TABLE OF CONTENTS
| PART I | | Page |
| Item 1. | | 3 |
| Item 1A. | | 16 |
| Item 1B. | | 27 |
| Item 2. | | 27 |
| Item 3. | | 28 |
| Item 4. | | 28 |
| | | |
| PART II | | |
| Item 5. | | 29 |
| Item 6. | | 29 |
| Item 7. | | 30 |
| Item 7A. | | 41 |
| Item 8. | | 42 |
| Item 9. | | 77 |
| Item 9A. | | 77 |
| Item 9B. | | 78 |
| Item 9C. | | 78 |
| | | |
| PART III | | |
| Item 10. | | 78 |
| Item 11. | | 79 |
| Item 12. | | 79 |
| Item 13. | | 80 |
| Item 14. | | 80 |
| | | |
| PART IV | | |
| Item 15. | | 80 |
| Item 16. | | 81 |
| | | 85 |
| | | 81 |
| * | to be incorporated by reference from the Proxy Statement for the registrant’s 2021 Annual Meeting of Shareholders. |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.
This report and the documents incorporated by reference herein contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on management’s assumptions, expectations and projections about us, and the industry within which we operate, and that have been made pursuant to the Private Securities Litigation Reform Act of 1995 reflecting our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “anticipate”, “believe”, “continue”, “estimate”, “intend”, “may”, “plan”, “potential”, “predict”, “expect”, “should”, “will” and similar expressions, or the negative of these terms or other comparable terminology, have been used to identify these forward-looking statements. These forward-looking statements may also use different phrases. These statements regarding our expectations reflect our current beliefs and are based on information currently available to us. Accordingly, these statements by their nature are subject to risks and uncertainties, including those listed under Item 1A Risk Factors, which could cause our actual growth, results, performance and business prospects and opportunities to differ from those expressed in, or implied by, these forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Except as otherwise required by federal securities law, we are not obligated to update or revise these forward looking statements to reflect new events or circumstances. We caution you that a variety of factors, including but not limited to the factors described below and in Item 1A Risk Factors, could cause our business conditions and results to differ materially from what is contained in forward-looking statements:
| • | changes in the rate of economic growth in the United States and other major international economies; |
| • | changes in investment by the nuclear and fossil electric utility industry, the chemical and petrochemical industries, or the U.S. military; |
| • | changes in the financial condition of our customers; |
| • | changes in the regulatory environment; |
| • | changes in political climate; |
| • | changes in project design or schedules; |
| • | changes in our estimates of costs to complete projects; |
| • | changes in trade, monetary and fiscal policies worldwide; |
| • | war and/or terrorist attacks on facilities either owned by our customers or our company, or where equipment or services are or may be provided; |
| • | catastrophic failure or other incident at facilities either owned by our customers or our company, or where equipment or services are or may be provided; |
| • | initiation, prosecution, or outcomes of future litigation; |
| • | protection and validity of our trademarks and other intellectual property rights; |
| • | increasing competition by foreign and domestic companies; |
| • | compliance with our debt covenants; |
| • | recoverability of claims against our customers and others; |
| • | changes in estimates used in our critical accounting policies; and |
| • | impact of the Novel Coronavirus (COVID-19), or other future pandemics, on the global economy and on our customers, suppliers, employees and business. |
The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report on Form 10-K. Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described above and in Item 1A Risk Factors in connection with any forward-looking statements that may be made by us. You should not place undue reliance on any forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.
Company Information Available on the Internet
Our Internet address is www.gses.com. We make available free of charge through our Internet site our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; proxy statements, and any amendment to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
PART I
GSE Systems, Inc. (hereinafter referred to as “GSE”, the “Company”, “we”, “us” or “our”), a Nasdaq-listed company trading under the symbol GVP, is a leading provider of engineering services and technology, expert staffing, and simulation software to clients in the power and process industries. We provide customers with simulation, engineering technology, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in the organization on a short-term basis, including but not limited to, the following: procedure writing, planning and scheduling; engineering; senior reactor operator (“SRO”) training and certification; technical support and training personnel focused on regulatory compliance and certification in the nuclear power industry.
Our services help our customers provide clean energy to all in a reliable and safe manner. There is growing recognition of the importance of low and zero carbon energy as the United States in particular, and the world in general, races to decarbonize power grids. We are uniquely positioned as one of the largest independent nuclear services companies in the United States to support decarbonization of the power industry. In fact, the more wind and solar that comes onto the grid, the greater zero carbon base-load becomes to ensure grid stability, reliability and safety. Decarbonization is a leading means of delivering environmental equity – ensuring that anyone regardless of background and economic status can benefit from a safe and healthy environment, free of pollution related to carbon intensive power generation. Our operations also include interactive software for tutorials and simulation for the refining, chemical, and petrochemical industries.
We execute projects globally with approximately 308 employees, as of December 31, 2021. We operate from offices in the U.S. and China and with additional employees deployed at client sites. While most of our revenue comes from support provided to the nuclear power industry, we also serve agencies in the United States Department of Energy (“DOE”), the United States Navy and adjacent defense opportunities, and the oil and gas, refining, chemical, and petrochemical markets.
GSE was formed to consolidate the simulation and related businesses of General Physics International Engineering & Simulation, S3 Technologies, and EuroSim. We completed our Initial Public Offering in 1995.
Since 2014, GSE has grown by consolidating and acquiring businesses serving the nuclear power industry. On November 14, 2014, we acquired Hyperspring, LLC (“Hyperspring”). Hyperspring is a nuclear industry focused staffing and training firm that employs highly skilled, high-value professionals primarily filling training and consulting positions on a contract basis for nuclear power plant operators. Hyperspring professionals provide training, operations and maintenance support including: generic fundamentals exams, accreditation training visit preparation, SRO certification, procedure development, work management, tagging/labeling, outage execution, planning/scheduling, corrective action, self-assessments and equipment reliability. On September 20, 2017, we acquired Absolute Consulting, Inc. (“Absolute”). Absolute is a provider of technical consulting and staffing solutions to the global nuclear power industry with expertise in procedure writing, engineering, technical support, scheduling, planning, project management, training, project controls, and corrective actions. On May 11, 2018, we acquired True North Consulting, LLC (“True North”). True North is a provider of engineering solutions to nuclear and non-nuclear power plants with an emphasis on regulatory-driven, American Society of Mechanical Engineers (“ASME”) code programs. On February 15, 2019, we acquired DP Engineering Ltd, Co. (“DP Engineering”). DP Engineering is a specialized provider of high-value engineering services and solutions to the nuclear power industry. Founded in 1995 in Fort Worth, Texas, DP Engineering generates over 90% of its revenue from the nuclear power industry with core expertise in mechanical design; civil/structural design; electrical, instrumentation and controls design; digital controls/cyber security; and fire protection. DP Engineering primarily works under master service agreements as the Engineer of Choice (“EOC”).
FOCUS FOR 2022
Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve, the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although this impacted us, as an essential services provider to an essential industrial base, we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. Additionally, as the pandemic effects started to wane, resulting staffing shortages in industry resulted in new opportunities for our Workforce Solutions segment (further defined below under Operating Segments). In 2021, the effects of the pandemic continued to impact the end markets we serve, but those effects were mitigated by a number of factors, including the following: the pandemic largely has had a targeted effect on the population; the availability of vaccines to address COVID-19 and, despite logistical challenges, making solid progress for those in most need; the economy of the United States has not had as much disruption as was initially feared which has benefited our end markets; and most importantly our end markets seem poised to spend to catch up on essential services that had been delayed as a result of the pandemic. As we concluded 2021 and entered 2022, we achieved several, significant contract “wins” that we publicly announced. We are optimistic that both the opportunities and successes are a harbinger of a more attractive business environment for the power industries that we serve.
As we look ahead to 2022 and beyond, with a new administration in the United States, there is renewed focus on decarbonizing the power sector, which is recognized as a key means in achieving environmental equity. The new administration is in the process of rejoining the Paris climate accord, has spoken in support of zero carbon power sources such as nuclear, and has spoken of increased public spending in support of the industry and related industries. The bipartisan infrastructure plan passed in 2021 specifically has spending elements in support of nuclear power and technology development.
In light of these emerging policies, there has been significant increase in the public awareness of the essential requirement that nuclear be a big part of the grid to achieve zero carbon goals. In an article early in 2020, Yale360.com, highlighted the potential of new generation Small Module Reactors (“SMRs”) in driving the achievement of a zero-carbon grid. Nuclear, especially SMRs, are recognized for their potential to replace carbon intensive power generation while maintaining a smaller footprint than existing coal plants. In February 2021, the Montana State Senate approved a feasibility study to evaluate replacing coal fired power generation with SMRs at the Colstrip power plant. Further, the benefits of SMRs are also noted as a key element to restore ecological systems while simultaneously maintaining zero carbon power generation. Idaho GOP Rep. Mike Simpson has proposed a sweeping $33.5 billion plan to save the Pacific Northwest’s iconic salmon that includes breaching four of the most controversial dams in the country. The power generation of the dams would be replaced by building SMRs as part of this plan. As 2021 unfolded, Canada, Poland, the Czech Republic, Bulgaria and Romania have all announced plans to pursue the build out of nuclear power generation, especially initial review of SMRs. Finally, Management feels that we are well positioned as one of the largest independent businesses focused on services supporting decarbonization through our support of the nuclear power industry to benefit from these developments in the economy and governing policy.
Branding
GSE Systems, Inc. remains the legal name of the parent company, publicly traded on Nasdaq under the ticker symbol “GVP”; GSE operations and marketing uses the more distinct trademark “GSE Solutions” as a way to communicate the fact that GSE’s specialized business units help customers reduce risk and optimize performance through unique solutions, a centralized project approach, expert resource management, and a culture of continuous improvement to drive decarbonization of the power industry.
OPERATING SEGMENTS
We operate through two reportable business segments: Performance Improvement Solutions and Workforce Solutions. Each segment focuses on delivering solutions to customers within our target markets. Marketing and communications, accounting, finance, legal, human resources, corporate development, information systems and other administrative services are organized at the corporate level. Business development and sales resources are generally aligned with each segment to support existing customer accounts and new customer development. The business units collaborate to facilitate cross-selling and the development of new solutions. The following is a description of our business segments
:
Performance Improvement Solutions (approximately 51.0% of revenue)
Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, technical engineering services for ASME programs, power plant thermal performance optimization, and interactive computer-based tutorials/simulation focused on the process industry. The Performance Solutions segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve: primarily nuclear and fossil fuel power generation and the process industries. Our simulation solutions include the following: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, including operator training systems, for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industry processes and control systems to newly hired employees and for ongoing workforce development and training. We and our predecessors have been providing these services since 1976.
Our Performance Improvement Solutions segment 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 subsidiaries, True North and DP Engineering, typically work as either the EOC or specialty EOC for our clients under master services agreements and are included in our Performance Improvement Solutions segment due to their service offerings. We have been providing these engineering solutions and services since 1995.
Workforce Solutions (approximately 49.0% of revenue)
The Workforce Solutions segment supports entire project lifecycles and provides highly specialized and skilled talent throughout the energy and engineering industries. Hyperspring provides training and professional service solutions, while Absolute provides technical and professional staffing and procedure writing experts. Together, our Workforce Solutions team reduces risk and costs, boosts agility and responsiveness, eliminating non-productive time, all while providing timely, flexible and effective solutions. Examples of some of the highly skilled positions we fulfill are senior reactor operations instructors, procedure writers, project managers, engineers, work management specialists, planners and training material developers. These employees work at our clients’ facilities under client direction. We manage this business through our subsidiaries, Hyperspring and Absolute. The business model, management focus, margins and other factors clearly separate the business line from the rest of our product and service portfolio. We have been providing these services since 1997.
Financial information is provided in Note 20 of the accompanying consolidated financial statements regarding our business segments and geographic operations and revenue.
BUSINESS STRATEGY, INDUSTRY TRENDS, PRODUCTS AND SERVICES
Business Strategy
Serve existing customers and adjacencies with compelling solutions, with a focus on decarbonization:
Our objective has been to create a leading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies. We are now one of the leading, publicly traded engineering and technology companies serving the zero-carbon energy sector of nuclear power and adjacent nuclear markets in DOE, US Navy and related defense sectors. As a result of this effort and established leadership position in key sectors, we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2022, we will keenly focus on organic growth in the sectors we serve by: cross selling and upselling in our existing markets as we focus on delivering significant value to our customers in a manner of excellence; create new and compelling solutions in-house as a result of advancing our technology offerings in sponsorship with industry early adopters focused on critical business need; develop new services as a result of combining our expertise; expand into compelling adjacent markets such as clean energy as they may arise with renewed sales focus.
Cross sell and upsell into existing markets:
From 2015 through early 2019, we devoted considerable time and effort to diversify the Company’s solutions capabilities for the nuclear power sector via a rollup of essential services providers to the industry. To ensure efficient and streamlined operations for the business, we have brought all of the engineering services together into one organization with one leader; and the Workforce Solutions teams together as one team under one leader. The business units operate uniformly within their respective structure. As such, the opportunity to cross-sell the capabilities across the entire customer base is greatly enhanced. This further differentiates us as a unique provider to industry vs. providers of specific niche services. The unified go-to-market efforts, such as cross-selling capability should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. As a result of a rejuvenated marketing effort, we are equipped to take this new approach to market. In particular, with the US government rejoining the Paris Climate Agreement and driving to decarbonize the energy grid by 2035, and create a carbon neutral economy by 2050, decarbonization of the energy sector will require significant investment for decades to come. As a key provider of essential services to the power sector, with a focus on decarbonization, we are poised to benefit from and exploit this investment.
Organic growth through new and compelling technology:
While managing through the pandemic, in parallel, our leadership was investigating compelling opportunities by which we could utilize our capabilities to create significant value for the industry and advance the efforts of decarbonizing the power sector. As a result, we have identified a robust pipeline of new and compelling technology solutions to develop and take to market. Net new solutions, such as Data Validation and Reconciliation ("DVR") and Thermal System Monitoring ("TSM"), have created new revenue streams with the potential of on-going annuities through license revenue, software maintenance and services revenue. More on DVR and TSM below. GSE has announced a handful of new wins for these new solutions, which were created through our unique combination of our industry/engineering know-how and software development capabilities. As we have demonstrated in the past few years, small wins over time accrue into meaningful revenue on an on-going basis. This is a key element of our organic growth thesis: focusing on creating and bringing to market compelling technology solutions.
