| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Investments in partnerships, joint ventures, and less-than-majority owned subsidiaries in which the Company has significant influence are accounted for under the equity method. Revisions Historically, the Company recognized revenue on multiple element arrangements which included sales of its EnVision software product as delivery occurred on each element except post contract support ("PCS"). PCS revenue was recognized ratably over the PCS term. During the fourth quarter of 2015, management determined that that Company had not established vendor specific objective evidence ("VSOE") of the fair value for any of the elements in multiple element transactions including sales of its EnVision software licenses. Accordingly, the consolidated financial statements have been revised to recognize all revenue on multiple element transactions including EnVision software license sales ratably over the PCS terms on these transactions since VSOE did not exist for any of the non-software elements in these multiple element transactions. The revision to revenue resulted in a decrease to revenue and an increase in operating loss of $587,000 for the year ended December 31, 2014. The revision also had the effect of increasing billings in excess by $1.2 million, decreasing unbilled receivables by $62,000, increasing prepaid expenses and other current assets by $291,000 and increasing the accumulated deficit by $415,000 at December 31, 2014as a result of the cumulative adjustment for prior periods. Certain prior year amounts have also been revised in the consolidated statements of cash flows to reflect the corrections to Net loss and changes in billings in excess, prepaid expenses and other assets. The revision had no impact on cash provided by operations or the net decrease in cash and cash equivalents. The Company assessed the materiality of these misstatements on prior periods' consolidated financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality Accounting Changes and Error Corrections Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements The following are selected line items from the Company's consolidated financial statements illustrating the effect of these corrections. GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2014 As Reported Adjustment As Revised ASSETS Contract receivables, net $ 15,830 $ (62 ) $ 15,768 Prepaid expenses and other current assets 1,703 291 1,994 Total currents assets 31,729 229 31,958 Total assets $ 45,999 $ 229 $ 46,228 LIABILITIES AND STOCKHOLDERS' EQUITY Billings in excess of revenue earned $ 8,684 $ 1,231 $ 9,915 Total current liabilities $ 20,273 $ 1,231 $ 21,504 Total liabilities $ 22,259 $ 1,231 $ 23,490 Accumulated deficit $ (45,142 ) $ (1,002 ) $ (46,144 ) Total stockholders' equity $ 23,740 $ (1,002 ) $ 22,738 Total liabilities and stockholders' equity $ 45,999 $ 229 $ 46,228 GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended December 31, 2014 As Reported Adjustment As Revised Contract revenue $ 37,930 $ (394 ) $ 37,536 Cost of revenue 26,551 193 26,744 Gross profit 11,379 (587 ) 10,792 Operating loss (6,929 ) (587 ) (7,516 ) Loss before income taxes (6,576 ) (587 ) (7,163 ) Net loss $ (6,742 ) $ (587 ) $ (7,329 ) Basic loss per common share $ (0.38 ) $ (0.03 ) $ (0.41 ) Diluted loss per common share $ (0.38 ) $ (0.03 ) $ (0.41 ) GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year ended December 31, 2014 (in thousands) As Reported Adjustment As Revised Net loss $ (6,742 ) $ (587 ) $ (7,329 ) Comprehensive loss $ (7,359 ) $ (587 ) $ (7,946 ) GSE SYSTEMS, INC, AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) Accumulated Deficit Total Stockholders' Equity As Reported Adjustment As Revised As Reported Adjustment As Revised Balance, December 31, 2013 $ (38,400 ) $ (415 ) $ (38,815 ) $ 30,387 $ (415 ) $ 29,972 Net loss (6,742 ) (587 ) (7,329 ) (6,742 ) (587 ) (7,329 ) Balance, December 31, 2014 $ (45,142 ) $ (1,002 ) $ (46,144 ) $ 23,740 $ (1,002 ) $ 22,738 GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31, 2014 As Reported Adjustment As Revised Cash flows from operating activities: Net loss $ (6,742 ) $ (587 ) $ (7,329 ) Changes in assets and liabilities: Contract receivables, net 10,285 62 10,347 Prepaid expenses and other assets 2,240 193 2,433 Billings in excess of revenue earned 2,109 332 2,441 Net cash provided by operating activities $ 6,649 $ - $ 6,649 Net decrease in cash and cash equivalents $ (2,060 ) $ - $ (2,060 ) Accounting estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates the estimates used, including but not limited to those related to revenue recognition, the allowance for doubtful accounts, estimates of future warranty costs, impairments of goodwill and other intangible assets and contingent consideration to be paid in business acquisitions, valuation of stock based compensation awards, and income taxes. Actual results could differ from these estimates. Revenue recognition The Company recognizes revenue through (1) fixed price contracts on the sale of uniquely designed/customized systems containing hardware, software and other materials which apply only to the Performance Improvement Solutions segment as well as (2) time and material contracts primarily through Nuclear Industry Training and Consulting support and service agreements. In accordance with ASC 605-35 , Construction-Type and Production-Type Contracts ) Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project. As the Company recognizes revenue under the percentage-of-completion method, it provides an accrual for estimated future warranty costs based on historical and projected claims experience. The Company's long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems. The Company's system design contracts do not normally provide for "post contract support" ("PCS") in terms of software upgrades, software enhancements or telephone support. In order to obtain PCS, the customers must normally purchase a separate contract. Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases. The Company recognizes revenue from these contracts ratably over the life of the agreements. Revenue from the sale of software licenses without other elements in the contract and which do not require significant modifications or customization for the Company's modeling tools are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable. We utilize written contracts as a means to establish the terms and conditions by which products support and services are sold to customers. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs after a license key has been delivered electronically to the customer. The Company also recognizes revenue from the sale of software licenses from contracts with multiple deliverables. These software license sales are evaluated under ASC 985-605, Software Revenue Recognition The Company recognizes revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts. Revenue on time and material contracts is recognized as services are rendered and performed. Under a typical time-and-materials billing arrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly. Any unbilled amounts are typically billed the following month. Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs. Cash and cash equivalents Cash and cash equivalents represent cash and highly liquid investments including money market accounts with maturities of three months or less at the date of purchase. Restricted cash Restricted cash consists of the cash collateralization of outstanding letters of credit used for various advance payment, bid, surety and performance bonds, and negative foreign exchange positions which have been segregated into restricted money market accounts with BB&T Bank. BB&T Bank has complete and unconditional control over the restricted money market accounts. At December 31, 2015 and 2014, the Company had approximately $3.5 million and $4.2 million, respectively, of cash in escrow accounts with BB&T Bank. The restricted cash balance has been classified within the consolidated balance sheets as follows: $1.8 million of current assets and $1.8 million of long term assets at December 31, 2015, respectively, compared to $613,000 of current assets and $3.6 million of long-term assets at December 31, 2014. The Company recorded interest income of $10,000 and $7,000 from the escrow accounts for the years ended December 31, 2015 and 2014, respectively. The interest earned on these restricted funds is added to the restricted cash balance. The Company classifies the restriction and release of the cash collateralization of outstanding letters of credit as an investing activity within the consolidated statements of cash flows, as these deposits are not related to borrowings against our line of credit. Contract receivables, net Contract receivables include recoverable costs and accrued profit not billed which represents revenue recognized in excess of amounts billed. Billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets represent advanced billings to clients on contracts in advance of work performed. Generally, such amounts will be earned and recognized over the next twelve months. Billed receivables are recorded at invoiced amounts. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, and specific identification and review of customer accounts. The activity in the allowance for doubtful accounts is as follows: (in thousands) As of and for the years ended December 31, 2015 2014 Beginning balance $ 22 $ 2 Current year provision 101 22 Acquired allowance for doubtful accounts - 20 Current year write-offs (20 ) (22 ) Ending balance $ 103 $ 22 Equipment, software and leasehold improvements, net Equipment and purchased software are recorded at cost and depreciated using the straight-line method with estimated useful lives ranging from three to ten years. Leasehold improvements are amortized over the life of the lease or the estimated useful life, whichever is shorter, using the straight-line method. Upon sale or retirement, the cost and related depreciation are eliminated from the respective accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to expense as incurred. Software development costs Certain computer software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenue and is determined using the straight-line method over the remaining estimated economic life of the product, typically three years. On an annual basis, and more frequently as conditions indicate, the Company assesses the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expected to be generated by the sale of the product. If the undiscounted cash flows are not sufficient to recover the unamortized software costs the Company will write-down the investment to its estimated fair value based on the future undiscounted cash flows. The excess of any unamortized computer software costs over the related