Company Quick10K Filing
GSE Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 20 $46
10-Q 2019-11-19 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-03-28 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-03-16 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-28 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-03-25 Annual: 2015-12-31
10-Q 2015-11-12 Quarter: 2015-09-30
10-Q 2015-08-13 Quarter: 2015-06-30
10-Q 2015-05-14 Quarter: 2015-03-31
10-K 2015-03-19 Annual: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-03-26 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-08-09
10-Q 2013-05-15 Quarter: 2013-03-31
10-K 2013-03-11 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-13 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-05-09
10-K 2012-03-08 Annual: 2012-02-21
10-Q 2011-11-09 Quarter: 2011-09-30
10-Q 2011-08-09 Quarter: 2011-06-30
10-Q 2011-05-10 Quarter: 2011-03-31
10-K 2011-03-14 Annual: 2011-03-14
10-Q 2010-11-09 Quarter: 2010-11-09
10-Q 2010-08-09 Quarter: 2010-08-04
10-Q 2010-05-10 Quarter: 2010-03-31
10-K 2010-03-11 Annual: 2009-12-31
8-K 2020-01-07 Enter Agreement
8-K 2020-01-06 Enter Agreement, Exhibits
8-K 2019-12-17 Officers, Exhibits
8-K 2019-11-19 Earnings, Exhibits
8-K 2019-09-24 Regulation FD, Exhibits
8-K 2019-09-18 Officers, Regulation FD, Exhibits
8-K 2019-06-30 Earnings, Exhibits
8-K 2019-06-28 Enter Agreement
8-K 2019-06-11 Shareholder Vote
8-K 2019-03-31 Earnings, Exhibits
8-K 2019-03-18 Earnings, Exhibits
8-K 2019-02-19 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-01-11 Officers
8-K 2018-12-31 Earnings, Exhibits
8-K 2018-09-30 Earnings, Exhibits
8-K 2018-08-27 Regulation FD, Exhibits
8-K 2018-08-17 Earnings, Exhibits
8-K 2018-06-30 Earnings, Exhibits
8-K 2018-06-12 Amend Bylaw, Shareholder Vote, Regulation FD, Other Events
8-K 2018-05-14 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-04-19 Regulation FD, Exhibits
8-K 2018-03-31 Earnings, Exhibits
8-K 2018-03-23 Officers
8-K 2017-12-31 Earnings, Exhibits
GVP 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 exh31-1.htm
EX-31.2 exh31-2.htm
EX-32.1 exh32-1.htm
EX-99.1 ex99_1.htm

GSE Systems Earnings 2019-09-30

GVP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
AWRE 70 65 4 16 6 1 2 21 36% 11.9 2%
NTWK 65 87 21 51 34 11 13 55 67% 4.3 12%
MTBC 61 65 0 -3 -0 50 0% -651.4 347,545,900%
AEYE 59 8 5 8 4 -7 -7 56 55% -8.2 -92%
TAOP 47 42 24 0 0 0 0 45 0%
GVP 46 69 41 160 39 -4 -2 53 25% -33.9 -6%
DTSS 45 6 0 -0 -0 -2 -2 39 347% -24.1 -27%
ZDGE 39 10 2 9 8 -2 -1 37 85% -45.5 -24%
QUMU 37 27 24 25 18 -2 1 33 72% 49.3 -8%
MYSZ 20 5 2 0 0 -5 -5 16 96% -3.1 -104%

10-Q 1 form10q.htm GSE SYSTEMS INC FORM 10-Q Q3 2019  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
     
 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended September 30, 2019
 
       
   
or
 
       
 
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the transition period from ____ to ____
 

Commission File Number 001-14785
 
GSE Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
52-1868008
(State of incorporation)
 
(I.R.S. Employer Identification Number)
 
1332 Londontown Blvd., Suite 200, Sykesville MD
 
21784
(Address of principal executive offices)
 
(Zip Code)

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

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

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

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

Large accelerated filer 
Accelerated filer 
Non-accelerated filer
Smaller reporting company
 
Emerging growth company
     

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

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

 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
 
Name of each exchange on which registered
Common Stock, $.001 Par Value
 
GVP
 
The NASDAQ Capital Market


There were 20,007,469 shares of common stock, with a par value of $0.01 per share outstanding as of October 31, 2019.



GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX

     
PAGE
PART I.
 
FINANCIAL INFORMATION
3
Item 1.
 