Focus on compelling adjacencies in clean energy, defense, and national labs:
Research and development (R&D). We invest in R&D to deliver unique solutions that add value to our end-user markets. Our software tools leverage the high-end expertise of our experienced staff in helping plants operate better and more efficiently. Our software technology together with our deep staff expertise supports multiple industries including the nuclear industry, as a part of the larger decarbonization drive. Our software technology includes decision-support tools for engineering simulation supporting design and plant commissioning, operational performance tools, and training platform.
One area of significant recent enhancement is in improving the thermal performance of power plants. We have introduced the next generation platform in TSM, providing the technology platform to centralize and continuously monitor plant thermal performance. The solution benefits our customers by automating standardized reporting in modern dashboards available to engineers and decision makers across the fleet, leveraging automation to facilitate troubleshooting plant performance issues, reducing time and error with direct access to source data, and applying industry guidelines for problem resolution. This platform also supports integration with DVR (implemented by True North) that enhances the quality of data for plant performance insights, analysis and decision making, providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.
In the area of engineering simulations, we deliver nuclear core and Balance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry’s need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP® and RELAP5-HD® solutions. Our entire JADETM suite of simulation software, including industry leading JTOPMERET® and JElectricTM software, provides the most accurate simulation of Balance-of-Plant and electrical systems available to the nuclear and fossil plant simulation market. The significant enhancements we have made to our SimExec® and OpenSimTM platforms enables customers to be more efficient in the daily operation of their simulators. We have brought SimExec® and OpenSimTM together into a next generation unified environment that adds new capabilities as requested by clients and driven by market need.
Additionally, enhancements to training content and delivery continue through the EnVision On-Demand platform, allowing our customers to access training content from anywhere in synchronous and asynchronous modes, thus increasing their efficiency and reducing infrastructure costs. We intend to continue to make pragmatic and measured investments in R&D that first and foremost are driven by the market and complement our growth strategy. Such investments in R&D may result in on-going enhancement of existing solutions as well as the creation of new solutions to serve our target markets, ensuring that we add greater value that is easier to use, at lower total cost of ownership than any alternative available to customers. We have pioneered a number of industry standards and intend to continue to be one of the most innovative companies in our industry. During the years ended December 31, 2021 and 2020, we have made R&D investments totaling $0.9 million and $1.0 million, respectively.
Strengthen and develop our talent while delivering high-quality solutions.
Over the past several years, we have assembled a unique and highly experienced group of talent through organic growth and strategic acquisition. Our engineering team comprised of design, simulation, regulatory compliance, and performance optimization capabilities are unique to the industry and capable of addressing the entire power generation life cycle.
Our experienced employees and management team are our most valuable resources. The continued integration of our team in parallel with attracting, training, and retaining top talent is critical to our success. To achieve our goals, we intend to remain focused on providing our employees with opportunities to increase client contact within their areas of expertise and to expand and deepen our service offerings. As we refine our product and service areas to best align with the critical areas listed above, we will also integrate and apply our composite employee talent to the fullest extent possible combining employee personal and professional growth opportunities with fulfillment of cutting-edge industry needs. Performance-based incentives including opportunities for stock ownership, bonuses and competitive benefits as benchmarked to our industry and locations will also be utilized to ensure continuity of our approach.
We have developed a strong reputation for quality services based upon our industry-recognized depth of experience, ability to attract and retain quality professionals, and exceptional expertise across multiple service sectors. As we continue to integrate and leverage our individual company components assembled over the past several years, our capabilities and reputation will further strengthen.
Industry Trends
Industry need to build and sustain a highly skilled workforce
We believe a critical ongoing challenge facing the industries we serve is access to, and continued development of, a highly trained and efficient workforce. This challenge manifests primarily in two ways: the increasing pace at which industry knowledge and experience are lost as a significant percentage of the existing experienced workforce reaches retirement age; and the fact that as new power plants come on-line, there is an increased demand for more workers to staff and operate those plants.
In the United States, the energy industry is expected to lose a large percentage of its workforce within the next few years as baby boomers retire on the traditional schedule. For example, Power Engineering reported that the power sector needs more than 100,000 skilled workers within the next few years to replace retiring baby boomers. Electric, Light, and Power reported that 72% of energy employers currently struggle to find quality candidates and fill open positions. The National Electrical Contractors Association reported that 7,000 electricians join the field each year, while 10,000 retire. Finally, the Nuclear Energy Institute estimated that 39% of the nuclear workforce were eligible to retire in the next few years. As the nuclear industry continues to operate and modernizes its fleet and strains to maintain the high standards of training for the existing workforce, existing plant simulator systems, which provide a critical environment for training services, are often operating 24 hours a day. As workers retire and the need to backfill as well as expand the workforce for new units, certain operators are exploring the opportunity to de-bottleneck their existing simulator capabilities through the creation of dual reference simulators. Other workforce shortages and/or short-term spikes in demand for specialist skills that we offer similarly are positive developments for our business. Further, as new nuclear technologies are researched and developed, such as new reactors and new fuels, the R&D industry needs to identify the right talent to advance those endeavors. Our business is uniquely positioned to identify and provide solutions that offer the best personnel for both short and long-term assignments.
Globally, as more people increase their standard of living, there is an expectation that their demand for power will increase, which in turn will require the on-going construction of power plants to meet this surging demand. The drive to lower carbon emissions from power generation while ensuring a stable baseload to accommodate intermittent energy sources such as wind and solar power brings focus on the essential nature of nuclear power. Developing a skilled labor force to operate these plants and keeping their skills current and their certifications in compliance with regulatory requirements is a key challenge facing the global power industry.
Status of decarbonization nuclear power in 2021/2022
According to World Energy Outlook report, 2019 had the second highest energy generation year for nuclear in history. By 2030, nuclear is planned to increase in generation capacity from roughly 400 GW to roughly 450 GW. Most new plants will be built in developing economies such as China and India, and advanced economies will invest to extend the lifetimes and increase the output of remaining nuclear reactors to bridge the gap to a new generation of reactors under development. With that said, several western countries have announced plans to develop nuclear power, including but not limited to the United States [at Idaho National Laboratory ("INL") via Utah Associated Municipal Power Systems’ (“UAMPS”)], Canada, Czech Republic, Poland, Bulgaria and Romania.
Decarbonizing the power sector is a key focus for advanced and developing nations. As a critical part of zero carbon clean energy, nuclear energy ensures access to abundant, clean, reliable and affordable energy to all who can connect to the grid, no matter a person’s background or status. To combat climate change and the pollution of the atmosphere, nuclear is a key element to decarbonizing the power sector across the world. As more variable sources of power come on to the grid, such as wind and solar, ensuring a stable grid requires baseload, and nuclear is the essential source of economically scalable carbon free baseload. As such, nuclear, wind and solar are tied together in the massive effort to decarbonize economies the world over.
Nuclear provides 10% of the world’s power, and 20% of power for the United States. President Biden is on record indicating a desire to decarbonize the United States power sector by 2035 and achieve a carbon neutral grid by 2050. The bipartisan infrastructure legislation passed into law in 2021 had specific allocation to enhance the nuclear power sector. To support this effort, the Department of Energy has made significant investment in the development of next generation zero carbon energy production through the development of advanced reactors and/or small modular reactors from Terra Power, X-Energy, NuScale and others.
These reactors are quickly becoming realty, with a January 2021 announcement of an agreement to facilitate the development of a project proposal for a NuScale-designed plant to be built at the United States Department of Energy (“DOE”) Idaho National Laboratory grounds. Engineering, procurement and construction firm, Fluor, will provide its services for Utah Associated Municipal Power Systems’ (“UAMPS”) Carbon-Free Power Project. The project includes plans for nuclear energy featuring NuScale’s small modular reactor design. NuScale has been a long-time customer, using our simulation technology and engineering services to enhance their reactor design, operations and accelerate NRC licensing efforts. In addition to the NuScale plans, HOLTEC, another firm with SMR technology, is studying the feasibility of building an SMR facility in New Jersey at the Oyster Creek site of a decommissioned traditional nuclear power plant. GE Hitachi Nuclear has also made a number of exciting announcements regarding their SMR technology being considered in Canada, Poland, potentially Clinch River in the United States, and elsewhere.
The SMR momentum is noted in the mainstream press. The Wall Street Journal notes the significant plans for SMRs being developed in the United States and elsewhere at an accelerated clip. In addition to the plants currently planned, as mentioned earlier in this document, proponents of SMRs, see them as a complementary role in the smart grid of the future—replacing coal- and gas-fired plants and operating alongside wind and solar.
All of this is part of a broader effort for decarbonization that we, through the aforementioned strategies, plan to exploit for organic growth.
Products and Services
Performance Improvement Solutions
Our engineering team, comprised of design, simulation, regulatory compliance, and performance optimization capabilities are unique to the industry and capable of addressing the entire power generation life cycle. As we move forward in alignment with client and industry goals targeting clean energy production and overall decarbonization we are positioned to be at the forefront in three critical areas:
| • | optimization of existing generation assets |
| • | design support and deployment of advanced reactor designs |
| • | integration with renewable power sources |
Optimizing Existing Generation Assets
As the existing fleet of nuclear reactors age and competitive pressures increase, we find ever increasing significance in being able to provide value to their continued operation. Maximizing power production through a variety of methods such as digital verification and reconciliation, a statistical based analysis used to lower uncertainty, and thus increase recognized power output is instrumental in helping these facilities face current competitive pressures. Other approaches involving safe reduction of testing and inspection requirements or performance periodicities are also at the forefront of our cost saving techniques with defined services and products providing a clear and positive return on investment. In all cases, these efforts are aligned with keeping this important source of carbon free base power economically and technically viable.
Advanced Reactor Designs & Deployment
Designers of first-of-a-kind plants or existing plants need a highly accurate dynamic simulation platform to model a wide variety of design assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in deployment of new technology, often involving the integration of disparate technologies for the first time, a high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. Going forward, we also envision many of the optimization techniques and strategies currently emphasized for the existing reactor fleet incorporated with new-build prototypes as they begin to add value and assume a larger component of our clean, carbon free, power requirements.
Renewable Integration
A significant component of overall decarbonization regarding power generation will ultimately fall to renewable sources such as wind, solar, and hydro generation. These technologies are individually well on their way towards assuming a significant share of the overall generation make-up and are expected to significantly increase. One of the particular needs is the ability to safely and efficiently integrate these renewable sources with our existing and planned nuclear generation. We are on the cutting edge, working closely with academia and industry support organizations to design, model, and evaluate creative approaches to support this integration. Base load production, renewable availability, and other pertinent factors are at the core of the solutions we are exploring.
Engineering Solutions for Decarbonization
With overall decarbonization as our primary focus, we will blend our current and future efforts in those areas described above to best support that goal positioning our Engineering team as recognized leaders in the pursuit of Clean Energy. An overview highlighting many areas of our current and planned involvement as well as the associated benefits is summarized below:
With nuclear power being such a high percentage of carbon free power generation, the continued safe and efficient operation of these plants is critical to meeting decarbonization goals. We help the industry achieve these goals through better training and provide engineering services to optimize performance while maintaining regulatory compliance. Our focus is on products and services to improve the efficiency and lower operating costs for existing power generation assets as well as help the next generation of carbon free power plants achieve design approval and plant startup as quickly as possible.
Training plant operators and engineers is critical to safe operations and continued viability of the industry. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, we provide simulation solutions that achieve unparalleled fidelity and accuracy. We have also adapted these solutions to provide highly accurate training across a variety of delivery platforms. These include universal or generic simulators which are excellent in teaching fundamental concepts, systems, and plant behaviors. They are also used by academia for research on improved plant operations, human factors design and the development of automated procedures and decision support systems for the next generation of reactors. Our part task simulators and virtual control panels are cost effective solutions enabling customers broader freedom in where they deliver simulation training and opening the door for plant engineers and maintenance staff to access high fidelity training without interrupting the operator training program. Our full scope simulators use the most sophisticated modeling technology. For these reasons, we have delivered more nuclear power plant simulators than any other company in the world.
Even prior to the COVID pandemic, we had delivered training products though the cloud. This delivery method reduces our customers infrastructure and ownership costs and provides anytime, anywhere access to rich learning content. Innovative Critical Thinking Exercises enable autonomous simulation training to take place, reducing the burden on instructors and increasing training touch time for students and employees. All of which enable the training organization to be more flexible and efficient.
Our simulation solutions not only address industry training needs, but are used for simulation assisted engineering, the process of using simulation to virtually test and commission plant designs prior to construction. Because new builds and upgrades to existing plants result in deployment of new technology, our high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. This technique reduces design costs, accelerates design approvals, de-risks projects, and provides clients with a tool to sell their new plant designs to both customers and regulators. In essence, enabling our customers to get to market faster.
Beyond training, our technology is used to improve the efficiency of existing power generation assets. Our TSM System provide live insights into plant operations, by monitoring performance of key plant equipment, analyzes degradation and advises actions to be taken. When combined with DVR techniques, we can help reduce operating and maintenance cost. DVR enhances the quality of data for analysis and decision making, providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.
Our EP-Plus software suite provides one common platform for all engineering programs, helping client engineers keep track of engineering program inspection and monitoring requirements aimed at safe plant operations. This reduces the engineering workload of our customers, saving costs and enabling staff to focus on the most critical activities.
All of these technologies leverage the vast experience and industry expertise of our engineering team. Our engineering team helps our clients throughout the entire plant lifecycle. We are the Engineer of Choice (“EOC”) in areas such as:
| • | Design engineering for plant mechanical, electrical, I&C, civil and structural, fire protection and cyber systems |
| • | Engineering programs addressing ASME codes, balance of plant programs other regulatory programs and economic driven programs such as plant thermal performance |
| • | Simulation engineering for nuclear, thermal and process plant training and virtual commissioning |
We see organic growth through closer integration of these engineering activities and technologies to provide solutions to improve the performance of our customers’ people and plants.
