| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies Principles of consolidation GSE Systems, Inc. is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the power
and process industries. References in this report to “GSE,” the “Company,” “we” and “our” are to GSE Systems, Inc. and its subsidiaries, collectively. All intercompany balances and transactions have been eliminated in consolidation. Accounting estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America
(U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate the estimates used, including, but not limited to those related to revenue recognition on long-term contracts, allowance for doubtful accounts, product
warranties, valuation of goodwill and intangible assets acquired, impairment of long-lived assets to be disposed of, valuation of stock-based compensation awards and the recoverability of deferred tax assets. Actual results could differ from these
estimates. Business combinations Business combinations are accounted for in accordance with the Financial Accounting Standards Board ( “ ” Business Combinations, Revenues and the results of operations of the acquired business are included in the accompanying consolidated statements of
operations commencing on the date of acquisition. Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, contingent
consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each
reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a
material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates, and changes in
probability assumptions with respect to the likelihood of achieving the various earn-out criteria. 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 Engineering segment and the training and consulting service contracts
through both the Engineering 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 PCS on the software. We generally have two
main performance obligations for an SDB contract: (1) the training simulator build and (2) the 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. 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 over time as control transfers to a
customer. Estimated contract costs are reviewed and revised periodically during the contract period, 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 become known. 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
our revenue and related margins to change significantly from previous estimates. Management judgments and estimates involved in the initial creation and subsequent updates to our estimates-at-completion and related profit recognized are
critical for our revenue recognition associated with SDB contracts. Inputs and assumptions requiring significant management judgment included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished
performance obligations. The SDB contracts generally provide a one-year base warranty on the systems. The base warranty will not be 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 will be evaluated on a case-by-case basis to determine if it provides more than just assurance that the product operates as intended, which requires 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 deliverables 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 are recognized when the installation and training are 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 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 temporary workers and the bill rates which are fixed by type of work, as well as approved expenses incurred. The customers are billed on a regular basis, such as weekly,
biweekly or monthly. In accordance with ASC 606-10-55-18, Revenue from contracts with customers 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. We recognize training and consulting services revenue as services are performed and bill our customers for services that we have provided on a regular
basis (i.e. weekly, biweekly or monthly). Contract asset relates to performance under the contract for obligations that are satisfied but not yet billed, which we classify as contract receivables,
net. Contract liability, which we classify as billing-in-excess of revenue earned, relates to payments received in advance of performance under the contract.
Contract liabilities are recognized as revenue as performance obligations are satisfied. Cash and cash equivalents Cash and cash equivalents represent cash and highly liquid investments including money market accounts with maturities of three months or less at the
date of purchase. Cash and cash equivalents may at times exceed the FDIC insured limits. Contract receivables, net and contract liabilities Contract receivables, net include recoverable costs for both billed and unbilled
receivables. Unbilled receivables include amounts earned in performance of services that have not been invoiced. Contract liabilities include billings in excess
of revenue earned on contracts in advance of work performed. Generally, such amounts will be earned and recognized over the next twelve months. Billed receivables are recorded at invoiced amounts. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs,
specific identification and review of customer accounts. Impairment of long-lived assets Long-lived assets, such as equipment, purchased software, capitalized software development costs, and intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized at the amount by which the carrying amount
of the asset exceeds its fair value. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell and would no longer be depreciated. Development expenditures Development expenditures incurred to meet customer specifications under contracts are charged to cost of revenue. Company sponsored development
expenditures are either charged to operations as incurred and are included in research and development expenses or are capitalized as software development costs. The amounts incurred for Company sponsored development activities relating to the
development of new products and services or the improvement of existing products and services, were approximately $1.0 million and $0.9 million for the year ended December 31, 2022
and 2021, respectively. Of these amounts, the Company capitalized approximately $0.4 million and $0.3 million for the year ended December 31, 2022 and 2021,
respectively. Equipment, software and leasehold improvements, net Equipment and purchased software are recorded at cost and depreciated using the straight-line method with estimated useful lives ranging from three years to ten years. Leasehold
improvements are amortized over the term of the lease or the estimated useful life, whichever is shorter, using the straight-line method. Upon sale or retirement, the cost and related depreciation are eliminated from the respective accounts and any
resulting gain or loss is included in operations. Maintenance and repairs are charged to expense as incurred. Software development costs Certain computer software development costs, including direct labor costs,
are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins
when the software product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenue and is determined using the straight-line method over the
remaining estimated economic life of the product, typically . On an annual basis, or 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 cost we will write-down the carrying amount of such asset to its estimated fair value based on the future discounted cash flows. The excess of any
unamortized computer software costs over the related fair value is written down and charged to operations. 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. Goodwill and intangible assets Our intangible assets include amounts recognized in connection with business
acquisitions, including customer relationships, trade names, non-compete agreements and alliance agreements. Our intangible assets impairment analysis includes the use of undiscounted and discounted cash flow models that requires management to make assumptions
regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset.