net realizable value is written down and charged to costs of revenue. Development expenditures Development expenditures incurred to meet customer specifications under contracts are charged to contract costs. Company sponsored development expenditures are either charged to operations as incurred and are included in selling, general and administrative expenses or are capitalized as software development costs. See Note 8, Software development costs, net Impairment of long-lived assets Long-lived assets, such as equipment, purchased software, capitalized software development costs, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized at the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. During the third quarter of 2015, the Company's new CEO conducted a review of the Company's organizational cost structure and software development plans. Based upon this review, the Company made the decision to terminate its Enterprise Data Management ("EDM") software development program and recorded a $1.5 million write-down of the capitalized balance of its EDM software development projects in the third quarter 2015. Goodwill and intangible assets The Company's intangible assets include amounts recognized in connection with business acquisitions, including customer relationships, contract backlog and software. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for contract backlog and contractual customer relationships which are recognized in proportion to the related projected revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. The Company does not have any intangible assets with indefinite useful lives. Goodwill represents the excess of costs over fair value of assets of businesses acquired. The company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with Accounting Standard Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment, Intangibles — Goodwill and Other ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Under ASU 2011-08, an entity is not required to perform step one of the goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. For the annual goodwill impairment test as of December 31, 2015, the Company performed a quantitative step one goodwill impairment test and concluded that the fair values of each of the reporting units exceeded their respective carrying values. For the annual goodwill impairment test as of December 31, 2014, the Company performed a qualitative assessment as permitted by ASU 2011-08 for the goodwill on reporting units and determined that it was more likely than not that the fair values of each of the reporting units exceeded their respective carrying values. If it is determined as a result of the qualitative assessment permitted by ASU 2011-08 that the fair value of a reporting unit is greater than its carrying value, then no additional testing is performed. If the Step 0 test indicates the fair value of a reporting unit is less than its carrying value, the Company performs the additional impairment test in accordance with the provisions of ASC 350. Foreign currency translation Balance sheet accounts for foreign operations are translated at the exchange rate as of the balance sheet date, and income statement accounts are translated at the average exchange rate for the period. The resulting translation adjustments are included in accumulated other comprehensive loss. Transaction gains and losses resulting from changes in exchange rates are recorded in operating loss in the period in which they occur. For the years ended December 31, 2015, and 2014, foreign currency transaction losses were approximately $30,000 and $180,000, respectively. Accrued warranty As the Company recognizes revenue under the percentage-of-completion method, it provides an accrual for estimated future warranty costs based on historical experience and projected claims for contracts which contain a warranty provision. The activity in the accrued warranty accounts is as follows: (in thousands) As of and for the years ended December 31, 2015 2014 Beginning balance $ 1,456 $ 1,851 Current year provision 626 660 Current year claims (455 ) (1,025 ) Currency adjustment (13 ) (30 ) Ending balance $ 1,614 $ 1,456 Income taxes Income taxes are provided under the asset and liability method. Under this method, deferred income taxes are determined based on the differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. A provision is made for the Company's current liability for federal, state and foreign income taxes and the change in the Company's deferred income tax assets and liabilities. We establish accruals for uncertain tax positions taken or expected to be taken in a tax return when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to income tax expense in the period of a change in facts and circumstances. Interest and penalties related to income taxes are accounted for as income tax expense. Stock-based compensation Compensation expense related to share based awards is recognized on a pro rata straight-line basis based on the value of share awards that are scheduled to vest during the requisite service period. During the years ended December 31, 2015, and 2014 the Company recognized $541,000, and $712,000, respectively, of pre-tax stock-based compensation expense under the fair value method. As of December 31, 2015, the Company had $1.1 million of unrecognized compensation expense related to the unvested portion of outstanding share based awards expected to