rate of (9.1)% and (0.6)%, respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. and China subsidiaries, and discrete item adjustments for U.S. and foreign taxes.

Because of our net operating loss carryforwards, we are subject to U.S. federal and state income tax examinations from the year 2000 and forward and are subject to foreign tax examinations by tax authorities for years ~~2015~~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. The Company has an estimated $0.8 million of tax benefit that will be realized in the third quarter of 2021 upon the expiration of the statute of limitations of the tax year in which the uncertain tax position was taken.

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that we will continue to assess a full valuation allowance on our U.S., China, and Slovakia net deferred assets as of June 30, ~~2021.~~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 $170 thousand at June 30, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.

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Note 14 - Leases

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

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

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

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

		As of					As of
Operating Leases	Classification	June 30, 2021		December 31, 2020		Classification	June 30, 2022		December 31, 2021

Leased Assets
Operating lease - right of use assets	Long term assets	$	1,279	$	1,562	Long term assets	$	880	$	1,200

Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,099		1,138	Other current liabilities		1,188		1,205
Operating lease liabilities	Long term liabilities		1,315		1,831	Long term liabilities		214		790
		$	2,414	$	2,969		$	1,402	$	1,995

We executed a sublease agreement with a tenant to sublease ~~3,650~~850 square feet from the Sykesville office space ~~in Sykesville~~ on ~~May 1, 2019.~~September 13, 2021. This agreement is in addition to the ~~3,822 of~~previous sublease for 3,650 square feet ~~previously subleased, which was~~ entered into on ~~April~~May 1, ~~2017.~~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 ~~both~~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.

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The table below summarizes lease income and expense recorded in the consolidated statements of operations incurred during the three and six months ended June 30, 2022 and 2021, ~~and 2020, (in thousands)~~(in thousands):

Three months ended Six months ended
Lease Cost
Classification June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Operating lease cost ⁽¹⁾

Selling, general and administrative expenses

$
177

$
321

$
369

$
418

Short-term leases costs ⁽²⁾

Selling, general and administrative expenses

14

1

30

1

Sublease income⁽³⁾

Selling, general and administrative expenses

(32
)

(32
)

(64
)

(64
)
Net lease cost

$
159

$
290

$
335

$
355

		Three months ended						Six months ended
Lease Cost	Classification	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021

Operating lease cost ⁽¹⁾	Selling, general and administrative expenses	$	174		$	177		$	360		$	369
Short-term leases costs ⁽²⁾	Selling, general and administrative expenses		15			14			30			30
Sublease income⁽³⁾	Selling, general and administrative expenses		(19	)		(32	)		(37	)		(64	)
Net lease cost		$	170		$	159		$	353		$	335

(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 23 tenants, which sublease parts of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

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The Company is obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of June 30, ~~2021~~2022 are as follows (in thousands):

(in thousands)	Gross Future Minimum Lease Payments		Gross Future Minimum Lease Payments
2021 remainder	$	613
2022		1,171
2022 remainder			$	645
2023		638		673
2024		122		122
2025		10		10
2026				3
Thereafter		3		0
Total lease payments	$	2,557	$	1,453
Less: Interest		143		51
Present value of lease payments	$	2,414	$	1,402

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

Lease Term and Discount Rate June 30, 2021
December 31, 2020

Weighted-average remaining lease term (years) Operating leases 2.24 2.64

Weighted-average discount rate Operating leases 5.00 % 5.00 %

Lease Term and Discount Rate	June 30, 2022			December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.36			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)	Six months ended				Six months ended
Cash paid for amounts included in measurement of liabilities	June 30, 2021		June 30, 2020		June 30, 2022		June 30, 2021
Operating cash flows used in operating leases	$	639	$	675	$	642	$	639

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Item 2.

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

~~GSE is~~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 ~~systematically~~ help clients fill key vacancies in ~~the organization on a short-term basis,~~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 ~~GSE serves,~~we serve, namely the power industries, delayed ~~the~~certain essential services and dramatically cut back on non-essential services. Although ~~this~~these delays and reductions impacted ~~GSE,~~us, as an essential services provider to an essential industrial base, ~~GSE~~we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. ~~As GSE enters into~~Additionally, staffing shortages have resulted in new opportunities for our Workforce Solutions segment. In 2021, the effects of the pandemic ~~are~~ still ~~impacting~~impacted the end markets we serve, but those effects ~~may be~~have been mitigated ~~for~~by a number of factors, including the following: the pandemic largely has had a targeted effect on the ~~population; there now are~~population; a number of vaccines in the market being distributed and, despite logistical challenges, making ~~solid~~substantial progress for those in most ~~need;~~need; the economy of the United States has not had as much disruption as was initially feared, which has benefited our end ~~markets;~~markets; and most importantly ~~the~~our end markets ~~of GSE~~ seem poised to ~~spend to catch up on~~contract with us for essential services that had been delayed as a result of the pandemic. ~~In the end of 2020 and~~At the beginning of ~~2021,~~2022, we have ~~had~~publicly announced a number of ~~significant~~ contract wins, ~~that have been publicly announced,~~ which we hope will be a harbinger of a more ~~solid 2021~~attractive business ~~environment.~~environment for the power industries we serve.

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

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

~~During the second quarter of~~In 2021, we ~~performed analysis to determine our eligibility for~~participated in the Employee Retention Credit ~~for~~(ERC) program available under the ~~first quarter~~CARES Act. The Company recognized total cumulative ERC credits of ~~2021.~~$7.2 million consisting of both refunds sought by the Company and credits from unremitted payroll taxes. We ~~amended certain payroll tax filings and~~ applied for ~~a refund of $2.4~~$5.0 million ~~dollars~~ in ~~April 2021. For the second quarter of 2021, we have applied for a refund of $1.8 million dollars~~refunds from the IRS with ~~the timely~~ filing of ~~Form 941~~our 941s and ~~have already recognized a benefit of $0.9~~achieved $2.2 million ~~dollars~~ in ~~value~~credits from unremitted payroll taxes as ~~allowable.~~allowed. For the three months ended June 30, 2022, we received refunds of $1.6 million with a remaining receivable of $1.4 million at June 30, 2022.