Workforce Solutions
As our customers’ experienced employees retire or pursue other opportunities, access to industry experts to operate and train existing and new employees how to operate nuclear plants is essential to ensure safe, ongoing plant operation. In addition, operating and training needs change over time and sometimes our clients require fixed-price, discrete projects, new or updated methods, or specialized courses in contrast to straight staff augmentation. The industry needs operating personnel, including procedure writers, engineers, operators and instructors who can step in and use, as well as, update the client’s operating methods, procedures, training material and more. Finding technical professionals and instructors, who know the subject, can perform the work or teach it to others and can adapt to the client’s culture is critical. We provide qualified professionals, instructors and turnkey projects/courses that work within the client’s system and complement the operating or training methods they already have in place. Examples of our training program courses include senior reactor operator (“SRO”) certification, generic fundamentals training, and simulation supervisor training. We also provide expert support through workforce solutions, consulting, or turnkey projects for procedure writing, technical engineers, project managers, training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability. Our Workforce Solutions segment include traditional staffing services, such as temporary and direct hire, as well as customized approaches in which we work with our customers to evaluate their specific needs and put together a strategic plan specifically to meet their unique needs. Workforce solutions is not only a complement to our other service offerings; it often leads the way as the preferred method for many of our clients to execute entire projects and/or supplement their own staff during project peak periods or with specialized skill sets that are often hard to find. Our staffing experts give our customers the ability to ramp up quickly, eliminate risks, and provide more flexible options as situations often demand.
In addition to the core training and staffing business lines in the nuclear sector, we continue to see significant organic growth opportunity with our Workforce Solutions segment by expanding our service offerings to meet the evolving needs of the energy industry as well as other opportunities that support decarbonization and major infrastructure projects. Due to the experience within our team, we are well positioned to expand our Workforce Solutions segment offerings through our existing relationships and industry knowledge. This growth is occurring both with existing and new customers. We are placing a greater emphasis on cross-selling the services offered by our Workforce Solutions segment with our Performance Improvement Solutions segment. The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and our success is showing with contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies dedicated to clean energy solutions. We have continued to better position us to support these opportunities with strategic hires and staff alignment. As the recent increases in employment transition have demonstrated, companies must also be able to adapt quickly to evolving staffing needs. This has certainly been demonstrated with companies adjusting and allowing more employees to work from home, but it’s not the only answer. Employees are making changes in their professional lives for many reasons, and our workforce solutions offer our customers added support and more flexibility to support ever changing needs. In fact, Workforce Solutions is uniquely positioned for growth in these types of employment environments. Our flexible solutions, and specialized industry experience position us both for current and future staffing needs.
We recognize the necessity to listen to the needs of our customers and provide the right solution. Whether the answer is one of our traditional service offerings or putting together a customized approach, we have the capabilities to help our customers get the job done. We bring together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high-fidelity simulation and training solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate level training solutions of EnVision, backed by the extensive Workforce Solutions services of Absolute and Hyperspring, and now strengthened by our ability to successfully adapt, diversify, and offer a solutions based approach with our Workforce Solutions.
CUSTOMER AND LOCATIONS
For almost 50 years, we have been developing next-generation, custom training simulation technologies. Since we built the first commercial full-scope nuclear power plant simulator in 1971, we have completed more than 1,100 installations across the power and process industries in 50 countries.
In 2021, approximately 12% of our revenue was generated from end-users outside the United States and we have a concentration of revenue from one individual customer, which accounted for 13.8% of our consolidated revenue, respectively. A small representative list of our customer base includes: ABB Inc., American Electric Power, Bechtel Hanford National Laboratory, Duke Energy, EDF Energy (United Kingdom), Emerson Process Management, Entergy Nuclear Operations Inc, Exelon, PSEG Nuclear, Inc., Siemens AG (Germany), Southern Nuclear Operating Company, Inc., State Nuclear Power Automation System Engineering Company (China), Savannah River Nuclear Solutions, LLC, Slovenkse Elektrarne, A.S. (Slovakia), Tennessee Valley Authority, and Westinghouse Electric Co. Hydrocarbon and chemical process customers include numerous large oil refineries and chemical plants such as BP (worldwide), Statoil ASA (Norway), Chevron, Shell Oil Company (worldwide), Total (Belgium), and Valero (USA).
MARKETING AND SALES
We market our products and services through a network of direct sales staff, agents and representatives, and strategic alliance partners. Market-oriented business and customer account teams define and implement specific campaigns to pursue opportunities.
We continue to have a proactive public relations program, issuing non-financial press releases to announce product development and significant deliveries, as well as our presence at numerous industry trade shows and technical conferences. We are active on numerous social media platforms and strive to build a strong presence across all media that our clients use to find information about us. Our goal is to provide useful information at each stage of the client’s journey with us.
Our ability to support our multi-facility, international, and multinational clients is facilitated by our network of offices and strategic partners in the U.S. and overseas. In addition to our office located in China, our ability to conduct international business is enhanced by our multilingual and multicultural workforce. We have strategic relationships with system integrators and agents representing its interests in Bulgaria, Japan, Malaysia, Singapore, South Korea, Taiwan, Ukraine and various locations in the Gulf Coast Countries of the Middle East.
COMPETITION
In the nuclear simulation market, we compete directly with firms primarily from Canada, France and the U.S., such as L-3 MAPPS Inc., a subsidiary of Harris (Canada), CORYS T.E.S.S (France) and Western Services Corporation. In the fossil simulation market, we compete with smaller companies in the U.S. and overseas. In the process industry, our main competition comes from large digital control system/automation companies such as Honeywell and Schneider. In our engineering market, we compete with firms primarily from North America such as Enercon Services, Kinectrics, Sargent & Lundy, and AECOM.
The Workforce Solutions business services include technical professional and training-related and services as well as staff augmentation solutions. The competition for these services includes but is not limited to the following: GP Strategies (acquired by LTG in 2021), The Westwind Group, Professional Training Technologies, and Western Technical Services. The competition for staff augmentation includes: System One, Aerotek, and Peak Technical. Competition with staff augmentation is further impacted by wide scale industry consolidation as a result of the growing movement toward use of Managed Staffing Providers (MSPs). As some competitors, have been forced to close their doors, others have lost market share with the MSP model as it has shown a clearer picture of which companies can best deliver. By conducting in depth reviews and ensuring strategic alignment with MSP providers, Workforce Solutions has continuously found success with the MSP models and avoided the missteps that have impacted other competitors.
Competitive Advantages
Although there is competition in various industry niches, few companies in our space compare to our engineering, simulation and performance optimization expertise, especially for the nuclear power industry. Few of our competitors serve the broader performance improvement market and few work across the full spectrum of energy markets addressing clean energy sources and decarbonization initiatives, specifically, existing nuclear generation, advanced reactor applications, and ongoing integration with renewable power sources. Our unique combination of talent and expertise, built through organic and acquisition-based growth has positioned us perfectly to align with the clean energy initiatives of our clients and the industry at large.
Full Spectrum Support. Over the past several years we have assembled a unique and highly experienced group of talent through organic growth and strategic acquisition. Our Engineering team comprised of design, simulation, regulatory compliance, and performance optimization capabilities are unique to the industry and capable of addressing the entire power generation life cycle. A major and ongoing attribute associated with this unique grouping of expertise is our multi-tiered approach aimed at leveraging the aggregate strengths and abilities of our resource components towards maximizing client and shareholder value. This centers on the following key areas:
| • | Retain and strengthen our “Base” revenue through optimization of current capabilities and established client relationships. |
| • | Integrate our product and service areas to provide more comprehensive or enhanced solutions when internal or external value can be identified. |
| • | Explore, evaluate, and develop new collaborative service areas, products, and solutions closely aligned with internal core strengths, client goals, and overall industry clean power initiatives. |
Base Revenue and Strategic Integration. We will continue to build upon what has historically worked well for our Engineering Service Areas maintaining our client connections through efforts that provide a clear and immediate return such as optimized power generation and efforts that reduce or extend testing and inspection requirements. In parallel we are aggressively evaluating ways to integrate and package our design, simulation, and plant performance components to further enhance client benefit. In many cases this is structured with our historical base scope of supply proposed as the stand-alone foundation with optional scopes included to deliver a more integrated comprehensive solution if desired.
New Product / Service Areas. A dedicated, strategically focused exercise centered on evaluation of core capabilities, potential adjacencies, client needs, and industry direction has resulted in several new product or service initiatives within our Engineering group. Further development, expansion, and application of existing product lines and associated services have moved to the forefront of this effort with the added benefit of minimizing engineering and information technology level of effort while maintaining very high client benefit. Additional competitive advantage are also present through client contracts which help fund the R&D components of the initiatives.
Proprietary Software Tools. We developed a library of proprietary software tools including auto-code generators and first principles-based system models that substantially improve and expedite the design, production and integration, testing and modification of software and systems. These tools are used to automatically generate the computer code and systems models required for specific functions commonly used in simulation applications, thereby enabling us or our customers to develop repeatable high-fidelity, real-time software quickly, accurately and at lower costs. We also have an expertise integrating third-party engineering codes into our simulation environment, thereby offering some of the most sophisticated technical solutions in the market. We have a substantial library of process-specific simulation models and e-learning modules aimed at the oil and gas, refining and specialty chemicals markets. Lastly, our TSM platform is being used as a plant performance reporting tool and as the graphical user interface for our DVR service initiatives which provide high value client return through power recovery and other optimization strategies. This platform also serves as the foundation for our new product service initiatives with numerous optional modules and applications under consideration.
Performance Expertise. We are a leading innovator and developer of engineering directed solutions for the power generation industry. Our design, simulation, and plant performance resources are fully engaged with industry developments and client requirements routinely providing answers to our clients most pressing needs. Design modifications addressing base generation usage for nuclear facilities, optimization of power production through innovative statistical analysis, and real-time simulation software producing high-fidelity, real-time plant simulation are representative examples. As of December 31, 2021, we employed a highly educated and experienced multinational workforce of approximately 308 employees, including approximately 135 engineers and scientists in fields such as nuclear, chemical, mechanical and electrical engineering, applied mathematics and computer sciences, and approximately 112 instructors and plant operations staff specialists.
Unique Combination of Talent. Few in our market space bring together the sophistication of simulation technology with the engineering expertise, training expertise and plant performance expertise to provide the holistic people and plant performance improvement solutions as well as we do.
Reputation for Customer Satisfaction. As part of its ISO-9001:2015 Quality Program Certification, we measure customer satisfaction across numerous factors such as On-Time Delivery, Problem Solving, and Customer Communication. In each category measured, we routinely exceed customer expectations.
Training Curricula
We have developed hundreds of detailed courses and simulator exercise material and specific industrial applications including oil and gas refining, gas-oil production, nuclear and combined cycle gas turbine power plant and desalination.
Our Workforce Solutions business is mostly focused on training and operations support. Our trainers and consultants provide their services at customer facilities which allows us to interface with our customers directly in the course of doing business versus only periodically calling on customers. Our proximity gives us a significant competitive advantage in that we can immediately offer and implement solutions rather than contending with lengthy bid processes.
INTELLECTUAL PROPERTY
We depend upon our intellectual property rights in our proprietary technologies and our distinctive trade and service marks. We maintain a portfolio of: trademarks and servicemarks (both registered and unregistered) on our logos, product and service names, and other elements of trade dress; copyrights (both registered and unregistered) on written materials including software code, manuals, and other creative works; trade secret protections on its proprietary technologies and methodologies; and licenses from third parties to use and commercially exploit other protected intellectual property. While such trademarks, copyrights, trade secrets, and inbound licenses as a group are of material importance to us, we do not consider any one trademark, copyright, trade secret, or license to be of such importance that the loss or expiration thereof would materially affect us. We distribute our software products under software license agreements that grant customers nonexclusive and nontransferable licenses for the use of the products. Usage of our licensed on-premise software is restricted to designated computers at specified sites, unless the customer obtains a site-wide license for its use of the software. Our software products delivered as a service (SaaS) over the internet also contain customer verifications and usage limitations. We employ not only software and hardware security measures to prevent unauthorized use of its software, but also detailed contractual terms and limitations within our license and service agreements to prohibit unauthorized usage or reproduction. We offer our customers both perpetual software licenses with unlimited duration (as long as the customer complies with the license terms) and term-limited software licenses and usage agreements.
We do not own any patents. We believe that all of our trademarks are valid and will have an unlimited duration as long as they are adequately protected and sufficiently used. We have numerous registered U.S. trademarks, including: GSE Systems®, JTOPMERET®, RELAP5-HD®, TOTALVISION®, VPanel® and SimExec®. We believe that our international trademark protection is adequate to our business needs. We also claim trademark rights to DesignEP™, Java Application and Development Environment (JADE)™, OpenSim™, PSA-HD™, RACS™, SimSuite Pro™, SmartTutor™, THOR™, and Xtreme I/S™. Despite these protections, we cannot be sure that we have protected or will be able to protect our intellectual property adequately, that the unauthorized disclosure or use of our intellectual property will be prevented, that others have not or will not develop similar technology independently, or, to the extent we own any patents in the future, that others have not or will not be able to design around those patents. Furthermore, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as do the laws of the United States
GOVERNMENT REGULATIONS
Our operations are directly and indirectly affected by political developments and both domestic and foreign governmental regulations. We cannot determine the extent to which changing political priorities, new legislation, new regulations or changes in existing laws or regulations may affect our future operations, positively or negatively.
INDUSTRIES SERVED
The following chart illustrates the approximate percentage of our 2021 and 2020 consolidated revenue by industries served:
| | | Years ended December 31, | |
| | | 2021 | | | 2020 | |
| Nuclear power | | | 91 | % | | | 89 | % |
| Fossil fuel power | | | 6 | % | | | 7 | % |
| Process | | | 3 | % | | | 4 | % |
| Total | | | 100 | % | | | 100 | % |
As of December 31, 2021, we had approximately $41.3 million of total gross revenue in backlog compared to $40.4 million as of December 31, 2020. Most of our contract terms are for less than 24 months. Our backlog 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 we have reason to believe that such changes may occur.
Backlog is expressed in terms of gross revenue and, therefore, may include significant estimated amounts of third-party or pass-through costs to subcontractors and other parties. Because backlog is not a defined accounting term, our computation of backlog may not necessarily be comparable to that of our industry peers.