be recognized through October 2019. Loss per share Basic loss per share is based on the weighted average number of outstanding common shares for the period. Diluted loss per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised. The number of common shares and common share equivalents used in the determination of basic and diluted loss per share were as follows: (in thousands, except for per share data) Years ended December 31, 2015 2014 Numerator: Net loss attributed to common stockholders $ (4,705 ) $ (7,329 ) Denominator: Weighted-average shares outstanding for basic loss per share 17,892,891 17,887,859 Effect of dilutive securities: Stock options and restricted stock units - - Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share 17,892,891 17,887,859 Shares related to dilutive securities excluded because inclusion would be anti-dilutive 2,492,710 2,811,709 Conversion of outstanding stock options and restricted stock units was not assumed for the years ended December 31, 2015 and 2014 because the impact was anti-dilutive. Significant Customers and Concentration of credit risk The Company is subject to concentration of credit risk with respect to contract receivables. Credit risk on contract receivables is mitigated by the nature of the Company's worldwide customer base and its credit policies. The Company's customers are not concentrated in any specific geographic region, but are concentrated in the energy industry. The following customer accounted for more than 10% of the Company's consolidated contract receivables for the indicated periods: December 31, 2015 2014 State Nuclear Power Automation System Engineering Co. 0.7% 10.2% In addition, we have a concentration of revenue from a single customer, which accounted for approximately 15.9% of our consolidated revenue for the year ended December 31, 2015. No other single customer accounted for more than 10% of our consolidated revenue in 2015. In 2014, we did not have a single customer who accounted for more than 10% of our consolidated revenue. Fair values of financial instruments The carrying amounts of current assets and current liabilities reported in the consolidated balance sheets approximate fair value due to their short term duration. Contingent consideration for business acquisitions Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. The Company estimates the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Derivative instruments The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates. It is the Company's policy to use such derivative financial instruments to protect against market risk arising in the normal course of business in order to reduce the impact of these exposures. The Company minimizes credit exposure by limiting counterparties to nationally recognized financial institutions. As of December 31, 2015, the Company had foreign exchange contracts outstanding of approximately 2.1 million Euro, 1.3 million Canadian Dollars, 0.5 million Pounds Sterling, and 0.4 million Australian Dollars. At December 31, 2014, the Company had foreign exchange contracts outstanding of approximately 1.4 million Euro, 0.8 million Australian Dollars, 0.5 million Malaysian Ringgit, and 0.3 million Pounds Sterling at fixed rates. The contracts expire on various dates through January 2017. The Company had not designated the foreign exchange contracts as hedges and had recorded the estimated fair value of the contracts in the consolidated balance sheet as follows: December 31, (in thousands) 2015 2014 Asset derivatives Prepaid expenses and other current assets $ 115 $ 71 Other assets 6 21 121 92 Liability derivatives Other current liabilities (57 ) (23 ) Other liabilities - (1 ) (57 ) (24 ) Net fair value $ 64 $ 68 The changes in the fair value of the foreign exchange contracts are included in gain (loss) on derivative instruments, net in the consolidated statements of operations. The foreign currency denominated trade receivables, unbilled 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 the functional currency using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is also included in gain (loss) on derivative instruments net in the consolidated statements of operations. For the years ended December 31, 2015, and 2014, the Company recognized a gain (loss) on its derivative instruments net as outlined below: Years ended December 31, (in thousands) 2015 2014 Foreign exchange contracts- change in fair value $ (6 ) $ 365 Remeasurement of related contract receivables and billings in excess of revenue earned (34 ) (156 ) $ (40 ) $ 209 Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. Recently Issued Accounting Pronouncements Not Yet Adopted In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers , which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company in the first quarter of its fiscal year ending December 31, 2018, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently in the process of evaluating the impact of its pending adoption of this ASU on the Company's consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018. In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," ("ASU 2016-02"). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company is still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and the Company expects that upon adoption the recognition of ROU assets and lease liabilities could be material. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes |