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 ~~believe~~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 ~~are~~would also ~~eligible~~be subject to ~~receive~~ the ~~employee retention credit in~~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 ~~third quarter~~status of ~~2021~~these or other mandates or regulations and ~~we are reducing~~their application to us and our ~~payroll taxes as permitted under the~~ ~~Coronavirus Aid, Relief and Economic Security Act.~~business.

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General Business Environment

We operate through two reportable business segments: Performance Improvement Solutions and ~~Nuclear Industry Training and Consulting (NITC).~~Workforce Solutions. The ~~NITC~~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%~~57% of revenue atfor the six months ended June 30, ~~2021)~~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~~computer-based tutorials/simulation focused on the process industry. The Performance Solutions segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve primarily nuclear and fossil fuel power generation and the process industries. Our simulation solutions include the following: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, including operator training systems, for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industry processes and control systems to newly hired employees and for ongoing workforce development and training. GSE and its predecessors have been providing these services since 1976.

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

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

~~Nuclear Industry Training and Consulting~~Workforce Solutions (approximately ~~48%~~43% of revenue atfor the six months ended June 30, ~~2021)~~2022)

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

Business Strategy

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

Our objective has been to create a leading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies. ~~GSE is~~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 ~~DOE,~~Department of Energy, US Navy and related defense sectors. As a result of this effort and established leadership position in key sectors, ~~GSE is~~we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In ~~2021,~~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; ~~creating~~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; ~~developing~~develop new services as a result of combining ~~the expertise of the Company; and expanding~~our expertise; expand into compelling adjacent markets such as clean energy as they may arise with renewed sales focus.

2524

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Cross sell and upsell into existing markets:

~~GSE has spent~~For the past several years, ~~executing an acquisition strategy~~we have devoted considerable time and effort to diversify the Company’s solutions capabilities for the nuclear power sector via a rollup ~~providers~~ of essential services providers to the industry. To ensure efficient and streamlined operations for the business, ~~the Company has consolidated~~we have brought all of the engineering services together into one organization ~~with~~under one ~~leader;~~leader, and the ~~NITC~~Workforce Solutions teams together as one team under one leader. The business units ~~operating~~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 ~~GSE~~us as a unique provider to industry vs. providers of specific niche services. The unified ~~go-to market~~go-to-market efforts, such as cross-selling capability should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. As a result of a rejuvenated marketing effort, ~~the Company is~~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 ~~creating~~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, ~~GSE is~~we are poised to benefit from and exploit this investment.

Organic growth through new and compelling technology:

While ~~the company was~~ managing through the pandemic, in parallel, ~~the~~our leadership was ~~working to investigate~~investigating compelling opportunities by which ~~new offerings that uniquely result from the combination of~~we could utilize our capabilities ~~across GSE could~~to create significant value for the industry and advance the efforts of decarbonizing the power sector. As a result, ~~the Company has~~we have identified a robust pipeline of new and compelling technology solutions to develop and take to market. Net new solutions, ~~would create~~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 ~~the Company has~~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. ~~GSE’s~~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, ~~Enterprise,~~ providing the technology ~~solution~~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 ~~Data Validation and Reconciliation (DVR)~~DVR (implemented by ~~GSE’s~~ True ~~North division)~~North) that enhances the quality of data for plant performance insights, analysis and decision making, ~~provides~~providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.

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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®~~DesignEP^® and ~~RELAP5-HD®~~RELAP5-HD^® solutions. Our entire ~~JADETM~~JADE^TM suite of simulation software, including industry leading ~~JTOPMERET®~~JTOPMERET^® and ~~JElectricTM~~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®~~SimExec^® and OpenSim^TM platforms enables customers to be more efficient in the daily operation of their simulators. We have brought ~~SimExec®~~ SimExec^®and ~~OpenSimTM~~ 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. ~~GSE has~~We have pioneered a number of industry standards and ~~intends~~intend to continue to be one of the most innovative companies in our industry. During the three months ended June 30, 2022 and 2021, we have made R&D investments totaling $182 thousand and $154 thousand, respectively. During the six months ended June 30, 2022 and 2021, we have made R&D investments totaling $324 thousand and $311 thousand, respectively.

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

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

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

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

Employees

As of June 30, ~~2021,~~2022, we had approximately ~~381~~286 employees, which includes approximately ~~194~~197 employees in our Performance segment and approximately ~~187~~89 employees in our ~~NITC~~Workforce Solutions segment.

Backlog

As of June 30, ~~2021,~~2022, we had approximately ~~$37.5~~$34.0 million of total gross revenue backlog, which included ~~$27.7~~$27.5 million of Performance backlog and ~~$9.8~~$6.5 million of ~~NITC~~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.

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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 isare unique to the industry and capable of addressing the entire power generation life cycle. As we move forward in alignment with client and industry goals targeting clean energy production and overall decarbonization we are positioned to be at the forefront in three critical areas:

• optimization of existing generation assets

• design support and deployment of advanced reactor designs

• integration with renewable power sources

Optimizing Existing Generation Assets

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

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Advanced Reactor Designs & Deployment

Designers of first-of-a-kind plants or existing plants need a highly accurate dynamic simulation platform to model a wide variety of design assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in deployment of new technology, often involving the integration of disparate technologies for the first time, a high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, ~~GSE was~~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~~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:

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With nuclear power being such a high percentage of carbon free power generation, the continued safe and efficient operation of these plants is critical to meeting decarbonization goals. We help the industry achieve these goals through better training and provide engineering services to optimize performance while maintaining regulatory compliance. Our focus is on products and services to improve the efficiency and lower operating costs for existing power generation ~~assets. We also~~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, ~~GSE provides~~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, ~~GSE has~~we have delivered more nuclear power plant simulators than any other company in the world.