HUMAN CAPITAL
As of December 31, 2021, we had approximately 308 employees, which include 187 in our Performance Improvement segment and 121 in our Workforce Solutions segment. The 308 employees are comprised of 241 fulltime employees and 67 part time employees, Excluding our Workforce Solutions segment, which consists primarily of specialized instructors, our employee attrition rate for 2021 among all staff was approximately 7.5%. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.
Our people are what make us who we are today. Not only does it depend on employing highly skilled professionals but also people who can work together, effectively and collaboratively, as a team, whether departmental, cross functional, or cross company. Our employees come from diverse backgrounds as well as a diverse geography, and we look to attract people by offering a positive and welcoming work environment, strong management and leadership teams, along with a competitive compensation and benefit package.
Talent Management
We are committed to recruiting, hiring, retaining, and developing the most talented and skilled professionals & graduates available in the job market. Our approach to talent management includes a rigorous selection process followed by coaching, training, and knowledge transfer. We differentiate our program from typical performance management programs by focusing on the manager’s role. HR provides support but the day-to-day interactions that ensure the employee’s success come from the manager. They coach and develop employees through their active and regular interactions. This is a critical part of both current performance as well as knowledge transfer from our more experienced staff that may be nearing the end of their career, to our less experienced. Training takes place internally and across our companies to take advantage of our SMEs in our industry. As a result of this we can integrate different talent pools to be interchangeable across projects. In addition, we offer a tuition reimbursement that allows employees to further their education or attend external professional development programs.
In 2022, we will be putting career paths in place and compensation structures that will increase our retention rates as well as offering leadership development for our upcoming, emerging leaders that will lead us into the future.
Compensation & Benefits
We offer market competitive compensation and benefit programs for our employees in order to attract and retain superior talent. In addition to competitive base wages, additional benefits provided include: a Long-Term Incentive Stock Option Plan, a Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and employee assistance programs.
Diversity & Inclusion
A diverse and inclusive workforce adds value to our Company and helps us succeed. We believe diversity is important because it provides varied insight and varied perspectives which results in innovative thinking, better decision making and faster problem solving. Having a diverse workforce also brings different skill sets and experiences that are shared throughout the Company. Our culture, which is collaborative in nature, provides for inclusion of all employees in all aspects of our work.
Health, Safety, & COVID-19
The health and safety of our employees is of paramount importance to us. Our OSHA records show that we have had zero injuries/illnesses in the past four years, and we attribute that to our employees working carefully so they don’t get injured. We provide everyone a safety manual and the employees that work at power plants are also provided with the necessary safety training on site.
In response to COVID-19, we have implemented some protocols to keep our employees safe. All employees are provided remote work with office visits restricted to essential work only and includes use of masks, social distancing, and proper hand washing and cleaning protocols. Travel has also been limited to essential work only. While some employees are doing essential work at client sites, all our clients have provided their COVID safety protocols, and they are strictly adhered to.
During COVID-19, our employees have faced the challenges of maintaining their mental health as well as providing an environment for their children to participate in virtual learning. In response to this, we have provided multiple mental health resources for our employees and their families including subscriptions to Headspace as well as a wellness program that incentivizes and motivates people to eat healthy, get some form of exercise, and destress. We also offer an Employee Assistance Program (“EAP”) and full access to mental health providers through our health partner, Cigna. And in order for our employees to be able to assist in the virtual learning environment with their children, we have offered flexible work schedules to accommodate their needs.
COVID-19
Our employees began working remotely during the first quarter of 2020 due to the COVID-19 pandemic and will continue to do so when practical and as mandated by local, state and federal directives and regulations. Employees almost entirely work from home within our Performance Improvement Solutions segment, except when required to be at the client site for essential project work. Our performance contracts, which are considered an essential service, are permitted to and mostly continue without pause; however, we have experienced certain delays in new business. For our staff augmentation business, we have seen certain contracts for our Workforce Solutions customers pause, delay, and/or reduce scope as clients faced their own challenges associated with shrinking their on-premise workforces to the minimum operating levels in response to the pandemic; as a result, our Workforce Solutions segment has experienced a decline in its billable employee base since the start of the pandemic. We cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic, and we have experienced delays in commencing some projects, as a result, our ability to recognize revenue has been delayed for some contracts. We routinely monitor our operating expenses as a result of contract delays and have made adjustments to keep our gross profit at a sustainable level.
The following are some of the factors that we believe could cause our actual results to differ materially from historical results and from the results contemplated by the forward-looking statements contained in this report and other public statements we have made. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. Most of these risks are generally beyond our control. If any of the risks or uncertainties described below, or any such other or additional risks and uncertainties actually occurs, our business, results of operations and financial condition could be materially and adversely affected. The following information should be read in conjunction with Item 1 – Business, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes under Item 8 – Financial Statements and Supplementary Data.
RISKS RELATED TO MACROECONOMIC CONDITIONS AND COVID-19
A regional epidemic or global pandemic, including the COVID-19 virus may adversely affect our business operations and financial condition.
A regional epidemic or global pandemic, depending upon its duration, severity, could have a material adverse effect on our business.
In March 2020, the World Health Organization declared the COVID-19 virus a global pandemic and President Donald J. Trump declared a national emergency in the United States. This pandemic has caused substantial disruptions to populations, including economic markets and businesses, worldwide. Government and public health officials have and are expected to continue to recommend significant regulations and restrictions in order to contain the spread of the virus and mitigate harm. These regulations and restrictions, adopted at varying times and extents in the affected locations, have had (and may continue to have) serious adverse impacts on economic markets and the operation of businesses in those locations. This pandemic has increased macroeconomic and stock market volatility and uncertainty, which may continue.
Parts of our business have been and could continue to be adversely affected by this pandemic. In response to the pandemic, varying restrictions have been implemented, either by government order or by voluntary measures, to try to contain the spread of virus and mitigate harm, such as temporary closures or restrictions on business operations, and/or the imposition of social distancing, quarantine, remote work, or other limitations on in-person meetings. The timing and severity of these imposed restrictions have varied in jurisdictions and, while some have been lifted, they could be reinstated at any time.
These disruptions have and may continue to adversely affect our customers’ operations. These disruptions have and may continue to impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations. Depending on the severity and duration of these disruptions and the subsequent supply chain effects, customer demand, our ability to meet demand, and our revenue and profit margins, may continue to be negatively impacted.
These disruptions have and may continue to adversely affect our own business operations. Our employees, in many cases, are working remotely and using various technologies to perform their functions. Personnel performing services offered by our Performance Solutions segment, have been classified as essential by most governmental bodies in affected jurisdictions, and accordingly have for the most part been able to continue without pause. Because of the embedded presence of personnel in our Workforce Solutions segment, this segment has faced restrictions on personnel being deployed to customer sites, which negatively impacts our business that is related to those disrupted services. Both the health and economic aspects of the COVID-19 virus are highly fluid and the future course of each is uncertain. For these reasons and other reasons that may come to light if the coronavirus pandemic and associated protective or preventative measures expand, we may experience a material adverse effect on our business operations, revenues and financial condition; however, its ultimate impact is highly uncertain and subject to change.
Due to the uncertainty of the severity and duration of these events, the extent and effectiveness of containment and mitigation measures that make be taken by governmental authorities or voluntarily, to the extent the COVID-19 pandemic, or any other regional epidemic or global pandemic has or may adversely impact our business, such impact may also heighten other risks set forth in this Section 1A – Risk Factors.
We are subject to regulations and laws related to COVID-19 impacting our workforce.
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, the OSHA issued this ETS, however the implementation of the ETS was blocked by federal appeals courts, pending resolution of ongoing litigation challenging the constitutionality of the ETS, and the ETS was withdrawn by OSHA on January 25, 2022. OSHA, however, has not withdrawn the proposed rule that would effectuate the same mandate, and it cannot be known whether OSHA may reissue the ETS or otherwise issue new emergency temporary standards imposing similar mandates. We have already received notice by both government customers and prime contractors serving government customers regarding the vaccination requirement and its application to our business with those customers. As an employer of more than 100 employees, we would also be subject to the ETS or a similar mandate should it become effective. It is possible that additional jurisdictions where we do business may impose similar mandates that would apply to our employees. In addition, certain of our customers have or may require vaccines for those of our employees who provide on-site service at their facilities. We will continue to monitor the status of these or other mandates or regulations and their application to us and our business. Our efforts, to comply with these or other mandates and restrictions, including continuing to require that some or all of our employees be fully vaccinated against COVID-19, or submit to frequent testing, could result in increased costs, labor attrition and disruption, as well as difficulty in securing future labor needs, and could adversely impact our ability to deliver services to the jurisdictions or customers where such mandates or restrictions are imposed.
We are subject to a wide variety of laws and regulations, and these may change.
Our businesses are subject to regulation by U.S. federal and state laws, and foreign laws, government regulations and policies, and other administrative requirements. Changes to laws or regulations may require us to modify our business objectives if existing practices become more restricted, subject to escalating costs, or prohibited outright. Particular risks include possible curtailment of our intended business activities or strategies as a result of changed or new regulatory risks arising from federal laws and regulations, such as laws and regulations regarding export of sensitive technologies or technical information or changed interpretations of existing laws and regulations. Our business and the industries in which we operate are also at times being reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties, or the assertion of private litigation claims and damages. Any significant change to laws, regulations, enforcement policies, or liability regimes, or other actions by government bodies having jurisdiction over our business, may have material adverse effects on our business and profitability. We have only limited ability to foresee, plan for, or influence changes to these requirements.
RISKS RELATED TO OUR INDUSTRY
Our business is largely dependent on sales to the nuclear power industry. Any significant disruption in this industry would have a material adverse effect upon our revenue and profitability.
In 2021 and 2020, 91.0% and 89.0% of our revenue, respectively, was from customers in the nuclear power industry customers. We expect to derive a significant portion of our revenue from customers in the nuclear power industry for the foreseeable future. Market demand for, and our ability to supply nuclear power plant simulators and related products and services is dependent on the continued operation of nuclear power plants globally and, to a lesser extent, on the construction of new nuclear power plants. A wide range of factors affect the continued operation and construction of nuclear power plants, including the political, regulatory and legal environment in which they operate, the availability and cost of alternative means of power generation, the occurrence of future nuclear incidents, such as the one which occurred at the Fukushima Daiichi nuclear plant in 2011, and general economic conditions. Significant regulatory changes in the U.S. or abroad could materially affect demand for our products, the profitability of our service deliveries to nuclear power industry customers, and the overall efficacy of our current business model.
Customer concentration in the U.S. nuclear power industry subjects us to risks and uncertainty, which we may not be able to mitigate through diversification.
The U.S. nuclear industry has significant customer concentration with a limited number of entities owning all of the 93 nuclear reactors currently operating in the United States. In 2021, we continued to experience high customer concentration with respect to each of our businesses. Indeed, one customer accounted for 13.8% of our total consolidated revenue for the year-ended December 31, 2021. We monitor our customer concentration and seek to diversify our customer base within this concentrated industry. In addition to pursuing diversification strategies and expanding relationships with targeted customers, we mitigate the associated customer concentration risk by developing meaningful relationships with each nuclear power plant, which are often separately responsible for vendor selection and individual procurement decisions.
While our acquisition activity has the potential to diversify our customer base through inorganic means, we have also found that some of the strongest commercial opportunities are within our existing customer base, as our existing relationships are a resource for introductions, due diligence, and business intelligence. Our acquisition of DP Engineering highlights these kinds of opportunities and challenges. Through the acquisition process, we benefited from insights obtained from our subsidiaries who work side-by-side with DP Engineering within our existing footprint. At the same time, DP Engineering had significant customer concentration within our existing customer base. As a result, our strategy with DP Engineering included a focus on new customer acquisition and diversification. Despite this strategy, DP Engineering was significantly impacted by the loss of a significant customer.
The nuclear power industry, our largest customer group, is associated with a number of hazards which could create significant liabilities.
Our business could expose us to third party claims with respect to product, environmental and other similar liabilities. Although we have sought protection from these potential liabilities through a variety of legal and contractual provisions as well as through liability insurance, the effectiveness of such protections has not been fully tested. Certain of our products and services are used by the nuclear power industry primarily in operator training. Although our contracts for such products and services typically contain provisions designed to protect us from potential liabilities associated with such use, there can be no assurance that we would not be materially adversely affected by claims or actions which may potentially arise due to factors that may be outside of our direct control.
The industries in which we operate are highly competitive. This competition may prevent us from raising prices at the same pace at which our costs increase.
Our businesses operate in highly competitive environments with both domestic and foreign competitors, many of whom have substantially greater financial, marketing, and other resources than we do. The principal factors affecting competition in our industries include price, technological proficiency, ease of system configuration and use, product reliability, applications expertise, engineering support, local presence, personal relationships, and the relative financial stability of the competitor. We believe competition in the simulation fields may further intensify in the future as a result of advances in technology, consolidations and strategic alliances among competitors, increased costs required to develop new technology and the increasing importance of software content in systems and products. Because our business has a significant international component, changes in the value of the dollar could adversely affect our ability to compete internationally and could reduce our profitability on international business opportunities that we do win. Any of these competitive factors, or any combination of two or more factors, could make it more difficult for us to bid successfully on new projects, or to complete projects at profit margins that we consider reasonable. An inability or reduced ability to win new work would have a material adverse impact on our backlog and revenue, and an inability or reduced ability to secure reasonable profit margins on projects awarded to us would have a material adverse impact on our profitability and overall results of operations
RISKS RELATED TO OUR PRODUCTS, SERVICES, AND BUSINESS PRACTICES
Our simulation business is dependent on product innovation and research and development, which costs are incurred prior to realization of revenue for new products and improvements.