Amortization is recognized on a straight-line basis over the estimated useful life of the intangible asset, except for contract backlog and contractual customer relations, which are recognized in proportion to the related project revenue streams.
Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. We do not have any intangible assets with indefinite useful lives. Goodwill represents the excess of costs over fair value of assets of businesses
acquired. We review goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. 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. We have determined that we have two
reporting units, which are the same as our two operating segments: (i) Engineering and (ii) Workforce Solutions. We completed our annual quantitative step 1 analysis as of December 31, 2022 and 2021 and concluded that the fair values of each of our reporting units exceeded 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
revenue growth rates and operating margins used to calculate projected future cash flows, and risk-adjusted discount rates. We make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for
each of our reporting units. Foreign currency translation The United States Dollar (USD) is our functional currency and that of our subsidiaries operating in the United States. The
functional currency of each of our foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Our foreign subsidiaries’ financial statements are translated into USD using the exchange rates
applicable to the dates of the financial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the average exchange rate for the year. Equity accounts are
translated at historical exchange rates. The effects of these translation adjustments are cumulative translation adjustments, which are reported as a component of accumulated other comprehensive (loss) income included in the consolidated statements
of changes in shareholders’ equity. For any business transaction that is in a currency different from the entity’s functional currency, we record a gain or loss based on the difference
between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) to the foreign currency realized gain (loss) account in the consolidated statements of operations. Income taxes Income taxes are provided under the asset and liability method. Under this method, deferred income taxes are determined based on the differences between
the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amounts expected to be realized. A provision is made for our current liability for federal, state and foreign income taxes and the change in our deferred income tax assets and liabilities. We establish accruals for uncertain tax positions taken or expected to be taken in a tax return when it is not more likely than not (i.e., a likelihood
of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater
than 50% likely of being realized upon ultimate settlement. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to income tax expense in the period of a change in facts and
circumstances. Interest and penalties related to income taxes are accounted for as income tax expense. Stock-based compensation Stock-based compensation expense is based on the grant-date fair value estimated in
accordance with the provisions of ASC 718, Compensation-Stock Compensation .
Compensation expense related to restricted stock unit (RSU) awards is recognized on a pro rata straight-line basis based of the fair value of share awards that are scheduled to vest during the requisite service period. Compensation expense
related to performance-vesting restricted stock unit (PRSU) awards is recognized on a straight-line basis over the performance period based on the probable
outcome of achievement of the financial targets. The Company can also elect to issue cash-settled RSUs or PRSUs which are subject to fair value remeasurement at each reporting date Significant customers and concentration of credit risk For the year ended December 31, 2022,
we have a concentration of revenue from one individual customer, which accounted for 13.6% of our consolidated revenue. For the year ended December 31, 2021,
we have a concentration of revenue from one individual customer, which accounted for 13.8% of our consolidated revenue. No other individual customer accounted for more than 10% of our consolidated revenue in 2022 or 2021. As of December 31, 2022 and 2021, we
have no customer that accounted over 10% of the Company’s consolidated contract receivables. Fair values of financial instruments The carrying amounts of current assets and current liabilities reported in the consolidated balance sheets approximate fair value due to their short term
duration. Liquidity and Going Concern The accompanying consolidated financial
statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes
that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and satisfy its liabilities and commitments in the normal course of business. Pursuant to the
requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are
conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into
consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this
methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, are only
considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management determined that the implemented plans to mitigate
relevant conditions may not alleviate management’s concerns that raise substantial doubt about the Company’s ability to continue as a going concern within the twelve months ended April 17, 2024. On November 4, 2022, the Company received a