Even prior to the COVID pandemic, ~~GSE~~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 ~~enabling~~enable the training organization to be more flexible and efficient.

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~~GSE’s~~Our simulation solutions not only address industry training needs, but are used for ~~Simulation Assisted Engineering,~~simulation assisted engineering, the process of using simulation to virtually test and commission plant designs prior to construction. Because new builds and upgrades to existing plants result in deployment of new technology, ~~GSE’s~~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, ~~GSE~~our technology is used to improve the efficiency of existing power generation assets. Our ~~Thermal System Monitoring~~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 ~~Data Validation and Reconciliation~~DVR techniques, ~~GSE~~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,~~engineering programs, helping client engineers keep track of ~~Engineering Program~~engineering program inspection and monitoring requirements aimed at safe plant operations. This reduces the engineering workload of our customers, saving costs and enabling staff to focus on the most critical activities.

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

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

• Engineering ~~Programs~~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

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

- Workforce ~~Solutions: Nuclear Industry Training and Consulting~~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 priced,~~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. ~~GSE provides~~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. ~~GSE~~We also ~~provides~~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~~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.

~~Table of Contents~~

In addition to the core training and staffing business lines in the nuclear sector, we ~~have~~continue to see significant organic growth opportunity with our ~~workforce solutions and consulting services~~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 ~~already~~ well positioned to ~~offer expanded workforce solutions~~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 ~~NITC organization~~Workforce Solutions segment with our ~~Engineering and~~ Performance ~~group. NITC is~~Improvement Solutions segment. The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and ~~we have already been awarded contracts~~our success is showing with contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies ~~focused on~~dedicated to clean energy solutions. ~~Further the U.S. government has already announced intentions to increase spending in key areas such as communication, clean energy, manufacturing, transportation, and environmental projects.~~ We ~~anticipated these developments and~~ have ~~made key hires~~continued to better position ~~GSE~~ourselves to support ~~those opportunities.~~these opportunities with strategic hires and staff alignment. As the ~~pandemic has shown, we~~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. Our~~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. ~~This flexibility combined with our ability to support all~~In fact, Workforce Solutions is uniquely positioned for growth in these types of ~~these areas~~employment environments. Our flexible solutions, and specialized industry experience position ~~GSE~~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 ~~nuclear industry training and consulting (workforce solutions)~~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.~~Workforce Solutions.

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Results of Operations

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

	Three Months Ended										Six Months Ended										Three Months Ended										Six Months Ended
(in thousands)	June 30, 2021					June 30, 2020					June 30, 2021					June 30, 2020					June 30, 2022					June 30, 2021					June 30, 2022					June 30, 2021
	$			%		$			%		$			%		$			%		$			%		$			%		$			%		$			%
Revenue	$	13,522		100.0	%	$	14,340		100.0	%	$	26,626		100.0	%	$	32,045		100.0	%	$	12,745		100.0	%	$	13,522		100.0	%	$	25,020		100.0	%	$	26,626		100.0	%
Cost of revenue		10,833		80.1	%		10,778		75.2	%		21,009		78.9	%		24,368		76.0	%		9,573		75.1	%		10,833		80.1	%		19,421		77.6	%		21,009		78.9	%
Gross profit		2,689		19.9	%		3,562		24.8	%		5,617		21.1	%		7,677		24.0	%		3,172		24.9	%		2,689		19.9	%		5,599		22.4	%		5,617		21.1	%

Operating expenses:
Selling, general and administrative		3,522		26.0	%		4,722		32.9	%		7,256		27.3	%		9,670		30.2	%		4,410		34.6	%		3,522		26.0	%		8,917		35.6	%		7,256		27.3	%
Research and development		154		1.1	%		179		1.2	%		311		1.2	%		389		1.2	%		182		1.4	%		154		1.1	%		324		1.3	%		311		1.2	%
Restructuring charges		-		0.0	%		-		0.0	%		808		3.0	%		10		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%		808		3.0	%
Loss on impairment		-		0.0	%		-		0.0	%		-		0.0	%		4,302		13.4	%		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%
Depreciation		71		0.5	%		70		0.5	%		147		0.6	%		178		0.6	%		72		0.6	%		71		0.5	%		144		0.6	%		147		0.6	%
Amortization of definite-lived intangible assets		303		2.2	%		444		3.1	%		643		2.4	%		1,114		3.5	%
Amortization of intangible assets																						231		1.8	%		303		2.2	%		491		2.0	%		643		2.4	%
Total operating expenses		4,050		30.0	%		5,415		37.8	%		9,165		34.4	%		15,663		48.9	%		4,895		38.4	%		4,050		30.0	%		9,876		39.5	%		9,165		34.4	%
Operating loss		(1,361	)	(10.1	)%		(1,853	)	(12.9	)%		(3,548	)	(13.4	)%		(7,986	)	(25.0	)%		(1,723	)	(13.5	)%		(1,361	)	(10.1	)%		(4,277	)	(17.2	)%		(3,548	)	(13.4	)%
Interest expense, net		(49	)	(0.4	)%		(187	)	(1.3	)%		(103	)	(0.4	)%		(428	)	(1.3	)%		(358	)	(2.8	)%		(49	)	(0.4	)%		(506	)	(2.0	)%		(103	)	(0.4	)%
Gain on derivative instruments, net		-		0.0	%		47		0.3	%		-		0.0	%		4		0.0	%
Other income, net		4,637		34.3	%		24		0.2	%		4,638		17.4	%		53		0.2	%
Income (loss) before income taxes		3,227		23.9	%		(1,969	)	(13.7	)%		987		3.7	%		(8,357	)	(26.1	)%
Change in fair value of derivative instruments, net																						695		5.5	%		-		0.0	%		114		0.5	%		-		0.0	%
Other (loss) income, net																						(72	)	(0.6	)%		4,637		34.3	%		(56	)	(0.2	)%		4,638		17.4	%
(Loss) income before income taxes																						(1,458	)	(11.4	)%		3,227		23.9	%		(4,725	)	(18.9	)%		987		3.7	%
(Benefit from) provision for income taxes		(4	)	0.0	%		180		1.3	%		(39	)	(0.1	)%		50		0.2	%		(57	)	(0.4	)%		(4	)	0.0	%		110		0.4	%		(39	)	(0.1	)%
Net income (loss)	$	3,231		23.9	%	$	(2,149	)	(15.0	)%	$	1,026		3.9	%	$	(8,407	)	(26.2	)%
Net (loss) income																					$	(1,401	)	(11.0	)%	$	3,231		23.9	%	$	(4,835	)	(19.3	)%	$	1,026		3.9	%