We believe that our success will depend in large part on our ability to maintain and enhance our current product line, develop new products, maintain technological competitiveness and meet an expanding range of customer needs. Our product development activities are aimed at the development and expansion of our library of software modeling tools, the improvement of our display systems and workstation technologies, and the advancement and upgrading of our simulation technology. The life cycles for software modeling tools, graphical user interfaces, and simulation technology are variable and largely determined by competitive pressures and the evolution of software and standards that may be controlled by third parties. Consequently, we will need to continue to make significant investments in research and development to enhance and expand our capabilities in these areas and to maintain our competitive advantage. We cannot control, and we may be unable to predict accurately, the development and evolution of these competitive pressures and external software and standards. We may be unable to monetize our investment in research and development in a timely manner, or at all. Unexpected or excessive delays in realizing a return on these investments may have a material and adverse effect on our cash position, results of operations, and financial condition.
Our backlog is subject to unexpected adjustments and cancellations and may not be a reliable indicator of future revenues or earnings.
Backlog represents products or services that our customers have committed by contract or purchase order to purchase from us and that we have not yet delivered or recognized as revenue. Our backlog as of December 31, 2021 and 2020 was $41.3 million and $40.4 million, respectively. There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits. Because of project cancellations or changes in project scope and schedule, we cannot predict with certainty whether or when backlog services will be performed, or products delivered. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed to us. Our poor project performance could increase the cost associated with a project. Thus, delays, suspensions, cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate the revenues and profits that we actually realize from projects in backlog. Reductions in our backlog due to cancellation or modification by a customer or for other reasons may adversely affect, potentially to a material extent, the revenues and earnings we actually receive from contracts and orders included in our backlog. Many, but not all, of the contracts in our backlog provide for cancellation fees in the event customers cancel projects. These cancellation fees usually provide for reimbursement of our out-of-pocket costs and payments, for work performed prior to cancellation including varying percentages of the profits we would have realized had the contract been completed. We usually have no contractual right to payment for all of the lost revenue or lost profits in the event of cancellation of the contracts and orders reflected in our backlog, however. Projects may remain in our backlog for extended periods of time. If we experience significant project terminations, suspensions, or scope adjustments to contracts reflected in our backlog, our financial condition, results of operations and cash flows may be adversely impacted.
We may encounter difficulties in effectively integrating acquired businesses.
As part of our business strategy, we have acquired, and intend to acquire, companies with compatible or related products. These acquisitions will be accompanied by the risks commonly encountered in acquisitions of companies, which include, among other things:
| • | potential exposure to unknown liabilities of the acquired companies; |
| • | higher than anticipated acquisition costs and expenses; |
| • | depletion of cash and other Company assets and resources in connection with the acquisition or integration; |
| • | difficulty and expense of integrating the operations and personnel of the companies, especially if the acquired operations are geographically distant or culturally different; |
| • | potential disruption of our ongoing business and diversion of management time and attention; |
| • | failure to maximize our financial and strategic position by the successful incorporation of acquired technology; |
| • | difficulties in adopting and maintaining uniform standards, controls, procedures, and policies; |
| • | loss of key employees and customers as a result of changes in management; and |
| • | possible dilution to our shareholder. |
We may not be successful in overcoming these risks or any other problems encountered in connection with any of our acquisitions, and if we are not successful, our financial results may be materially impacted. We may be forced to modify our strategic objectives or seek alternative sources of growth.
RISKS RELATED TO FOREIGN OPERATIONS
Our sales to foreign customers expose us to risks associated with operating internationally.
Sales of products and services to end users outside the United States accounted for approximately 12.0% of our consolidated revenue in 2021 and 17.0% of consolidated revenue in 2020. Consequently, our businesses are subject to a variety of risks that are specific to international operations, including the following:
| • | export laws and regulations that could erode our profit margins or restrict the export of some or all of our products; |
| • | compliance with the U.S. Foreign Corrupt Practices Act and similar non-U.S. regulations; |
| • | the burden and cost of compliance with foreign laws, treaties and technical standards generally, as well as responding to changes in those requirements; |
| • | contract award and funding delays; |
| • | potential restrictions on transfers of funds; |
| • | potential difficulties in accounts receivable collection; |
| • | currency fluctuations, including costs and potentially limited availability of viable hedging options; |
| • | import and export duties and value added or other taxes; |
| • | transportation and communication delays and interruptions; |
| • | differences in insurance availability and coverage in some jurisdictions; |
| • | difficulties involving strategic alliances and managing foreign sales agents or representatives; |
| • | uncertainties arising from foreign local business practices and cultural considerations; and |
| • | potential military conflicts and political risks, including particularly the current conflict between Russia and Ukraine |
| • | potential disruption of our international business due to the worldwide COVID-19 virus outbreak. |
In December 2019, an outbreak of the COVID-19 virus was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared the COVID-19 virus a global pandemic. This highly contagious disease has spread to most of the countries in the world and throughout the United States, creating a serious impact on customers, workforces and suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn. It has caused a disruption of the normal operations of many businesses, including the temporary closure or scale-back of business operations and/or the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. The pandemic may adversely affect our international customers’ operations, our employees and our employee productivity. It may also impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in costs, delays or disruptions in performance. These supply chain effects, and the direct effect of the virus and the disruption on our employees and operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins.
In late February 2022, following rising tensions between the regions, Russian military forces launched significant military action against Ukraine, and sustained tension, conflict, and disruption in the region is expected.
We do not have employees or operations in Russia or Ukraine, but we do have customers who do business in these countries or surrounding countries. Such operations and customers may be adversely affected by the continued conflict and any related disruptions, sanctions or other governmental actions.
While we have and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of our foreign business, we cannot ensure that such measures will be adequate. During the years ended December 31, 2021 and 2020, we did not have revenues greater than 10% from any individual foreign country.
Exports and sales to certain foreign countries, including the People’s Republic of China, are subject to regulatory, political, and other risks.
The export and sale of our services and technology to certain foreign countries including China, are subject to U.S. export control regulations. Export control policy pertaining to China and other countries may be enforced through laws and regulations administered by the Department of Commerce and the Department of Energy, and jurisdiction with regard to the export and sale of our services and technology may be overlapping and unclear. Specific governmental authorizations may be required before we can export our services or technology to countries such as China or collaborate with foreign entities or foreign individuals located in countries such as China. These restrictions include our own wholly-owned Chinese subsidiary and its employees. If export or other authorizations are required and not granted, or are significantly delayed, our international business plans pertaining to China and other countries could be materially affected. Further, our exports and sales to China and other countries with respect to which the United States may have shifting or negative diplomatic and trade relations, including sales made by or through our wholly-owned Chinese subsidiary, expose us to particular risks associated with the political and regulatory relationship between the U.S. and China and between the U.S. and such other countries.
In October 2018, DOE announced the tightening of certain export control restrictions with regard to the export of nuclear technology to China, including certain presumptive denials with regard to the export of identified nuclear technologies to China. Although we do not believe that these policy changes cover our technologies or services, additional restrictions pertaining to U.S. regulation and policy pertaining to international trade with China could adversely affect our business in China and the performance of our Chinese subsidiary.
Finally, violation of export control regulations, including those pertaining to China, could subject us to fines and other penalties, such as losing the ability to export for a period of years, which would limit our revenue growth opportunities and significantly hinder our attempts to expand our business internationally. Although we take steps to monitor and ensure our compliance with all applicable export laws and regulations, we are nevertheless exposed to political and regulatory risks that we may not be able to mitigate fully and that may have a material adverse effect upon our international business operations.
Our operations within China subject us to risks and uncertainties relating to the laws and regulations of China.
Our business and operations within China may be adversely affected by China’s continuously evolving internal policies, laws and regulations, including those relating to nuclear technology, trade, taxation, import and export tariffs or restrictions, currency controls, cybersecurity and data protection, indigenous innovation and the promotion of a domestic nuclear industry, and intellectual property rights and enforcement and protection of those rights. Enforcement of existing laws or agreements in China may be inconsistent. In addition, changes in the political environment, governmental policies, international trade policies and relations, or U.S. - China relations could result in revisions to laws or regulations or their interpretation and enforcement, exposure of our proprietary intellectual property to risk of loss, increased taxation, trade sanctions, the imposition of import duties or tariffs, restrictions on imports or exports, currency revaluations, or retaliatory actions by the Chinese government in response to U.S. actions, any or all of which could have an adverse effect on our business plans and operating results.
RISKS RELATED TO OUR FINANCIAL CONDITIONS, ACCOUNTING, AND CONTRACTS
If we cannot comply with the financial or other restrictive covenants in our credit agreement, or obtain waivers or other relief from our lender, we may cause an event of default to occur, which could result in loss of our sources of liquidity and acceleration of our debt.
In order to fund general working capital needs, repayment of indebtedness, and other corporate purposes, we entered into a Securities Purchase Agreement with Lind Global Fund II LP (“Lind Global”) in March 22, 2022. Pursuant to which we issued to Lind Global a two-year, secured, interest-free convertible promissory note in the amount of $5.75 million (the “Convertible Note”) and a common stock purchase warrant to acquire 1,283,732 shares of our common stock (the “Warrant”). The Convertible Note will reach maturity in February of 2024, although we are permitted to prepay the Convertible Note, subject to certain restrictions. We may not be able to refinance or restructure this Convertible Note or any other debt, sell assets or raise equity, in each case on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy repayment obligations or to refinance or restructure these obligations on commercially reasonable terms could have a material adverse effect on our business, financial condition, results of operations and cash flows. Upon the occurrence of an event of default under the Convertible Note, or another credit arrangement, our lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable. If we were unable to repay all outstanding amounts in full, our lenders could exercise various remedies including instituting foreclosure proceedings against our assets pledged to them as collateral to secure that debt.
Our PPP Loan eligibility and forgiveness remains subject to audit for compliance with applicable SBA Requirements.
As a result of the COVID-19 pandemic, we sought and obtained support through various business assistance programs. We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the “PPP Loan”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), as administered by the Small Business Administration (the “SBA”). The application for receipt of the PPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan was serviced by Citizens Bank, N.A. (the “Lender”). 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 the Lender substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. The Lender reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with the Lender’s determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA. Under the terms of the PPP Loan, we must retain all records relating to our PPP Loan for a period of six years from the date the loan was forgiven. During this period, our PPP Loan eligibility and loan forgiveness application are subject to review and audit by the SBA. We are aware of the requirements of the PPP Loan and believe we are within the eligibility threshold and have used the loan proceeds in accordance with the PPP Loan forgiveness requirements. We have retailed all necessary documentation supporting our eligibility. If, despite our actions and good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are made subject to an audit and are found to have been ineligible to receive the PPP Loan or forgiveness thereof, or are found in violation of any of the laws or regulations that apply to us in connection with the PPP Loan, we may be subject to penalties, including significant civil, criminal, and administrative penalties and could be required to repay the PPP Loan. An audit by the SBA could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial conditions. 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. The ERC Credits are subject to confirmation that we were eligible to receive the credits and the CARES Act could be subject to further modification or revised interpretation.
Our revenue, results of operations, and cash flows may suffer upon the loss of a significant customer.
For the years ended December 31, 2021 and 2020, four customers have provided more than 10% of Workforce Solutions segment's revenues:
| | | Years ended December 31, | |
| | | 2021 | | | 2020 | |
| Customer A | | | 28 | % | | | 0 | % |
| Customer B | | | 19 | % | | | 15 | % |
| Customer C | | | 13 | % | | | 12 | % |
| Customer D | | | 10 | % | | | 11 | % |
Hyperspring and Absolute, which together comprise our Workforce Solutions segment, may lose a significant customer if any existing contract with such customer expires without extension, renewal, or negotiation or if it is terminated by the customer prior to expiration, to the extent such early termination is permitted by the contract. A number of Hyperspring's and Absolute’s contracts typically are subject to expiration during each year, and either company may lose any of these contracts if we are unable to extend, renew, or renegotiate the contracts. The loss of any significant customer would adversely affect our Workforce Solutions segment’s revenue, results of operations, and cash flows.
For the years ended December 31, 2021 and 2020, two and one customers have provided more than 10% of Performance Improvement Solutions segment's revenues, respectively:
| | | Years ended December 31, | |
| | | 2021 | | | 2020 | |
| Customer E | | | 14 | % | | | 6 | % |
| Customer F | | | 12 | % | | | 11 | % |
Customer A also provided 13.8% of our total consolidated revenue for the years ended December 31, 2021, While the acquisition of DP Engineering increased our product and service offerings, we anticipate that it will further increase our customer concentration in our Performance Improvement Solutions segment.
Absolute, True North, and DP Engineering, which together comprise our Performance Improvement Solutions segment, may lose a significant customer if any existing contract with such customer expires without extension, renewal, or negotiation or if it is terminated by the customer prior to expiration, to the extent such early termination is permitted by the contract. A majority of the contracts entered into by our Performance Improvement Solutions businesses are able to be terminated by our customer on relatively short notice without cause or further compensation. The loss of any significant customer would adversely affect our Performance Improvement Solutions segment’s revenue, results of operations, and cash flows.
Our expense levels are based upon our expectations as to future revenue, and we may be unable to adjust spending to compensate for a revenue shortfall. Accordingly, any revenue shortfall would likely have a disproportionate effect on our operating results.
Our revenue was $55.2 million and $57.6 million for the years ended December 31, 2021 and 2020, respectively. We had operating loss of $6.0 million and $9.5 million for the years ended December 31, 2021 and 2020, respectively. Our operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, including purchasing patterns, timing of launch or release of new products and enhancements by us and our competitors, and fluctuating global economic conditions. Because our expense levels are based in part on our expectations as to future revenue and includes certain fixed, pre-negotiated, and prepaid costs, we may be unable to adjust spending in a timely manner to compensate for any revenue shortfall. Because of this lag in response time, such revenue shortfalls likely would have a disproportionate adverse effect on our operating results.
A sustained decline in the price of our common stock or weaker than forecasted operating results could result in write-downs of goodwill and other intangible assets and capitalized software development costs.
In conjunction with business acquisitions, we record goodwill and other intangible assets and review their fair value for impairment annually as of December 31, or on an interim basis if impairment indicators are present, such as a significant reduction in our market capitalization, significant declines in operating performance or disruptions to the business that could reduce our future cash flow. We used a discounted cash flow analysis to test for impairment and concluded that the carrying value of the definite-lived intangible assets of DP Engineering exceeded its fair value by $4.3 million, and we recorded an impairment for this amount as of the three months ended March 31, 2020. We can provide no assurance that we will not have an impairment charge in future periods as the result of changing conditions. See Note 7 to our consolidated financial statements for information regarding our goodwill.