notification letter from NASDAQ related to NASDAQ Listing Rules informing us that the Company no longer meets the requirement to maintain a minimum bid price of $1.00 per share. The Company filed a Form 8K on November 8, 2022, to disclose receipt of this letter. The Company has an initial 180-day period (or until May 3, 2023) to cure this deficiency by maintaining a closing bid price of $1
per share for at least 10 consecutive trading days. If compliance is not achieved within these 180 calendar days we can petition NASDAQ for an additional period of 180 calendar days in which to increase the stock price. The second 180-day period may be available
and will expire on October 30, 2023, if the Company:
•
Meets the market value of publicly held shares requirement for continuing listing
•
Meets all other listing requirements for NASDAQ (other than bid price requirement), and
•
Provides written notice to NASDAQ with a plan how it intends to regain compliance with the bid price requirement during the second 180-day period; provided, however, that if it does not appear to NASDAQ this it is possible for the Company to cure the deficiency, GSE will
not be eligible for the additional grace period. GSE will submit its request for the additional 180-day compliance period on or about April 19, 2023. The Company’s plan to regain compliance will include implementing a one-for-five to one-to-ten reverse stock split, which will have the initial effect
of tripling the trading price of the Company’s stock. Such an action requires stockholder approval, so the Company will put the matter before its stockholders for approval at the 2023 annual meeting of stockholders to be held on June 12, 2023.
If the stockholders approve the measure, we believe that compliance with the NASDAQ minimum bid price listing requirement will be achieved well before the expiration of the second 180-day period. Thus, as part of the Company’s petition for additional time within which to regain compliance, the Company will notify NASDAQ of the following specific planned steps:
•
The Company’s Board of Directors considered and approved a resolution on April 3, 2023, to conduct a reverse stock split of 1-for-5 to 1-for-10, to put the
matter before stockholders at the June 2023 annual meeting, and authorizing Management to file the necessary Proxy Statements to effectuate submission of the matter to stockholders
•
We will prepare and file a Preliminary Proxy Statement with the SEC containing this measure in April 2023
•
We will file and mail a Definitive Proxy Statement to stockholders containing the reverse stock split proposal on or about May 2, 2023
•
Stockholders will vote on the proposed reverse stock split on June 12, 2023
•
If the reverse stock split is approved by stockholders, the Company will effectuate it as quickly thereafter as administratively possible, and
•
Following effectuation of the reverse stock split, the Company would expect to regain compliance with the NASDAQ minimum bid price listing
requirement with a few weeks, well before the end of the second 180-day period. If compliance within the prescribed
period is not achieved, or if NASDAQ does not approve the Company’s petition for an additional 180-day period in which to achieve
compliance, and consequently a delisting letter is issued the Company will request a hearing before the NASDAQ Hearing Panel which will stay the delisting and GSE will present its plan to regain compliance. Such plan will include the Company’s
Board implementing the reverse stock split described above to regain compliance with the minimum bid price requirement, or taking additional measures that may be available. If our common stock ceases to be listed on NASDAQ, Lind may deliver a
demand for payment to the Company for payment in full of our Convertible Note held with them and, if such a demand is delivered, the Company shall, within ten twenty The Company has incurred operating losses and has not demonstrated an ability to generate cash in excess of
its operating expenses for a sustained period of time. During the year ended December 31, 2022, the Company generated a loss from operations of $14.4
million, which includes non-cash impairment charges of long-lived assets and goodwill from our Workforce Solutions segment totaling $7.5
million. As of December 31, 2022, the Company had domestic unrestricted cash and cash equivalents of $2.0 million which is not
sufficient to fund the Company’s planned operations through one year after the date the consolidated financial statements are issued. These factors create substantial doubt about the Company’s ability to continue as a going concern for at least
one year after the date that our audited consolidated financial statements are issued. In making this assessment we performed a comprehensive analysis of our current circumstances and to alleviate
these conditions, management is monitoring the Company’s performance and evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, restructuring of operations to
grow revenues and decrease expenses, obtaining equity financing, issuing debt, or entering into other financing arrangements. The analysis used to determine the Company’s ability to continue as a going concern does not include cash sources
outside the Company’s direct control that management expects to be available within the next twelve months. |