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Revenue

~~Revenue~~Consolidated revenue for the three months ended June 30, ~~2021~~2022 totaled ~~$13.5~~$12.7 million, which was 6% less than the ~~$14.3~~$13.5 million of revenue for the three months ended June 30, ~~2020.~~2021. Revenue for the six months ended June 30, ~~2021~~2022 totaled ~~$26.6~~$25.0 million, which was ~~17%~~6% less than the ~~$32.0~~$26.6 million of revenue for the six months ended June 30, ~~2020.~~2021.

	Three Months Ended									Six Months Ended									Three Months Ended									Six Months Ended
(in thousands)	June 30, 2021		June 30, 2020		Change					June 30, 2021		June 30, 2020		Change					June 30, 2022		June 30, 2021		Change					June 30, 2022		June 30, 2021		Change
Revenue:					$			%						$			%						$			%						$			%
Performance	$	6,862	$	8,273		(1,411	)	(17	)%	$	13,943	$	17,984		(4,041	)	(22	)%	$	7,953	$	6,862		1,091		16	%	$	14,350	$	13,943		407		3	%
NITC		6,660		6,067		593		10	%		12,683		14,061		(1,378	)	(10	)%
Workforce Solutions																				4,792		6,660		(1,868	)	(28	)%		10,670		12,683		(2,013	)	(16	)%
Total revenue	$	13,522	$	14,340		(818	)	(6	)%	$	26,626	$	32,045		(5,419	)	(17	)%	$	12,745	$	13,522		(777	)	(6	)%	$	25,020	$	26,626		(1,606	)	(6	)%

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Performance Improvement Solutions revenue ~~decreased by 17% from $8.3 million to $6.9 million~~ for the three months ended June 30, ~~2021 and 2020, respectively. The decrease in~~2022 totaled $8.0 million, which was a 16% increase from the $6.9 million of revenue was primarily due to lower orders on the simulator part of the business, but offsetting with improvements in specialized engineering and consulting services. We recorded total Performance Improvement Solutions orders of $5.8 million and $7.1 million for the three months ended June 30, ~~2021~~2021. The increase in revenue was primarily attributable to large simulator and ~~2020,~~upgrade projects offset by lower revenue in consulting services. Total Performance Improvement Solutions orders of $3.8 million and $5.8 million were recorded for the three months ended June 30, 2022, respectively.

Performance Improvement Solutions revenue ~~decreased by 22% from $18.0 million to $13.9 million~~ for the six months ended June 30, ~~2021 and 2020, respectively. The decrease~~2022 totaled $14.4 million, which was a 3% increase from the $13.9 million of revenue was primarily due to several significant SDB projects ended in the prior fiscal year and delays in commencing new contracts remotely due to the COVID-19 pandemic. We recorded total Performance Improvement Solutions orders of $11.4 million and $12.5 million for the six months ended June 30, 2021. The increase of revenue was primarily attributable to several significant simulator upgrade projects which began later in 2021 with continued work performed in the first six months of 2022. Total Performance Improvement Solutions orders of $10.2 million and ~~2020,~~$11.4 million were recorded for the six months ended June 30, 2022 and 2021, respectively.

For the three months ended June 30, ~~2021, Nuclear Industry Training and Consulting (workforce solutions)~~2022, Workforce Solutions revenue ~~increased~~decreased by ~~10%~~28% to ~~$6.7~~$4.8 million compared to revenue of ~~$6.1~~$6.7 million for the three months ended June 30, ~~2020.~~2021. The ~~increase~~decrease in revenue was ~~primarily~~ due to a ~~large new customer contract which started~~minor reduction in ~~Q1 2021. We recorded total~~staffing needs from our major customers. Total new orders of $3.1 million and $5.0 million ~~and $(0.3) million~~were recorded for the three months ended June 30, 2022 and 2021, ~~and 2020, respectively~~respectively.

For the six months ended June 30, ~~2021, Nuclear Industry Training and Consulting (workforce solutions)~~2022, Workforce Solutions revenue decreased by ~~10%~~16% to ~~$12.7~~$10.7 million compared to revenue of ~~$14.1~~$12.7 million for the six months ended June 30, ~~2020.~~2021. The decrease in revenue was primarily due to ~~stoppage~~the wind down of ~~existing projects and ending of some~~ large projects resulting in a reduction in demand for staffing from our major customers. ~~We recorded total~~Total new orders of $7.8 million and $12.4 million ~~and $14.0 million~~were recorded for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

As of June 30, ~~2021,~~2022, our backlog was ~~$37.5~~$34.0 million, of which, ~~$27.7~~$27.5 million was attributed to the Performance segment and ~~$9.8~~$6.5 million was attributed to the ~~Nuclear Industry Training and Consulting (workforce solutions)~~Workforce Solutions segment. As of December 31, ~~2020,~~2021, our backlog was ~~$40.4~~$41.3 million with ~~$30.3~~$31.8 million attributed to our Performance segment and ~~$10.1~~$9.5 million to ~~Nuclear Industry Training and Consulting (workforce solutions).~~Workforce Solutions.