We capitalize certain computer software development costs and, accordingly, the capitalized costs are reported on our balance sheet. 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, we assess the status of our development programs and the recoverability 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, we will write-down these costs to their 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 operations.
Write-down of goodwill and capitalized software development costs in the current and future accounting periods may have an impact on our value, results of operations, and price of our common stock.
We are currently a party to multiple fixed price contracts and will continue to enter into similar contracts in the future. If we are not able to estimate accurately or control costs on such projects, the profitability of such projects could be reduced.
A significant portion of our revenue is attributable to contracts entered into on a fixed price basis, which enable us to benefit from cost savings, but expose us to the risk of cost overruns. If our initial estimates are incorrect regarding our costs of performance under these contracts, or if unanticipated circumstances arise, we could experience cost overruns that could result in reduced profits or even net losses on these contracts. Our financial condition is dependent upon our ability to maximize our earnings from our contracts. Lower earnings or losses caused by cost overruns could have a negative impact on our financial results.
Under our time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and are paid a fee, which may be fixed, or performance based. In both cases, however, if our 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 even under a time and materials or cost-reimbursable contract.
Our inability to successfully estimate and manage costs on each of these contract types may materially and adversely affect our financial condition.
We use derivative instruments in the normal course of our business which could result in financial losses and exposure to other risks that negatively impact our net income (loss) and business operational efficiency.
While we had no foreign exchange contracts outstanding as of December 31, 2021, we periodically enter into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated trade receivables. We could recognize financial losses as a result of volatility in the market values of these contracts or if a derivative instrument counterparty fails to perform. We attempt to minimize credit exposure by limiting counterparties to internationally recognized financial institutions, but even these counterparties are subject to default and contract risk and this risk is beyond our control. We also engage in interest rate hedging transactions in the ordinary courses of our business to mitigate the risk that amounts borrowed under our credit facility at floating interest rates may be affected by adverse rate movements. Depending on future business, market, and interest rate environments, however, these hedging transactions may not be effective to mitigate the financial impact of the risks for which they were put into place sufficiently to justify their expense. Additionally, we may need or wish to avail ourselves of other forms of hedging or derivative instruments in the future depending on our business needs, and these other types of derivative instruments may be subject to the same and other risks and may not be available to us on a cost-effective or risk-controlled basis, if at all. The unavailability of viable and cost effective risk management, hedging, or similar instruments now or in the future could adversely impact our business operational efficiency or results.
We issue letters of credit, performance, advance payment, and bid bonds in the normal course of our business which could result in financial losses that negatively impact our net income (loss).
We may be required to issue letters of credit, performance, advance payment, and bid bonds to our customers and potential customers as a normal part of our business activities. Our customers may have the ability to draw upon these performance bonds in the event we fail to cure a material breach of the contract within a specified period after receiving notice from the customer regarding the nature of the breach. For the year ended December 31, 2021, we did not issue any advance payment or performance bonds, but we may be required to do so in the future to secure contract awards. As of December 31, 2021, we had four letters of credit outstanding for customers in the respective amounts of $513,300, $359,674, $118,800, and $60,000 for an aggregate outstanding amount of $1,051,774.
Our ability to use our net operating loss (NOL) carryforward and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or tax liabilities may be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
RISKS RELATED TO INTELLECTUAL PROPERTY
We rely upon our intellectual property rights for the success of our business, but the steps we have taken to protect our intellectual property may be inadequate.
Although we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are important to establishing and maintaining a technological leadership position, our business depends, in part, on the strength of our intellectual property rights in our proprietary technology and information. We rely upon a combination of trade secret, copyright, and trademark law, contractual arrangements and technical means to protect our intellectual property rights. We enter into confidentiality agreements with our employees, consultants, joint venture and alliance partners, customers, and other third parties that are granted access to our proprietary information, and we limit access to and distribution of our proprietary information. There can be no assurance, however, that we have protected or will be able to protect our proprietary technology and information adequately, that the unauthorized disclosure or use of our proprietary information will be prevented, that others have not or will not develop similar technology or information independently, or, to the extent we own any patents in the future, that others have not or will not be able to design around those future patents. Furthermore, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as the laws of the United States. Our inability to protect our intellectual property rights from infringement, dilution, or loss could make it more difficult for us to generate revenue from the offer, licensure, and sale of our products and services and could enable third parties to compete with us more effectively.
Third-party claims that we allegedly infringe the intellectual property rights of others may be costly to defend or settle and could damage our business.
We cannot be certain that our software and services do not infringe issued patents, copyrights, trademarks or other intellectual property rights of third parties. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of intellectual property rights of third parties by us or our licensees concerning their use of our software products and integration technologies and services. Third parties may bring claims of infringement directly against us, or because our software is integrated with our customers’ networks and business processes, as well as other software applications against us, our customers, and our business partners or software suppliers, if the cause of the alleged infringement cannot easily be determined.
Claims of alleged infringement may have a material adverse effect on our business and may discourage potential customers from doing business with us on acceptable terms, if at all, even if the claims are ultimately adjudicated to have no merit, dismissed, or settled. Defending against claims of infringement may be time-consuming and may result in substantial costs and diversion of resources, including our management’s attention to our business. Furthermore, a party making an infringement claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our software or require that we re-engineer some or all of our products or modules. Claims of intellectual property infringement also might require us to enter costly royalty or license agreements. We may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Our business, operating results and financial condition could be harmed significantly if any of these events were to occur, and the price of our common stock could be adversely affected. In addition, we have agreed, and may agree in the future, to indemnify certain of our customers against claims that our software infringes upon the intellectual property rights of others. Although we carry general liability insurance, our current insurance coverage may not apply to, and likely would not protect us entirely or at all from, liability that may be imposed under any of the types of claims described above.
RISKS RELATED TO CYBER SECURITY
Cyber security incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
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.
RISKS RELATED TO ATTRACTING AND RETAINING TALENT
We are dependent on our management team, and the loss of or the inability to attract and retain one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.
Our future success is substantially dependent on the continued services and continuing contributions of our executive officers and other key personnel. All of our recently acquired businesses, including Hyperspring, Absolute, True North, and DP Engineering, are particularly dependent on key personnel and their key strategic relationships. The loss of the services of any of our executive officers or other key personnel could harm our business. Our future success also depends on our ability to continue to attract, retain, and motivate highly skilled employees. If we are not able to attract and retain key skilled personnel, our business could be harmed and our revenue, profitability, and overall results of operations could be materially impacted.
A failure to attract and retain technical personnel could reduce our revenue and our operational effectiveness.
There is a continuing demand for qualified technical personnel in the industries within which we operate. We believe that our future growth and success will depend upon our ability to attract, train and retain such personnel. Our design and development efforts, particularly within our Performance Improvement Solutions business segment, depend on hiring and retaining qualified technical personnel. An inability to attract or maintain a sufficient number of technical personnel could have a material adverse effect on our contract performance or on our ability to capitalize on market opportunities.
RISKS RELATED TO STATE LAW
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of our Company, even if that change may be considered beneficial by some shareholders.
The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay or prevent a change in control of our Company that a shareholder may consider favorable. These include provisions:
| • | providing that our Board of Directors fixes the number of members of the board and fills all vacancies on the Board of Directors; |
| • | providing for the division of our Board of Directors into three classes with staggered terms; |
| • | limiting who may call special meetings of shareholders; |
| • | prohibiting shareholder action by written consent, thereby requiring shareholder action to be taken at a meeting of the shareholders; |
| • | establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted on by shareholders at shareholder meetings; |
| • | establishing supermajority vote requirements for certain amendments to our certificate of incorporation and bylaws; |
| • | limiting the right of shareholders to remove directors; and |
| • | authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt. |
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging takeover attempts that might result in a premium over the market price for shares of our common stock.
We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal and are not intended to make our Company immune from takeovers. These provisions apply even if the offer may be considered beneficial by some shareholders, however, and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of our Company and our shareholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
We are headquartered in Columbia, Maryland. On November 28, 2017, we entered into an office lease agreement to sublease 5,039 rentable square feet of an office building located in Columbia, Maryland. The lease is for an initial six years and six months with two renewal periods of five years each. The office in Columbia, Maryland, now serves as our executive office location.
We lease a facility in Sykesville, Maryland (37,000 square feet). The lease for this facility expires on June 30, 2023. As of December 31, 2021, we subleased approximately 4,500 square feet of the facility with a sublease term ending June 30, 2023.
In addition, we lease office space domestically in Huntsville, Alabama; Montrose, Colorado; Fort Worth, Texas, and internationally in Beijing, China. Our leases for these facilities have terms ending between 2022 and 2026. See Note 6 and 18 to our consolidated financial statements for information regarding our restructuring activity and leases
| ITEM 3. | LEGAL PROCEEDINGS. |
We are, from time to time, involved in ordinary routine litigation incidental to the conduct of our business. Neither we nor any of our subsidiaries are a party to, nor is any of our property the subject of, any material pending legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business, financial condition or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock is listed on the NASDAQ Stock Market Exchange, where it trades under the symbol “GVP”. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as reported by the NASDAQ Stock Market Exchange for each full quarterly period within the two most recent fiscal years:
| 2021 | |
| Quarter | | High | | | Low | |
| First | | $ | 2.68 | | | $ | 1.30 | |
| Second | | $ | 1.92 | | | $ | 1.24 | |
| Third | | $ | 1.70 | | | $ | 1.14 | |
| Fourth | | $ | 1.73 | | | $ | 1.27 | |
| 2020 | |
| Quarter | | High | | | Low | |
| First | | $ | 1.84 | | | $ | 0.88 | |
| Second | | $ | 1.18 | | | $ | 0.91 | |
| Third | | $ | 1.08 | | | $ | 0.90 | |
| Fourth | | $ | 1.46 | | | $ | 0.98 | |
On February 28, 2022, there were 20,980,811 shares of our common stock outstanding. As of the latest record date, we had 725 holders of record. This number does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
| ITEM 6. | SELECTED FINANCIAL DATA. |
This information is not required for smaller reporting companies.
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
We are a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in their respective organizations, primarily in procedures, engineering, technical support and training focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries.
Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve, namely the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although these delays and reductions impacted us, as an essential services provider to an essential industrial base, we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. Additionally, staffing shortages have resulted in new opportunities for our Workforce Solutions segment. In 2021, the effects of the pandemic still impacted the end markets we serve, but those effects have been mitigated by a number of factors, including the following: the pandemic largely has had a targeted effect on the population; a number of vaccines in the market being distributed and, despite logistical challenges, making substantial progress for those in most need; the economy of the United States has not had as much disruption as was initially feared, which has benefited our end markets; and most importantly our end markets seem poised to contract with us for essential services that had been delayed as a result of the pandemic. As we end 2021 and begin 2022, we have had a number of significant contract wins that have been publicly announced, which we hope will be a harbinger of a more attractive business environment for the power industries we serve.
As a result of the COVID-19 pandemic, we have sought and obtained support through various business assistance programs. We applied for and, on April 23, 2020, received the PPP Loan under the CARES Act, as administered by the SBA. The application for receipt of the PPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan bore interest at a rate of 1% per annum and would mature on April 23, 2022, with the first payment deferred until September 2021. We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to the Lender substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. The Lender reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with the Lender’s determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA.
During the second quarter of 2021, we performed analysis to determine our first quarter 2021 eligibility for the Employee Retention Credit available under the CARES Act . We amended certain payroll tax filings and applied for a refund of $2.4 million dollars in April 2021. For the second quarter of 2021, we have applied for a refund of $1.8 million dollars from the IRS with the timely filing of Form 941 and have already recognized a benefit of $900,000 in value from unremitted payroll taxes as allowable. For the third quarter of 2021, we have applied for a refund of $1.0 million from the IRS with the timely filing of Form 941 and have recognized a benefit of $1.4 million in value from unremitted payroll taxes as allowable. Subsequent to the year end, we received refunds of $1.1 million, which was included in the other current assets balance at December 31, 2021.
We entered into a contract with a subcontractor to purchase large equipment from Siemens in order to build a simulator for project Slovenske Elektrarne Mochovce Full Scope Simulator Upgrade in December 2018. The total contract price was about $2.7 million and included VAT taxes of approximately $450,000. We paid the VAT taxes and had pursued the collection of this VAT refund for a couple of years. In May 2021, we were informed that this VAT refund was no longer collectable. As a result, we wrote off this VAT receivable during 2021.
On September 9, 2021, President Biden released the COVID-19 Action Plan, Path Out of the Pandemic (the “Plan”), with the stated goal of getting more people vaccinated. As part of the Plan, Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (the “Order”), creates the Safer Federal Workforce Task Force (the “Task Force”), which released guidance for U.S. Government contractors and their subcontractors. This guidance included mandatory vaccination of all employees working on or for a government contract, either directly or indirectly, by January 4, 2022 (subject to medical and religious exemptions). As a part of the Plan and Order, President Biden also directed, the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) requiring that all employers with at least 100 employees ensure that their U.S.-based employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week. On November 4, 2021, OSHA issued this ETS, however the implementation of the ETS was blocked by federal appeals courts, pending resolution of ongoing litigation challenging the constitutionality of the ETS, and the ETS was withdrawn by OSHA on January 25, 2022. OSHA, however has not withdrawn the proposed rule that would effectuate the same mandate, and it cannot be known whether OSHA may reissue the ETS or otherwise issue new emergency temporary standards imposing similar mandates. We have already received notice by both government customers and prime contractors serving government customers regarding the vaccination requirement and its application to our business with those customers. As an employer of more than 100 employees, we would also be subject to the ETS or a similar mandate should it become effective. It is possible that additional jurisdictions where we do business may impose similar mandates that would apply to our employees. In addition, certain of our customers may require vaccines for those of our employees who provide on-site service at their facilities. We will continue to monitor the status of these or other mandates or regulations and their application to us and our business.
Results of Operations.