Financial Statements:
 
   
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018
3
   
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019, and September 30, 2018
5
   
Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2019, and September 30, 2018
6
   
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019, and September 30, 2018
7
   
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and September 30, 2018
9
   
Notes to Consolidated Financial Statements
10
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
36
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
51
Item 4.
 
Controls and Procedures
51
       
PART II.
 
OTHER INFORMATION
52
Item 1.
 
Legal Proceedings
52
Item 1A.
 
Risk Factors
52
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
52
Item 3.
 
Defaults Upon Senior Securities
52
Item 4.
 
Mine Safety Disclosures
52
Item 5.
 
Other Information
52
Item 6.
 
Exhibits
52
   
SIGNATURES
54



PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

   
September 30, 2019
   
December 31, 2018
 
   
(unaudited)
       
ASSETS
 
Current assets:
           
Cash and cash equivalents
 
$
8,606
   
$
12,123
 
Contract receivables, net
   
16,566
     
21,077
 
Prepaid expenses and other current assets
   
1,836
     
1,800
 
Total current assets
   
27,008
     
35,000
 
                 
Equipment, software, and leasehold improvements
   
5,627
     
5,293
 
Accumulated depreciation
   
(4,525
)
   
(4,228
)
Equipment, software, and leasehold improvements, net
   
1,102
     
1,065
 
                 
Software development costs, net
   
648
     
615
 
Goodwill
   
16,709
     
13,170
 
Intangible assets, net
   
7,960
     
6,080
 
Deferred tax assets
   
6,635
     
5,461
 
Operating lease - right of use assets, net
   
3,720
     
-
 
Other assets
   
77
     
49
 
Total assets
 
$
63,859
   
$
61,440
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Current portion of long-term debt, net of debt issuance costs and original issue discount
 
$
4,778
   
$
1,902
 
Accounts payable
   
1,174
     
1,307
 
Accrued expenses
   
1,820
     
2,646
 
Accrued compensation
   
2,904
     
3,649
 
Billings in excess of revenue earned
   
3,870
     
10,609
 
Accrued warranty
   
1,185
     
981
 
Income taxes payable
   
1,368
     
1,176
 
Other current liabilities
   
1,078
     
60
 
Total current liabilities
   
18,177
     
22,330
 
                 
Long-term debt, less current portion, net of debt issuance costs and original issue discount
   
14,968
     
6,610
 
Operating lease liabilities
   
3,121
     
-
 
Other liabilities
   
1,070
     
1,371
 
Total liabilities
   
37,336
     
30,311
 
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Preferred stock $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding
   
-
     
-
 
Common stock $0.01 par value; 60,000,000 shares authorized, 21,788,525 shares issued, 20,189,614 shares outstanding as of September 30, 2019; 60,000,000 shares authorized, 21,485,445 shares issued, 19,886,534 shares outstanding as of December 31, 2018
   
218
     
214
 
Additional paid-in capital
   
79,138
     
78,118
 
Accumulated deficit
   
(48,050
)
   
(42,569
)
Accumulated other comprehensive loss
   
(1,784
)
   
(1,635
)
Treasury stock at cost, 1,598,911 shares on September 30, 2019 and December 31, 2018
   
(2,999
)
   
(2,999
)
Total stockholders' equity
   
26,523
     
31,129
 
Total liabilities and stockholders' equity
 
$
63,859
   
$
61,440
 

The accompanying notes are an integral part of these consolidated financial statements.



GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

   
Three months ended September 30,
   
Nine months ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Revenue
 
$
20,031
   
$
21,801
   
$
65,683
   
$
69,394
 
Cost of revenue
   
15,358
     
16,380
     
50,407
     
52,735
 
Gross profit
   
4,673
     
5,421
     
15,276
     
16,659
 
                                 
Operating expenses:
                               
Selling, general and administrative
   
3,465
     
4,366
     
12,231
     
13,686
 
Research and development
   
130
     
247
     
526
     
765
 
Restructuring charges
   
740
     
70
     
742
     
1,177
 
Loss on impairment
   
-
     
-
     
5,464
     
-
 
Depreciation
   
107
     
132
     
300
     
411
 
Amortization of definite-lived intangible assets
   
494
     
632
     
1,550
     
1,094
 
Total operating expenses
   
4,936
     
5,447
     
20,813
     
17,133
 
                                 
Operating loss
   
(263
)
   
(26
)
   
(5,537
)
   
(474
)
                                 
Interest (expense), net
   
(288
)
   
(114
)
   
(812
)
   
(153
)
Loss on derivative instruments, net
   
(61
)
   
(59
)
   
(69
)
   
(306
)
Other income (expense), net
   
59
     
(5
)
   
62
     
24
 
Loss before income taxes
   
(553
)
   
(204
)
   
(6,356
)
   
(909
)
Provision (benefit) for income taxes
   
568
     
314
     
(874
)
   
124
 
Net loss
 
$
(1,121
)
 
$
(518
)
 
$
(5,482
)
 
$
(1,033
)
                                 
                                 
Basic loss per common share
 
$
(0.06
)
 
$
(0.03
)
 
$
(0.27
)
 
$
(0.05
)
                                 
Diluted loss per common share
 
$
(0.06
)
 
$
(0.03
)
 
$
(0.27
)
 
$
(0.05
)
                                 
Weighted average shares outstanding - Basic
   
20,007,469
     
19,786,888
     
20,021,829
     
19,620,207
 
                                 
Weighted average shares outstanding - Diluted
   
20,007,469
     
19,786,888
     
20,021,829
     
19,620,207
 

The accompanying notes are an integral part of these consolidated financial statements.



GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
                         
Net loss
 
$
(1,121
)
 
$
(518
)
 
$
(5,482
)
 
$
(1,033
)
Cumulative translation adjustment
   
(89
)
   
(31
)
   
(149
)
   
(258
)
Comprehensive loss
 
$
(1,210
)
 
$
(549
)
 
$
(5,631
)
 
$
(1,291
)

The accompanying notes are an integral part of these consolidated financial statements.


GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)

 
Common
Stock
                 
Treasury
Stock
     
Nine Months Ended
 
Shares
   
Amount
   
Additional
Paid-in
Capital
   
Accumulated
Deficit
   
Accumulated
Other Comprehensive
Loss
   
Shares
   
Amount
   
Total
 
Balance, January 1, 2019
   
21,485
   
$
214
   
$
78,118
   
$
(42,569
)
 
$
(1,635
)
   
(1,599
)
 
$
(2,999
)
 
$
31,129
 
                                                                 
Stock-based compensation expense
   
-
     
-
     
1,238
     
-
     
-
     
-
     
-
     
1,238
 
Common stock issued for options exercised
   
9
     
1
     
89
     
-
     
-
     
-
     
-
     
90
 
Common stock issued for RSUs vested
   
294
     
3
     
(3
)
   
-
     
-
     
-
     
-
     
-
 
Shares withheld to pay taxes
   
-
     
-
     
(304
)
   
-
     
-
     
-
     
-
     
(304
)
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
(149
)
   
-
     
-
     
(149
)
Net loss
   
-
     
-
     
-
     
(5,482
)
   
-
     
-
     
-
     
(5,482
)
Balance, September 30, 2019
   
21,789
   
$
218
   
$
79,138
   
$
(48,050
)
 
$
(1,784
)
   
(1,599
)
 
$
(2,999
)
 
$
26,523
 

Balance, January 1, 2018
   
21,024
   
$
210
   
$
76,802
   
$
(42,870
)
 
$
(1,471
)
   
(1,599
)
 
$
(2,999
)
 
$
29,672
 
                                                                 
Cumulative effect of adopting ASC 606
   
-
     
-
     
-
     
655
     
-
     
-
     
-
     
655
 
Stock-based compensation expense
   
-
     
-
     
1,370
     
-
     
-
     
-
     
-
     
1,370
 
Common stock issued for options exercised
   
214
     
2
     
37
     
-
     
-
     
-
     
-
     
39
 
Common stock issued for RSUs vested
   
194
     
2
     
(2
)
   
-
     
-
     
-
     
-
     
-
 
Shares withheld to pay taxes
   
-
     
-
     
(331
)
   
-
     
-
     
-
     
-
     
(331
)
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
(258
)
   
-
     
-
     
(258
)
Net loss
   
-
     
-
     
-
     
(1,033
)
   
-
     
-
     
-
     
(1,033
)
Balance, September 30, 2018
   
21,432
   
$
214
   
$
77,876
   
$
(43,248
)
 
$
(1,729
)
   
(1,599
)
 
$
(2,999
)
 
$
30,114
 


                                   
 
Common
Stock
                 
Treasury
Stock
       
                                               
Three Months Ended
 
Shares
   
Amount
   
Additional
Paid-in
Capital
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Shares
   