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Gross Profit

Gross profit was ~~$2.7~~$3.2 million ~~or 19.9%~~and 24.9% of revenue and ~~$3.6~~$2.7 million ~~or 24.8%~~and 19.9% of revenue for the three months ended June 30, ~~2021~~2022 and ~~2020 ,~~2021, respectively. Gross profit was $5.6 million ~~or 21.1%~~and 22.4% of revenue and ~~$7.7~~$5.6 million ~~or 24.0%~~and 21.1% of revenue for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

(in thousands)	Three Months Ended								Six Months Ended								Three Months Ended								Six Months Ended
	June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020				June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
	$		%		$		%		$		%		$		%		$		%		$		%		$		%		$		%
Gross profit:
Performance Improvement Solutions	$	1,760	25.6	%	$	2,730	33.0	%	$	3,952	28.3	%	$	5,758	32.0	%	$	2,568	32.3	%	$	1,760	25.6	%	$	4,383	30.5	%	$	3,952	28.3	%
Nuclear Industry Training and Consulting		929	13.9	%		832	13.7	%		1,665	13.1	%		1,919	13.6	%
Workforce Solutions																		604	12.6	%		929	13.9	%		1,216	11.4	%		1,665	13.1	%
Total gross profit	$	2,689	19.9	%	$	3,562	24.8	%	$	5,617	21.1	%	$	7,677	24.0	%	$	3,172	24.9	%	$	2,689	19.9	%	$	5,599	22.4	%	$	5,617	21.1	%

The Performance Improvement Solutions segment’s gross profit ~~decreased~~increased by ~~$970 thousand~~$0.8 million during three months ended June 30, ~~2021~~2022 over three months ended June 30, ~~2020.~~2021. The Performance Improvement Solutions segment’s gross profit ~~decreased~~increased by ~~$1.8~~$0.4 million during six months ended June 30, ~~2021~~2022 over six months ended June 30, ~~2020.~~2021. The ~~decrease~~increase is primarily related to ~~lower revenue, underutilization of staff~~an increase in large simulator build and ~~several significant SDB~~upgrade projects ~~completed in the prior year that were not replaced with new orders.~~ awarded this year.

The ~~Nuclear Industry Training and Consulting (workforce solutions)~~Workforce Solutions segment’s gross profit ~~increased~~decreased by ~~$97 thousand~~$0.3 million during three months ended June 30, ~~20201~~2022 over the three months ended June 30, ~~2020.~~2021. The ~~Nuclear Industry Training and Consulting (workforce solutions)~~Workforce Solutions segment’s gross profit decreased by ~~$254 thousand~~$0.4 million during the six months ended June 30, ~~2021~~2022 over the six months ended June 30, ~~2020.~~2021. The decrease in ~~gross profit~~the three months and six months ended June 30, 2022 was primarily ~~driven by a decrease in revenue~~due to the reduction in the ~~NITC business and new contracts undertaken at lower margins, partially offset by a reduction in direct costs.~~demand from existing customers for additional workforce professionals.

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

Selling, general and administrative (SG&A) expenses totaled ~~$3.5~~$4.4 million and ~~$4.7~~$3.5 million for the ~~three~~six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Selling, general and administrative (SG&A) expenses totaled ~~$7.3~~$8.9 million and ~~$9.7~~$7.3 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Fluctuations in the components of SG&A spending were as follows.

	Three months ended					Six Months ended					Three months ended					Six months ended
(in thousands)	June 30, 2021			June 30, 2020		June 30, 2021			June 30, 2020		June 30, 2022		June 30, 2021			June 30, 2022		June 30, 2021

Corporate charges	$	2,632		$	2,792	$	5,390		$	6,471	$	3,375	$	2,632		$	6,857	$	5,390
Business development		749			810		1,516			1,746		721		749			1,560		1,516
Facility operation & maintenance (O&M)		268			255		468			491		216		268			393		468
Provision for loss on legal settlement		-			861		-			861
Bad debt (recovery) expense		(137	)		-		(133	)		93
Bad debt expense												97		(137	)		97		(133	)
Other		10			4		15			8		1		10			10		15
Total	$	3,522		$	4,722	$	7,256		$	9,670	$	4,410	$	3,522		$	8,917	$	7,256

Corporate charges

During the three months ended June 30, ~~2021,~~2022, corporate charges ~~decreased~~increased by ~~$0.2~~$0.7 million over the same period of the prior year. During the six months ended June 30, ~~2021~~2022 corporate charges ~~decreased~~increased by ~~$1.1~~$1.5 million over the same period of the prior year. The ~~decrease~~increase was primarily due to a ~~reduction of external~~$0.6 million increase in stock compensation expense, a $0.4 million increase in indirect labor & burden cost due to increased headcount and a $0.5 million increase in legal ~~audit~~fees and ~~temporary worker’s fees of $0.9 million~~other business expenses during the six months ended June 30, ~~2021.~~2022.

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Business development expenses

Business development expense decreased ~~$0.1 million~~$28 thousand during the three months ended June 30, ~~2021~~2022 over the same period of the prior ~~fiscal~~ year. Business development expense ~~decreased $0.2 million~~increased $44 thousand during the six months ended June 30, ~~2021~~2022 over the same period of the prior fiscal year. The ~~decrease~~increase was primarily due to ~~lower commission costs~~increased recruiting fees and ~~reduced~~Indirect Labor & Burden due to increased headcount during the six months ended June 30, ~~2021.~~2022.

Facility operation & maintenance (“O&M”)

Facility O&M expenses ~~increased $13~~decreased $52 thousand for three months ended June 30, ~~2021,~~2022, compared to the same period in ~~2020. The increase was mainly due to a utility fee during the three months ended June 30,~~ 2021. Facility O&M expenses decreased ~~$23~~$75 thousand for six months ended June 30, ~~2021,~~2022, compared to the same period in ~~2020.~~2021. The decrease in facility O&M during fiscal ~~2021~~2022 was mainly due to ~~lease terminations in the first half~~an increased allocation of ~~2020.~~facility cost from O&M to COGS.