The following table sets forth the results of operations for the periods presented expressed as a percentage of revenue.
| ($ in thousands) | | Years ended December 31, | |
| | | 2021 | | | % | | | 2020 | | | % | |
| Revenue | | $ | 55,183 | | | | 100.0 | % | | $ | 57,620 | | | | 100.0 | % |
| Cost of revenue | | | 43,325 | | | | 78.5 | % | | | 42,835 | | | | 74.3 | % |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | 11,858 | | | | 21.5 | % | | | 14,785 | | | | 25.7 | % |
| Operating expenses | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 14,908 | | | | 27.0 | % | | | 15,765 | | | | 27.4 | % |
| Research and development | | | 626 | | | | 1.1 | % | | | 686 | | | | 1.2 | % |
| Restructuring charges | | | 798 | | | | 1.4 | % | | | 1,297 | | | | 2.3 | % |
| Loss on impairment | | | 3 | | | | - | | | | 4,302 | | | | 7.5 | % |
| Depreciation | | | 284 | | | | 0.5 | % | | | 330 | | | | 0.6 | % |
| Amortization of definite-lived intangible assets | | | 1,213 | | | | 2.2 | % | | | 1,943 | | | | 3.4 | % |
| Total operating expenses | | | 17,832 | | | | 32.3 | % | | | 24,323 | | | | 42.2 | % |
| | | | | | | | | | | | | | | | | |
| Operating loss | | | (5,974 | ) | | | (10.8 | %) | | | (9,538 | ) | | | (16.6 | %) |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | (159 | ) | | | (0.3 | %) | | | (623 | ) | | | (1.1 | %) |
| Gain (loss) on derivative instruments, net | | | 19 | | | | 0.0 | % | | | (17 | ) | | | 0.0 | % |
| Other income (expense), net | | | 16,884 | | | | 30.6 | % | | | (4 | ) | | | 0.0 | % |
| | | | | | | | | | | | | | | | | |
| Income (loss) before taxes | | | 10,770 | | | | 19.5 | % | | | (10,182 | ) | | | (17.7 | %) |
| Provision for income taxes | | | 163 | | | | 0.3 | % | | | 355 | | | | 0.6 | % |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 10,607 | | | | 19.2 | % | | $ | (10,537 | ) | | | (18.3 | %) |
Comparison of the Years Ended December 31, 2021 to December 31, 2020.
Revenue. Revenue for the year ended December 31, 2021, totaled $55.2 million, which was 4.2% less than the $57.6 million of revenue for the year ended December 31, 2020.
| (in thousands) | | Year ended December 31, |
| | | 2021 | | | 2020 | | | Change | |
| Revenue: | | | | | | | | $ | | |
| % | |
| Performance Improvement Solutions | | $ | 28,140 | | | $ | 32,790 | | | | (4,650 | ) | | | (14.2 | )% |
| Workforce Solutions | | | 27,043 | | | | 24,830 | | | | 2,213 | | | | 8.9 | % |
| Total revenue | | $ | 55,183 | | | $ | 57,620 | | | | (2,437 | ) | | | (4.2 | )% |
Performance Improvement Solutions revenue decreased 14.2% from $32.8 million to $28.1 million for the years ended December 31, 2020 and 2021, respectively. The decrease of revenue was primarily due to several significant projects ending in the prior fiscal year. We recorded total Performance Improvement Solutions orders of $30.0 million and $26.2 million for the years ended December 31, 2021 and 2020, respectively.
For the year ended December 31, 2021, Workforce Solutions revenue increased 8.9% to $27.0 million compared to revenue of $24.8 million for the year ended December 31, 2020. The increase in revenue was primarily due a significant new customer obtained in Q1 2021. We recorded total new orders of $26.5 million and $19.1 million for the years ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, our backlog was $41.3 million, $31.8 million was attributed to the Performance Improvement Solutions segment and $9.5 million was attributed to the Workforce Solutions segment. As of December 31, 2020, our backlog was $40.4 million with $30.3 million attributed to the Performance Improvement Solutions segment and $10.1 million attributed to the Workforce Solutions segment. The increase in our backlog over fiscal year 2020 was primarily due to higher orders in the Performance Improvement Solutions during fiscal year 2021.
Gross profit. Gross profit was $11.9 million, or 21.5% of revenue, for the year ended December 31, 2021 compared to $14.8 million, or 25.7% of revenue, for the year ended December 31, 2020.
| ($ in thousands) | | Years ended December 31, | |
| | | 2021 | | | % | | | 2020 | | | % | |
| Gross profit: | | | | | | | | | | | | |
| Performance Improvement Solutions | | $ | 8,124 | | | | 28.9 | % | | $ | 11,395 | | | | 34.8 | % |
| Workforce Solutions | | | 3,734 | | | | 13.8 | % | | | 3,390 | | | | 13.7 | % |
| Consolidated gross profit | | $ | 11,858 | | | | 21.5 | % | | $ | 14,785 | | | | 25.7 | % |
The Performance Improvement Solutions segment's gross profit decreased by $3.3 million during fiscal year 2021 over fiscal year 2020. The decrease is primarily related to lower revenue and several significant projects completed in the prior year.
The Workforce Solutions segment's gross profit increased by $0.3 million during fiscal year 2021 over fiscal year 2020. The increase in gross profit was primarily driven by an increase in revenue in the Workforce Solutions segment.
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses totaled $14.9 million and $15.8 million for the years ended December 31, 2021 and 2020, respectively. Fluctuations in the components of SG&A spending were as follows:
| ($ in thousands) | | Years ended December 31, | |
| | | 2021 | | | % | | | 2020 | | | % | |
| Selling, general and administrative expenses: | | | | | | | | | | | | |
| Corporate charges | | $ | | | | | 69.1 | % | | $ | 10,881 | | | | 69.0 | % |
| Business development | | | 3,024 | | | | 20.3 | % | | | 3,364 | | | | 21.3 | % |
| Facility operation & maintenance (O&M) | | | 872 | | | | 5.8 | % | | | 928 | | | | 5.9 | % |
| Provision for loss on legal settlement | | | - | | | | 0.0 | % | | | 477 | | | | 3.0 | % |
| Bad debt expense | | | |
| | | | % | | | 103 | | | | 0.7 | % |
| Other | | | 16 | | | | 0.1 | % | | | 12 | | | | 0.1 | % |
| Total | | $ | 14,908 | | | | 100.0 | % | | $ | 15,765 | | | | 100.0 | % |
Corporate charges decreased $0.6 million in 2021 compared to 2020. The decrease was primarily due to a reduction of external legal, audit, and consultants fees of $0.8 million. Additionally, the Company saw a reduction in realized foreign exchange rate loss of $0.3 million during the fiscal year 2021.
Business development charges decreased $0.3 million in 2021 compared to 2020. The decrease was primarily due to lower headcount in 2021.
Facility O&M expenses decreased $0.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease during the fiscal year 2021 was mainly due to lease terminations in the first half of 2020.
Provision for loss on legal settlement. On August 17, 2020, Absolute entered into a Settlement Agreement with the plaintiffs (Joyce), which resulted a final settlement cost, including plaintiff's attorney fees of approximately $1.4 million. On September 29, 2020, the Company received $952 thousand from a general escrow account, originally set up as part of the Company's purchase of Absolute during fiscal 2017. The Company presented the loss on Joyce legal settlement and the benefit from the proceeds from the release of escrow from the Absolute transaction in selling, general and administrative expenses, in the amount of $477 thousand for the year ended December 31, 2020. There were no similar transactions during the same period of 2021.
Bad debt expense. We recorded bad debt expense of $691 thousand and $103 thousand for the years ended December 31, 2021 and December 31, 2020, respectively. GSE's bad debt allowance is based on historical trends of past due accounts, write-offs, and specific identification and review of customer accounts. Included in the current year provision is an impairment of unbilled receivables of $824 thousand related to a customer contract with our GSE Beijing entity offset by $133 thousand recovery of bad debt from previously written off balances.
As of December 31, 2021, management considered the following factors when assessing the unbilled receivable balance in question for impairment: the overall geopolitical environment, the Company’s inability to travel to China to meet with the customer to resolve their concerns, and the restrictions on restarting the project due to both regulatory constraints and our ability to meet future milestones. Based on these factors we determined that the unbilled was impaired and a reserve for unbilled was recorded resulting in bad debt expense of $824 thousand. We will continue to pursue billing and collections of this balance.
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 $0.6 million and $0.7 million for both the years ended December 31, 2021 and 2020, respectively.
Restructuring charges. Restructuring charges totaled $0.8 million and $1.3 million for the years ended December 31, 2021 and 2020, respectively. On December 27, 2017, the Board of GSE Systems, Inc. approved an international restructuring plan to streamline and optimize the Company’s global operations. Under this international restructuring plan, we have incurred cumulative restructuring charges of $3.9 million. The Company expects no future charges relating to the international restructuring plan, excluding any tax impacts and cumulative translation adjustments from the final disposal of foreign entities. Additionally, during the third quarter of 2019, the Company implemented a restructuring plan as a result of the work suspension of DP Engineering’s largest customer and subsequent notification on August 6, 2019 that the EOC contract was being terminated. This plan was put in place to align the workforce with the expected level of business moving forward. Under this restructuring plan, we have incurred total restructuring of $2.6 million. In the twelve months ending December 31, 2020, we recorded $1.0 million to international restructuring, and $0.2 million of related employee termination benefits. The decrease in our 2021 restructuring plan charges was mainly due to final charges related to the liquidation of our Sweden operations during the period, pursuant to our foreign restructuring plan.
Loss on impairment of goodwill and definite-lived intangible assets. We recognized a $3 thousand ROU asset impairment during the fiscal year 2021. We recognized a $4.3 million intangible asset impairment during the fiscal year 2020.
Depreciation. Depreciation expense totaled $0.3 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively.
Amortization of definite-lived intangible assets. Amortization expense related to definite-lived intangible assets totaled $1.2 million and $1.9 million for the years ended December 31, 2021 and 2020, respectively. The decrease in amortization expense was primarily due to the reduction in the carrying value of DP Engineering’s intangible assets, due to the $4.3 million impairment in Q1 2020. Additionally, certain intangible assets such as Customer Contracts & Relationships have larger amortization the earlier they are in their useful lives.
Interest expense. Interest expense totaled $0.2 million and $0.6 million for the years ended December 31, 2021 and 2020. The decrease was due to a reduction in total indebtedness during the fiscal year 2021.
Gain (loss) on derivative instruments, net. The Company periodically enters into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated trade receivables. The Company had not designated the contracts as hedges and recognized a loss on the change in the estimated fair value of the contracts of $17 thousand for the years ended December 31, 2020. We had no foreign exchange contracts outstanding as of December 31, 2021.
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, 2021 and 2020, the Company incurred a gain of $19 thousand and $15 thousand, respectively, related to the remeasurement of such assets and liabilities.
Other income (expense), net. The Company recognized $16.9 million of other income, net and $(4) thousand of other expense, net for the years ended December 31, 2021 and 2020, respectively. The increase was primarily due to the recording of $10.1 million PPP loan forgiveness by SBA and $7.2 million Employee Retention Credit during the period, offset by VAT write-off of $0.5 million, We paid VAT taxes for a subcontractor equipment purchase 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.
Provision for Income Taxes. The Company files tax returns in the United States federal jurisdiction and in several state and foreign jurisdictions. Because of the net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations for tax years 2000, and forward, and is subject to foreign tax examinations by tax authorities for the years 2016 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.
The Company’s tax expense in 2021 was $0.2 million, representing an annual effective tax rate of 1.5%, and consisted of $0.1 million of current tax provision and $0.1 million of deferred tax liability related to the portion of goodwill which cannot be offset by deferred tax assets. The Company’s tax expense in 2020 was $0.4 million, representing an annual effective rate of (3.5)% and consisted of $0.4 million of current tax provision.
The significant change of $0.8 million in net operating loss carryforwards was primarily driven by the release of the U.S. uncertain tax position on the U.K. worthless stock deduction which originally offset the federal and state net operating losses.
The difference between the effective rate and statutory rate primarily resulted from a change in valuation allowance, permanent differences, including PPP loan forgiveness and foreign restructuring, accruals related to uncertain tax positions, the tax impact of stock compensation forfeitures, foreign tax expense, and state tax expense. Please see Note 15 for additional information.
Coronavirus Aid, Relief and Economic Security Act
On March 27, 2020, the United States enacted the Cares Act. The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact our consolidated financial statements include removal of certain limitations on utilization of net operating losses and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. On April 23, 2020, we received $10 million in funds under the Paycheck Protection Program (PPP), a part of the CARES Act. On August 5, 2021, the Company was notified that the Small Business Administration ("SBA") had forgiven the PPP loan including all accrued interest thereon was forgiven. 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.
Consolidated Appropriations Act
On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law. The CAA included additional funding through tax credits as part of its economic package for 2021. We evaluated these items in our tax computation as of December 31, 2021 and determined that the items do not have a material benefit on our consolidated financial statements as of December 31, 2021.
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. Those accounting estimates that have the most significant impact on our operating results and place the most significant demands on management’s judgment are discussed below. For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates may require adjustment.
Revenue Recognition. We derive our revenue through three broad revenue streams: 1) System Design and Build (“SDB”), 2) software, and 3) training and consulting services. We recognize revenue from SDB and software contracts mainly through the Performance Improvement Solutions segment and revenue from training and consulting services through both the Performance Improvement Solutions segment and Workforce Solutions segment.
The SDB contracts are typically fixed-price and consist of initial design, engineering, assembly and installation of training simulators which include hardware, software, labor, and post contract support (“PCS”) on the software. We generally have two main performance obligations for an SDB contract: the training simulator build and PCS period. The training simulator build performance obligation generally includes hardware, software, and labor. The transaction price under the SDB contracts is allocated to each performance obligation based on its standalone selling price. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method as our performance creates or enhances assets with no alternative use to us, and we have an enforceable right to payment for performance completed to date. Cost-to-cost input method best measures the progress toward complete satisfaction of the performance obligation. PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.
In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. 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 our revenue recognition as a significant change in the estimates can cause the our revenue and related margins to change significantly from the amounts estimated in the early stages of the project.
The SDB contracts generally provide a one-year base warranty on the systems. The base warranty is not accounted for as a separate performance obligation under the contract because it does not provide the customer with a service in addition to the assurance that the completed project complies with agreed-upon specifications. Warranties extended beyond our typical one-year period, if any, are evaluated on a case by case basis to determine if it provides more than just assurance that the product operates as intended, which would require carve-out as a separate performance obligation.
Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer. Revenue from the sale of cloud-based subscription-based software licenses is recognized ratably over the term of such licenses following delivery to the customer. Delivery is considered to have occurred when the customer receives a copy of the software and is able to use and benefit from the software.
A software license sale contract with multiple performance obligations typically includes the following elements: license, installation and training services and PCS. The total transaction price of a software license sale contract is typically fixed and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue is recognized when the installation and training is completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.
The contracts within the training and consulting services revenue stream are either time and materials (“T&M”) based or fixed-price based. Under a typical T&M contract, we are compensated based on the number of hours of approved time provided by workers and the bill rates which are fixed per type of work, as well as approved expenses incurred. Our customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (“ASC”) 606-10-55-18, we elected to apply the “right to invoice” practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under a typical fixed-price contract, we recognize the revenue on a percentage of completion basis as it relates to construction contracts with revenue recognized based on project delivery over time. Revenue from the sale of short-term contracts with a delivery period of one month or less is recognized in the month completed.
For contracts with multiple performance obligations, we allocate the contract price to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.
Impairment of Intangible Assets, including Goodwill. Our intangible assets impairment analysis includes the use of undiscounted cash flow and discounted cash flow models that require management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates and future economic factors that may impact each asset group. We review goodwill and intangible assets for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We test goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP (See Note 7).
Accounting Standards Update (“ASU”) 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). 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. 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 (Step 0). If the Step 0 test indicates the fair value of a reporting unit is less than its carrying value, then additional impairment testing is required in accordance with the provisions of ASC 350, Intangibles — Goodwill and Other.
ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill.
As of December 31, 2020, we performed a quantitative step 1 analysis and have concluded that the estimated fair values of each of our reporting units as of December 31, 2020, is more likely than not, greater than their respective carrying values.
Our 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. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparable. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.
Capitalization of Computer Software Development Costs. In accordance with U.S. GAAP, we capitalize computer software development costs incurred after technological feasibility has been established, but prior to the release of the software product for sale to customers. Once the product is available to be sold, we amortize the costs, on a straight-line method, over the estimated useful life of the product, which is typically three years. As of December 31, 2021, we have net capitalized software development costs of $0.5 million. On an annual basis, and more frequently as conditions indicate, we assess 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, we will write-down the investment to its estimated fair value based on future discounted cash flows. The excess of any unamortized computer software costs over the related net realizable value is written down and charged to operations. Included in capitalized software development costs are certain expenses associated with the development software services. These are similarly capitalized, although not subjected to the same recoverability considerations. Significant changes in the sales projections could result in an impairment with respect to the capitalized software that is reported on our consolidated balance sheets.
Deferred Income Tax Valuation Allowance. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Management makes a regular assessment of the ability to realize our deferred tax assets. In making this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of our deferred tax liabilities and projected future taxable income in making this assessment. A valuation allowance is recorded to reduce the total deferred income tax asset to its realizable value. As of December 31, 2021, our largest deferred tax asset was $6.2 million of net operating losses. It primarily relates to a U.S. net operating loss carryforward of $6.2 million; $4.5 million of the net operating loss carryforward expires in various amounts between 2023 and 2037; $1.7 million of the net operating loss carryforward is an indefinite-lived deferred tax asset. We do not believe that it is more likely than not that we will be able to realize our deferred tax assets for our U.S. and foreign deferred tax assets as of December 31, 2021, and therefore we have recorded a $9.4 million valuation allowance for our net deferred tax assets. The Company has a deferred tax liability in the amount of $0.1 million at December 31, 2021 related to the portion of goodwill which cannot be offset by deferred tax assets
Liquidity and Capital Resources.
As of December 31, 2021, we had cash and cash equivalents of $3.6 million compared to $6.7 million at December 31, 2020.
For the years ended December 31, 2021 and 2020, net cash used in operating activities was $0.2 million and provided by operating activities was $1.1 million, respectively. The year over year decrease in cash provided by operating activities was largely driven by:
| • | A $6.2 million decrease in net inflows from changes in net working capital was primarily driven by increased collections due to large milestone payments of large projects in the prior year. |
| • | A $2.1 million decrease in operating expenses (excluding non-cash operating expenses) mainly driven by a reduction of external legal and audit fees in 2021. |
| • | A $2.9 million decrease in gross profit, primarily driven by lower revenue due to COVID-19. |
Net cash used in investing activities. For the year ended December 31, 2021, net cash used in investing activities was $0.8 million compared to net cash of $0.3 million used in investing activities in the prior year. The increase in cash outflow in 2021 was primarily related to the systems implementation, see note 10 for further details.
Net cash used in financing activities. For the years ended December 31, 2021 and 2020, net cash used in financing activities totaled $2.2 million and $6.1 million, respectively. The decrease in cash used in financing activities of $3.8 million was driven by a $2.0 million repayment of line of credit in 2021 compared to a repayment on term loans of $18.5 million offset by proceeds of the PPP Loan of $10 million.
Paycheck Protection Program Loan (“PPP Loan”)
We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the “PPP Loan”) under the CARES Act, as administered by the SBA. The application for receipt of the PPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan bore interest at a rate of 1% per annum and would mature on April 23, 2022, with the first payment deferred until September 2021. We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to the Lender substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. The Lender reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with the Lender’s determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA.
Credit Facilities
On December 29, 2016, we entered a 3-year $5.0 million revolving line of credit facility (“RLOC”) with the Citizens Bank, N.A. (the “Bank”) to fund general working capital needs and acquisitions. On May 11, 2018, we entered into the Amended and Restated Credit and Security Agreement (the “Credit Agreement” or the “Credit Facility”) to (a) expand the RLOC to include a letter of credit sub-facility and not be subject to a borrowing base and (b) to add a $25.0 million term loan facility, available to finance permitted acquisitions over the following 18 months. The credit facility was subject to certain financial covenants and reporting requirements and was scheduled to mature on May 11, 2023 and accrue interest at the USD LIBOR, plus a margin that varies depending on our overall leverage ratio. We subsequently amended and ratified the Credit Agreement a number of times, and as a part of the Eighth Amendment and Reaffirmation Agreement, we repaid the entire outstanding balance on the term loan facility. Due to a projected violation of the leverage ratio at the end of the first quarter of 2021, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021 (See FN 13).
Following the Ninth Amendment, we experienced continued delays in commencing new projects and thus our ability to recognize revenue was delayed for some contracts. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic 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 resulted in breaching the Minimum Liquidity ratio subsequent to both June 30, 2021 and at September 30, 2021 as well as projected breaching of the Leverage and Fixed Charges ratio covenant. On November 12, 2021, due to these covenant violations, we signed the Tenth Amendment and Reaffirmation Agreement with an effective date of November 12, 2021 to adjust the thresholds for future covenants to ease the risk of non-compliance. Per the Tenth Amendment, we received a waiver for the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. RLOC Amount” means (i) $3,500,000 (ii) on each date a payment in the amount of $250,000 is made pursuant to Subsection 2.1.5(d), the RLOC Amount immediately prior to such payment reduced by $250,000 and (iii) on March 31, 2022 and on each June 30, September 30, December 31 and March 31 thereafter, the RLOC Amount immediately prior to each such date reduced by $37,500. In addition, we agreed, by December 31, 2021, we will pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. Commencing on March 31, 2022 and on each June 30, September 30, December 31 and March 31 thereafter, we will pay the Bank $75,000 to be applied to the principal amount outstanding under the RLOC. In addition, within the fifth (5th) Business Day after we have received, subsequent to November 1, 2021, Employee Retention Credits in an aggregate amount not less than $500,000, we will pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. We are also required to maintain a minimum of $2.25 million in aggregate USA liquidity. We incurred $15 thousand of amendment fee related to this amendment.
During the year ended December 31, 2021, we repaid for $2 million and had a draw of $0.8 million on our RLOC. As of December 31, 2021, we had outstanding borrowings of $1.8 million under the RLOC and four letters of credit totaling $1.1 million outstanding to certain of our customers. The total borrowing capacity under RLOC was $3.25 million as of December 31, 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.
Subsequent to the year ended December 31, 2021, the Company issued a Convertible Note (further described in Note 24 to Consolidated Financial Statements). The proceed received from this Note were used to repay in full, all outstanding indebtedness owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. We will continue to maintain a cash management account and certain letters of credit with Citizens and, accordingly, have entered into a certain Cash Management Agreement with Citizens, as well as certain Cash Pledge Agreements in amounts corresponding to the current outstanding letters of credits with customers (as further described in Note 13 to the Consolidated Financial Statements).
Foreign Exchange
A portion of our international sales revenue has been and may be received in a currency other than the currency in which the expenses relating to such revenue are paid. Accordingly, we periodically enter into forward foreign exchange contracts to manage the market risks associated with the fluctuations in foreign currency exchange rates. As of December 31, 2021, we did not hold a position in forward foreign exchange contracts.
Other Matters
Management believes inflation has not had a material impact on our operations.
EBITDA and Adjusted EBITDA Reconciliation (in thousands)
References to “EBITDA” mean net (loss) income, before taking into account interest expense (income), provision for income taxes, depreciation and amortization. References to Adjusted EBITDA exclude the impact of litigation, loss on impairment, employee retention credit, PPP loan forgiveness, restructuring charges, stock-based compensation expense, change in fair value of derivative instruments, and VAT write-off. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate our results because it excludes certain items that are not directly related to our core operating performance that may, or could, have a disproportionate positive or negative impact on our results for any particular period. Investors should recognize that EBITDA and Adjusted EBITDA might not be comparable to similarly-titled measures of other companies. This measure should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation G follows:
| | | Three Months Ended | | | Twelve Months Ended | |
| | | December 31, | | | December 31, | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| Net income (loss) | | $ | (1,857 | ) | | $ | (1,469 | ) | | $ | 10,607 | | | $ | (10,537 | ) |
| Interest expense, net | | | 24 | | | | 67 | | | | 159 | | | | 623 | |
| Provision for income taxes | | | 36 | | | | 189 | | | | 163 | | | | 355 | |
| Depreciation and amortization | | | 439 | | | | 582 | | | | 1,865 | | | | 2,612 | |
| EBITDA | | | (1,358 | ) | | | (631 | ) | | | 12,794 | | | | (6,947 | ) |
| Litigation | | | (22 | ) | | | 568 | | | | (22 | ) | | | 477 | |
| Loss on impairment | | | - | | | | - | | | | 3 | | | | 4,302 | |
| Employee retention credit | | | - | | | | - | | | | (7,162 | ) | | | - | |
| PPP Loan and accumulated interest forgiveness | | | - | | | | - | | | | (10,127 | ) | | | - | |
| Restructuring charges | | | - | | | | 1,102 | | | | 798 | | | | 1,297 | |
| Stock-based compensation expense | | | 259 | | | | 21 | | | | 1,043 | | | | 378 | |
| Change in fair value of derivative instruments | | | (19 | ) | | | 52 | | | | (19 | ) | | | 17 | |
| Acquisition-related expense | | | - | | | | 1 | | | | - | | | | 192 | |
| VAT write-off | | | - | | | | - | | | | 450 | | | | - | |
| Adjusted EBITDA | | $ | (1,140 | ) | | $ | 1,113 | | | $ | (2,242 | ) | | $ | (284 | ) |
Adjusted Net (Loss) Income and Adjusted EPS Reconciliation (in thousands, except per share amounts)
References to Adjusted net (loss) income exclude the impact of litigation, loss on impairment, employee retention credit, PPP loan forgiveness, restructuring charges, stock-based compensation expense, change in fair value of derivative instruments, acquisition-related expenses, VAT write-off, amortization of intangible assets related to acquisitions, release of valuation allowance, and income tax expense impact of adjustments. Adjusted Net Income and adjusted earnings per share (adjusted EPS) are not measures of financial performance under GAAP. Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, are useful to investors to evaluate our results because they exclude certain items that are not directly related to our core operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results for any particular period. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to GAAP net income, the most directly comparable GAAP financial measure, is as follows:
| | | Three Months ended December 31, | | | Twelve Months ended December 31, | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| | | (unaudited) | | | (unaudited) | | | audited | | | audited | |
| Net income (loss) | | $ | (1,857 | ) | | $ | (1,469 | ) | | $ | 10,607 | | | $ | (10,537 | ) |
| Litigation | | | (22 | ) | | | 568 | | | | (22 | ) | | | 477 | |
| Loss on impairment | | | - | | | | - | | | | 3 | | | | 4,302 | |
| Employee retention credit | | | - | | | | - | | | | (7,162 | ) | | | - | |
| PPP Loan and accumulated interest forgiveness | | | - | | | | - | | | | (10,127 | ) | | | - | |
| Restructuring charges | | | - | | | | 1,102 | | | | 798 | | | | 1,297 | |
| Stock-based compensation expense | | | 259 | | | | 21 | | | | 1,043 | | | | 378 | |
| Change in fair value of derivative instruments | | | (19 | ) | | | 52 | | | | (19 | ) | | | 17 | |
| Acquisition-related expense | | | - | | | | 1 | | | | - | | | | 192 | |
| VAT write-off | | | - | | | | - | | | | 450 | | | | - | |
| Amortization of intangible assets related to acquisitions | | | 284 | | | | 415 | | | | 1,213 | | | | 1,943 | |
| Valuation allowance | | | 246 | | | | 1,589 | | | | 246 | | | | 1,589 | |
| Income tax expense impact of adjustments | | | 46 | | | | 345 | | | | 46 | | | | 345 | |
| Adjusted net income (loss) | | $ | (1,063 | ) | | $ | 2,624 | | | $ | (2,924 | ) | | $ | 3 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings (loss) per common share | | $ | (0.09 | ) | | $ | (0.07 | ) | | $ | 0.51 | | | $ | (0.52 | ) |
| | | | | | | | | | | | | | | | | |
| Adjusted earnings (loss) per common share – Diluted | | $ | (0.05 | ) | | $ | 0.13 | | | $ | (0.14 | ) | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding – Diluted | | | 20,901,005 | | | | 20,646,910 | | | | 20,761,191 | | | | 20,439,157 | |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not required of a smaller reporting company.