Amount
   
Total
 
Balance, July 1, 2019
   
21,699
   
$
217
   
$
79,028
   
$
(46,930
)
 
$
(1,695
)
   
(1,599
)
 
$
(2,999
)
 
$
27,622
 
                                                                 
Stock-based compensation expense
   
-
     
-
     
169
     
-
     
-
     
-
     
-
     
169
 
Common stock issued for options exercised
   
0
     
-
     
15
     
-
     
-
     
-
             
15
 
Common stock issued for RSUs vested
   
90
     
1
     
(1
)
   
-
     
-
     
-
             
-
 
Shares withheld to pay taxes
   
-
     
-
     
(73
)
   
-
     
-
     
-
             
(73
)
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
(89
)
   
-
             
(89
)
Net loss
   
-
     
-
     
-
     
(1,121
)
   
-
     
-
             
(1,121
)
Balance, September 30, 2019
   
21,789
   
$
218
   
$
79,138
   
$
(48,050
)
 
$
(1,784
)
   
(1,599
)
 
$
(2,999
)
 
$
26,523
 
                                                                 
Balance, July 1, 2018
   
21,311
   
$
213
   
$
77,611
   
$
(42,730
)
 
$
(1,698
)
   
(1,599
)
 
$
(2,999
)
 
$
30,397
 
                                                                 
Stock-based compensation expense
   
-
     
-
     
402
     
-
     
-
     
-
     
-
     
402
 
Common stock issued for options exercised
   
84
     
-
     
(56
)
   
-
     
-
     
-
     
-
     
(56
)
Common stock issued for RSUs vested
   
37
     
1
     
-
     
-
     
-
     
-
     
-
     
1
 
Shares withheld to pay taxes
   
-
     
-
     
(81
)
   
-
     
-
     
-
     
-
     
(81
)
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
(31
)
   
-
     
-
     
(31
)
Net income
   
-
     
-
     
-
     
(518
)
   
-
     
-
     
-
     
(518
)
Balance, September 30, 2018
   
21,432
   
$
214
   
$
77,876
   
$
(43,248
)
 
$
(1,729
)
   
(1,599
)
 
$
(2,999
)
 
$
30,114
 

The accompanying notes are an integral part of these consolidated financial statements.


 
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

   
Nine months ended
September 30,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
Net loss
 
$
(5,482
)
 
$
(1,033
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Loss on impairment
   
5,464
     
-
 
Depreciation
   
300
     
411
 
Amortization of definite-lived intangible assets
   
1,550
     
1,094
 
Amortization of capitalized software development costs
   
293
     
353
 
Change in fair value of contingent consideration
   
(1,200
)
   
-
 
Stock-based compensation expense
   
1,150
     
1,535
 
Loss on derivative instruments, net
   
69
     
306
 
Bad debt expense
   
48
     
146
 
Deferred income taxes
   
(1,276
)
   
74
 
Gain on sale of equipment, software, and leasehold improvements
   
(7
)
   
-
 
Changes in assets and liabilities:
               
Contract receivables, net
   
7,314
     
(3,165
)
Prepaid expenses and other assets
   
438
     
948
 
Accounts payable, accrued compensation, and accrued expenses
   
(2,400
)
   
(965
)
Billings in excess of revenue earned
   
(6,777
)
   
(5,800
)
Accrued warranty
   
102
     
(256
)
Other liabilities
   
82
     
(8
)
Cash used in operating activities
   
(332
)
   
(6,360
)
                 
Cash flows from investing activities:
               
Proceeds from sale of equipment, software and leasehold improvements
   
8
     
-
 
Purchase of equipment, software and leasehold improvements
   
(127
)
   
(510
)
Capitalized software development costs
   
(326
)
   
(325
)
Acquisition of True North Consulting, net of cash acquired
   
-
     
(9,635
)
Acquisition of DP Engineering, net of cash acquired
   
(13,521
)
   
-
 
Cash used in investing activities
   
(13,966
)
   
(10,470
)
                 
Cash flows from financing activities:
               
Proceeds from issuance of long-term debt
   
14,263
     
10,154
 
Repayment of long-term debt
   
(3,029
)
   
(1,164
)
Proceeds from issuance of common stock
   
90
     
39
 
Contingent consideration payments to former owners of Hyperspring, LLC
   
-
     
(1,701
)
Shares withheld to pay taxes
   
(304
)
   
(331
)
Cash provided by financing activities
   
11,020
     
6,997
 
                 
Effect of exchange rate changes on cash
   
(239
)
   
(398
)
Net decrease in cash, cash equivalents and restricted cash
   
(3,517
)
   
(10,231
)
Cash, cash equivalents, and restricted cash, beginning balance
   
12,123
     
20,071
 
Cash, cash equivalents, and restricted cash, ending balance
 
$
8,606
   
$
9,840
 
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.


GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

1.
Summary of Significant Accounting Policies

Basis of Presentation
 
GSE Systems, Inc. is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the power and process industries. References in this report to “GSE,” the “Company,” “we” and “our” are to GSE Systems and its subsidiaries, collectively.
 
The consolidated interim financial statements included herein have been prepared by GSE and are unaudited. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2018 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.
 
The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 27, 2019.
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. The Company’s most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired including the determination of fair value in impairment tests, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock-based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.
 
Going Concern Consideration

The Company is currently in compliance with its debt covenants; however, it is probable, based on our forecasts, that we will not be in compliance with these covenants at future measurement dates in the following twelve-month period. We do have the ability to cure one of the two financial covenants, the leverage ratio, by paying down an amount of debt necessary to meet the leverage ratio and we are considering taking this action. Regarding the fixed charge coverage ratio, we anticipate reducing fixed charges, namely excess real estate at the DP Engineering office and other space to be made idle. We will be working with Citizens Bank, National Association (the Bank) to obtain a modification of our covenant requirements that would, based on our projections, provide forecasted compliance with the covenants. If at such future time a covenant violation were to occur and if we are unable to agree to amended financial covenant measures with the Bank before such time or obtain a waiver in the event of subsequent non-compliance, the Company would likely not be able to repay the entirety of the outstanding debt in the event the Bank were to call the debt, thus leading to substantial doubt about the Company’s ability to continue as a going concern until such amendments or waivers are in place.

Based on our cash flow projection, we believe our funds from operations and availability of cash provide us with sufficient funds to cure one of the forecasted violations if we choose to; have sufficient cash to fund our on-going operations and make our scheduled debt repayments in the normal course of business.

2.
Recent Accounting Pronouncements
 
Accounting pronouncements recently adopted
 
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2016-02, Leases (Topic 842), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest applicable period presented in the consolidated financial statements, with certain practical expedients available.

The Company adopted the new standard using the modified retrospective approach effective on January 1, 2019. The Company's adoption included lease codification improvements that were issued by the FASB through June 2019.

The FASB made available several practical expedients in adopting the new lease accounting guidance. The Company elected the package of practical expedients permitted under the transition guidance within the amended guidance, which among other things, allowed registrants to carry forward historical lease classification. The Company elected the practical expedient that allows the combination of both lease and non-lease components as a single component and account for it as a lease for all classes of underlying assets. The Company elected not to apply the new guidance to short term leases with an initial term of twelve months or less. The Company recognizes those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected to use a single discount rate for a portfolio of leases with reasonably similar characteristics.

The most significant impact was the recognition of ROU assets and related lease liabilities for operating leases on the consolidated balance sheets. The Company recognized ROU assets and related lease liabilities of $2.7 million and $3.0 million respectively, related to operating lease commitments, as of January 1, 2019. The operating lease ROU asset represents the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The new guidance did not have a material impact on the Company's cash flows or results of operations. See Note 16 of the consolidated financial statements.

Accounting pronouncements not yet adopted

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

In January 2017, the FASB issued 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. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. We are currently evaluating the potential impact of the adoption of ASU 2017-04 on our consolidated financial statements.


3.
Basic and Diluted (Loss) Income per Common Share

Basic (loss) income per share is computed by dividing net (loss) income by weighted average number of outstanding shares of common stock outstanding for the period. Diluted net (loss) income per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised and restricted stock units ("RSU") were vested, unless the impact of potential dilutive common shares outstanding are anti-dilutive. Since we experienced a net loss in each period presented, basic and diluted net loss per share are the same. The diluted loss per share, in each period present, excludes the impact of potentially dilutive securities since they would have an anti-dilutive effect.