Bad debt (recovery) expense

We recorded ~~$(133)~~$97 thousand and ~~$93~~$(137) thousand of bad debt expense (recovery) during the three months ended June 30, 2022 and 2021, respectively. We recorded $97 thousand and $(133) thousand of bad debt expense (recovery) during the six months ended June 30, 2022 and 2021, ~~and 2020,~~ respectively. ~~The bad debt recovery as of June 30, 2021 was driven by payment received for previously recorded bad debt.~~

Research and development

Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled ~~$154~~$182 thousand and ~~$179~~$154 thousand for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Research and development costs totaled ~~$311~~$324 thousand and ~~$389~~$311 thousand for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The ~~decrease~~increase was mainly due to ~~lower~~higher headcount.

Restructuring

~~There was~~We recorded no restructuring ~~cost recorded during~~charges for the three and six months ended June 30, ~~2021 and 2020.~~2022. During the three and six months ended June 30, 2021, ~~and 2020,~~ we recorded restructuring charges of ~~$808~~$0 thousand and ~~$10~~$808 thousand, respectively. The ~~increase~~decrease was mainly due to final charges related to the liquidation of our Sweden operations during the prior period, pursuant to our foreign restructuring plan.

~~Loss on impairment~~

Table of ~~goodwill and definite-lived intangible assets~~Contents

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

Depreciation

We recorded depreciation expense of ~~$71~~$72 thousand and ~~$70~~$71 thousand for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Depreciation expense was ~~$147~~$144 thousand and ~~$178~~$147 thousand for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The reduction of ~~$31~~$3 thousand for the six months ended June 30, ~~2021~~2022 over the same period in ~~2020~~2021 was due primarily to assets becoming fully depreciated in ~~2021.~~2022.

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled ~~$0.3 million~~$231 thousand and ~~$0.4 million~~$303 thousand for the three months ended June 30, 2022 and 2021, respectively, and ~~2020~~$491 thousand and ~~$0.6 million and $1.1 million~~$643 thousand for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The decrease in amortization expense was primarily due to the ~~reduction in~~amortization of Customer Contracts and Relationships, which are amortized at a declining rate over the ~~carrying value of DP Engineering’s intangible assets due to the $4.3 million impairment in Q1 2020.~~15 year useful life.

Interest expense, net

Interest expense totaled ~~$49~~$358 thousand and ~~$187~~$49 thousand for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Interest expense totaled ~~$103~~$506 thousand and ~~$428~~$103 thousand for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The ~~decrease~~increase for the three and six month periods was due to ~~a reduction~~an increase in total indebtedness compared to ~~six months ended June 30, 2020.~~prior period.

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Other (loss) income, net

For the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, we recognized other (loss) income, net of ~~$4.6~~$(0.1) million and ~~$24 thousand,~~$4.6 million, respectively. For the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, we recognized other income, net of $(0.1) million and $4.6 million, ~~and $53 thousand,~~ respectively. The ~~increase~~decrease was primarily due to the recording of $5.1 million Employee Retention Credit during the 2021 period offset by a VAT write-off of $0.5 ~~million,~~million. We paid a VAT taxes for subcontractor equipment purchase and had pursued the collection of this VAT refund for ~~a couple of~~multiple years. In May of 2021, we were informed by our tax advisor that this VAT refund was no longer collectable.

Income ~~taxes benefit~~tax (benefit) expense

Income tax expense ~~(benefit)~~ for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit of $4$(57) thousand for the three months ended June 30,2022 was comprised mainly of current foreign tax benefit and state tax ~~expense~~expense. The total income tax benefit of ~~$180~~$(4) thousand for the three months ended June 30, ~~2021 and 2020, respectively, were~~2021was comprised mainly of foreign tax benefit ~~or expense~~ and state tax expense. Total income tax ~~(benefit)~~ expense of ~~$(39)~~$110 thousand for the six months ended June 30, 2022 was comprised mainly of current foreign and state tax expense and deferred federal and state tax expense related to the portion of ~~$50~~goodwill which cannot be offset by deferred tax assets. Total tax benefit of $(39) thousand for the six months ended June 30, 2021 ~~and 2020, respectively, were~~was comprised mainly of foreign tax benefit ~~or expense~~ and state tax expense.

Our income effective tax rate was ~~(0.1)%~~3.9% and ~~(4.0)~~(2.3)% for the three and six months ended June 30, ~~2021,~~2022, respectively. For the three and six months ended June 30, ~~2021,~~2022, the difference between our income tax ~~benefit~~expense and (benefit), at an effective tax rate of ~~(0.1)%~~3.9% and ~~(4.0)~~(2.3)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes.

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Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, Management makes several estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired, valuation of ~~long-lived assets to be disposed, valuation of~~ stock-based compensation awards and the recoverability of deferred tax assets. These critical accounting policies and estimates are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our most recent Annual Report on Form 10-K, filed with the SEC on ~~April 13, 2021.~~March 31, 2022. In addition, in the quarter ended 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 June 30, ~~2021,~~2022, our cash, ~~and~~ cash equivalents and restricted cash totaled ~~$3.8~~$6.9 million, compared to ~~$6.7~~$3.6 million as of December 31, ~~2020.~~2021.

As of June 30, 2022, we have long-term restricted cash of $1.0 million. We have restricted cash of $1.1 million to secure four letters of credit with various customers and $0.5 million to secure our corporate credit card program.

For the six months ended June 30, 2022 and 2021, net cash provided by operating activities were $1.6 million and ~~2020,~~ net cash used in operating activities ~~was~~were $1.1 ~~million and net cash provided by operating activities was $2.0~~ million, respectively. The ~~decrease of $3.1 million~~increase in cash flows ~~used in~~provided by operating activities was primarily driven by ~~lower than expected orders resulting~~ERC refunds and increased collections in ~~less~~the six months ended June 30, 2022 and slower billing in the first half of ~~2021 and increased collections due to large milestone payments of large projects in the prior year.~~2021.

Net cash used in investing activities totaled ~~$0.5~~$0.3 million and ~~$0.1~~0.5 million for the six months ended June 30, 2022 and 2021, ~~and 2020,~~ respectively. ~~The increase in the cash outflow for investing activities year over year was primarily driven by the increase of capital expenditures during the six months ended June 30, 2021.~~

For the six months ended June 30, 2022 and 2021, net cash provided by financing activities was $2.2 million and ~~2020,~~ net cash used in financing activities was $1.3 million, ~~and net~~respectively. The increase in cash provided by financing activities of $3.4 million was primarily driven by $4.8 million ~~respectively. The decrease in cash used in financing activities~~ of ~~$6.0 million was driven by a repayment on term loans~~proceeds received from issuance of ~~$8.6 million~~Convertible Note, offset by a ~~draw on~~$1.8 million repayment of the line of credit ~~of $3.5 million~~ during the six months ended June 30, ~~2020.~~2022.

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Paycheck Protection Program Loan ~~(“PPP Loan”)~~

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

The PPP Loan contains events of default and other provisions customary for a loan of this type, including: (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100% of the principal amount of the loan is guaranteedas administered by the ~~Small Business Administration (“SBA”) and (3) an amount up~~SBA (further described in Note 4 to the full principal amount may qualify for loan forgiveness in accordance with the terms of CARES Act. We have accumulated forgivable expenses beyond our loan amount and provided all prescribed support with our application for forgiveness with our Bank. Our Bank hasConsolidated Financial Statements). Citizens reviewed our application for forgiveness and associated documentation, and ~~forwarded it~~ on February 26, 2021 forwarded our application to the SBA with ~~their~~Citizens’ determination that the loan is fully forgivable.

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

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

Credit Facilities

On ~~December 29, 2016, we entered into~~February 23, 2022, the Company issued a ~~3-year $5.0~~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 ~~revolving line~~owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. As of credit facility (“RLOC”) with the Bank to fund general working capital needs and provide funding for acquisitions. The credit facility agreement was subject to certain financial covenants and reporting requirements. The Bank amended the agreement with us several times for acquisition lending and covenant violations.

On March 29, 2021, due to a projected violation of Q1 2021 leverage ratio, we signed the Ninth Amendment and Reaffirmation Agreement dated March 29, 2021 (the “Ninth Amendment”), with the Bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and we agreed, for each quarter thereafter, that the fixed charge coverage ratio would not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio (starting on September 30, 2021) as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022, ~~and (iv) 2.00~~we had four letters of credit totaling $1.1 million outstanding to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter. We are also required to maintain a minimum of $2.5 million in aggregate USA liquidity pursuant to the Ninth Amendment. As part of the amendment, we agreed, at closing, (i) to make a $0.5 million pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75 thousand to reduce the RLOC. We incurred $25 thousand of amendment fees related to this amendment during the year ended December 31, 2020.

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

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

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

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

~~Going Concern Consideration~~

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

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

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

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

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

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Non-GAAP Financial Measures

Adjusted EBITDA

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

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Net income (loss)	$	3,231		$	(2,149	)	$	1,026		$	(8,407	)
Net (loss) income													$	(1,401	)	$	3,231		$	(4,835	)	$	1,026
Interest expense, net		49			187			103			428			358			49			506			103
Provision for income taxes		(4	)		180			(39	)		50			(57	)		(4	)		110			(39	)
Depreciation and amortization		481			598			994			1,451			387			481			802			994
EBITDA		3,757			(1,184	)		2,084			(6,478	)		(713	)		3,757			(3,417	)		2,084
Provision for legal settlement		-			861			-			861
Loss on impairment		-			-			-			4,302
Employee retention credit		(5,075	)		-			(5,075	)		-			-			(5,075	)		-			(5,075	)
Restructuring charges		-			-			808			10			-			-			-			808
Stock-based compensation expense		463			177			501			324			693			463			1,101			501
Change in fair value of derivative instruments		-			(47	)		-			(4	)
Acquisition-related expense		-			7			-			188
Change in fair value of derivative instruments, net														(695	)		-			(114	)		-
VAT write-off		450			-			450			-			-			450			-			450
Adjusted EBITDA	$	(405	)	$	(186	)	$	(1,232	)	$	(797	)	$	(715	)	$	(405	)	$	(2,430	)	$	(1,232	)

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

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

(in thousands)	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020			June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021

Net income (loss)	$	3,231		$	(2,149	)	$	1,026		$	(8,407	)
Provision for legal settlement		-			861			-			861
Loss on impairment		-			-			-			4,302
Net (loss) income													$	(1,401	)	$	3,231		$	(4,835	)	$	1,026
Employee retention credit		(5,075	)		-			(5,075	)		-			-			(5,075	)		-			(5,075	)
Restructuring charges		-			-			808			10			-			-			-			808
Stock-based compensation expense		463			177			501			324			693			463			1,101			501
Change in fair value of derivative instruments		-			(47	)		-			(4	)
Acquisition-related expense		-			7			-			188
Change in fair value of derivative instruments, net														(695	)		-			(114	)		-
VAT write-off		450			-			450			-			-			450			-			450
Amortization of intangible assets related to acquisitions		303			444			643			1,114			231			303			491			643
Adjusted net loss	$	(628	)	$	(707	)	$	(1,647	)	$	(1,612	)	$	(1,172	)	$	(628	)	$	(3,357	)	$	(1,647	)

Adjusted net loss per common share – diluted	$	(0.03	)	$	(0.03	)	$	(0.08	)	$	(0.08	)	$	(0.06	)	$	(0.03	)	$	(0.16	)	$	(0.08	)

Weighted average shares outstanding used to compute adjusted net loss per share - diluted⁽¹⁾		20,647,426			20,407,958			20,638,116			20,375,446			21,033,447			20,647,426			21,006,910			20,638,116

⁽¹⁾ During the three and six months ended June 30, 2022, we reported a U.S. GAAP net loss and an adjusted net loss. Accordingly there was no dilutive shares from RSUs included in the adjusted net loss per share calculation that were considered anti-dilutive when calculating the net loss per share.

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

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

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

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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, ~~2020.~~2021, filed with the SEC on March 31, 2022, and in our form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 15, 2022.

Through ~~Management’s~~management’s evaluation of controls as of December 31, ~~2020,~~2021 it was determined that athe material weakness ~~existed and~~ related to management’s review of reconciliations over unbilled receivables and billings in excess of revenue ~~earned.~~ earned were unremediated. 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. No additional material weaknesses were identified in the course of our assessment of our internal controls as of June 30, 2022, and we continue to remediate the material weaknesses identified as of December 31, 2021, and as of March 31, 2022.

Our remediation of ~~this material~~the remaining control weakness ~~was initiated by~~from 2021 included the hiring of additional skilled personnel to prepare and review reconciliations over unbilled receivables and billings in excess of revenue ~~earned.~~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. Remediation procedures will include developing enhanced documentation of review steps performed prior to distributing financial statements for reporting. As well as concluding on the financial presentation for items noted on a list of significant and unusual transactions identified for the respective 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.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

~~The Company and its subsidiaries~~We are, from time to time, involved in ordinary routine litigation incidental to the conduct of ~~its~~our business. ~~The Company and its~~Neither we nor any of our subsidiaries are ~~not~~ a party to, ~~and its~~nor is any of our property ~~is not~~ the subject of, any material pending legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on ~~the Company’s~~our business, financial condition or results of ~~operations.~~operations.

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

The Company is involved in litigation in the ordinary course of business. While it is too early to determine the outcome of such matters, management does not expect the resolution of these matters to have a material impact on the Company’s financial position or results of operations.

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Item ~~1a.~~1A.

Risk Factors

The ~~following additional risk factors should be read in conjunction with the risk factors set forth under “Item 1A. Risk Factors” in our 2020 Form 10-K. Except as described herein, there have been~~Company has no material changes ~~with respect~~ to the ~~risk factors disclosed~~disclosure on this matter made in ~~our 2020~~its Annual Report on Form ~~10-K.~~10-K for the fiscal year ended December 31, 2021.

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

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.

We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.

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

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

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

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

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

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

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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.

	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

4239

Table of Contents

SIGNATURES

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

Date: August ~~16, 2021~~15, 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)

4340

(Mark One)
☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, ~~2021~~2022

		or

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

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

~~1332 LONDONTOWN BLVD, SYKESVILLE~~6940 Columbia Gateway Dr., Suite 470, Columbia MD		~~21784~~21046
(Address of principal executive offices)		(Zip Code)

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

Emerging growth company ☐

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

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of June 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021	3
	Unaudited Consolidated Statements of Operations for the ~~Three and~~ Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021	4
	Unaudited Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~ for the ~~Three and~~ Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the ~~Three and~~ Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021	6
	Unaudited Consolidated Statements of Cash Flows for Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021	8
	Notes to the Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2423
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3836
Item 4.	Controls and Procedures	39 37
PART II.	OTHER INFORMATION	39 38
Item 1.	Legal Proceedings	39 38
Item 1A.	Risk Factors	4038
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4138
Item 3	Defaults Upon Senior Securities	4138
Item 4	Mine Safety Disclosures	4138
Item 5.	Other Information	4138
Item 6.	Exhibits	4239

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

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

Stock-based compensation expense																								-		0		1,025			0			0			-			0			1,025
Common stock issued for RSUs vested																								317		3		(3	)		0			0			-			0			0
Shares withheld to pay taxes																								-		0		(203	)		0			0			-			0			(203	)
Foreign currency translation adjustment																								-		0		0			0			75			-			0			75
Net loss																								-		0		0			(4,835	)		0			-			0			(4,835	)

Balance, June 30, 2022																								22,850	$	228	$	81,324		$	(59,419	)	$	(29	)		(1,599	)	$	(2,999	)	$	19,105

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

Stock-based compensation expense		-		0		501			0			0			-			0			501			-		0		501			0			0			-			0			501
Common stock issued for RSUs vested		268		3		(3	)		0			0			-			0			0			268		3		(3	)		0			0			-			0			0
Shares withheld to pay taxes		-		0		(161	)		0			0			-			0			(161	)		-		0		(161	)		0			0			-			0			(161	)
Foreign currency translation adjustment		-		0		0			0			1,132			-			0			1,132			-		0		0			0			1,132			-			0			1,132
Net income		-		0		0			1,026			0			-			0			1,026			-		0		0			1,026			0			-			0			1,026

Balance, June 30, 2021		22,461	$	225	$	80,024		$	(64,165	)	$	(82	)		(1,599	)	$	(2,999	)	$	13,003			22,461	$	225	$	80,024		$	(64,165	)	$	(82	)		(1,599	)	$	(2,999	)	$	13,003

Balance, January 1, 2020		21,839	$	218	$	79,400		$	(54,654	)	$	(1,846	)		(1,599	)	$	(2,999	)	$	20,119

Stock-based compensation expense		-		0		324			0			0			-			0			324
Common stock issued for RSUs vested		311		3		(3	)		0			0			-			0			0
Shares withheld to pay taxes		-		0		(45	)		0			0			-			0			(45	)
Foreign currency translation adjustment		-		0		0			0			20			-			0			20
Net loss		-		0		0			(8,407	)		0			-			0			(8,407	)

Balance, June 30, 2020		22,150	$	221	$	79,676		$	(63,061	)	$	(1,826	)		(1,599	)	$	(2,999	)	$	12,011

Cash and cash equivalents	$	5,364	$	3,829
Restricted cash, current		632		0
Restricted cash included in other long-term assets		951		0
Total cash, cash equivalents and restricted cash	$	6,947	$	3,829


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