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

(in thousands, except for share amounts)
 
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Numerator:
                       
Net loss
 
$
(1,121
)
 
$
(518
)
 
$
(5,482
)
 
$
(1,033
)
                                 
Denominator:
                               
Weighted-average shares outstanding for basic loss per share
   
20,007,469
     
19,786,888
     
20,021,829
     
19,620,207
 
                                 
Effect of dilutive securities:
                               
Stock options and restricted stock units
   
-
     
-
     
-
     
-
 
Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share
   
20,007,469
     
19,786,888
     
20,021,829
     
19,620,207
 
                                 
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
   
578,676
     
713,024
     
397,131
     
645,714
 


4.
Acquisitions
 
2019 Acquisition
 
DP Engineering
 
On February 15, 2019, through its wholly-owned subsidiary Performance Solutions, the Company entered into a membership interest purchase agreement with Steven L. Pellerin, Christopher A. Davenport, and DP Engineering (the “DP Engineering Purchase Agreement”), to purchase 100% of the membership interests in DP Engineering for $13.5 million. The purchase price is subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5 million, potentially payable in 2020 and 2021 depending on DP Engineering’s satisfaction of certain targets for adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") in calendar years 2019 and 2020, respectively.  The acquisition was completed through the drawdown of $14.3 million (including transaction costs) of the term loan. An escrow of approximately $1.7 million was funded at the closing and is available to GSE to satisfy indemnification claims arising within 18 months after the closing.
 
DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages, which is in line with our Performance segment. The Company's allocation of the purchase price remains preliminary and the net assets are subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.
 
Based on preliminary forecasted adjusted EBITDA of DP Engineering for the years 2019 and 2020, as of the acquisition date, the estimated fair value of the total earn-out amount was $1.2 million and was recorded as contingent consideration. Subsequent to the acquisition, it was determined that the conditions related to the contingent consideration would not be met and hence $1.2 million was taken to income in the first quarter of 2019.
 
The following table summarizes the calculation of adjusted purchase price as of the acquisition date (in thousands):
 
Base purchase price per agreement
 
$
13,500
 
Pre closing working capital adjustment
   
155
 
Fair value of contingent consideration
   
1,200
 
Total purchase price
 
$
14,855
 

The following table summarizes the consideration paid to acquire DP Engineering and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of September 30, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, contingent consideration, accrued compensation and the residual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of DP Engineering, net of cash acquired" line caption.
 
(in thousands)
Total purchase price
 
$
14,855
 
 Purchase price allocation:
       
Cash
   
134
 
Contract receivables
   
2,934
 
Prepaid expenses and other current assets
   
209
 
Property, and equipment, net
   
210
 
Intangible assets
   
6,798
 
Other assets
   
1,806
 
Accounts payable and accrued expenses
   
(1,375
)
Other liabilities
   
(1,494
)
 Total identifiable net assets
   
9,222
 
 Goodwill
   
5,633
 
 Net assets acquired
 
$
14,855
 

The fair value of the assets acquired includes gross trade receivables of $2.9 million, of which the Company has collected in full. GSE did not acquire any other class of receivable as a result of the acquisition of DP Engineering.
 
The goodwill is primarily attributable to value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modification during plant outages, the workforce of the acquired business and the significant synergies expected to arise after the acquisition of DP Engineering. The total amount of goodwill is expected to be tax deductible. All of the $5.6 million of goodwill was assigned to our Performance segment. As discussed above, the goodwill amount is provisional pending receipt of the final valuations of various assets and liabilities and is subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.
 
The Company identified other intangible assets of $6.8 million, including customer contracts and relationships, tradename, and non-compete agreements, with amortization periods of five years to fifteen years.
 
Approximately one week following our acquisition of DP Engineering, an adverse event occurred at one of DP Engineering’s major customer's location that affected plant operations. This incident adversely impacted the relationship between DP Engineering and its customer. The Company determined this represented a triggering event requiring an interim assessment for impairment. As a result of the impairment analysis, we recognized the impairment charges of $2.1 million on goodwill and $3.4 million on definite-lived intangible assets related to the acquisition of DP Engineering during the quarter ended March 31, 2019. On August 6, 2019, as a follow on to the Notice of Suspension, the Company received a Notice of Termination from this customer, notifying the Company that they were terminating their Engineer of Choice consulting service agreement with DP Engineering.  Please see Note 8 for further analysis on the carrying amount change due to impairment on goodwill and definite-lived intangible assets during the nine months ended September 30, 2019. Additionally, also see Item 2. Management’s Discussion and Analysis for further discussion regarding the termination of Engineer of Choice of DP Engineering’s major customer.

The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related weighted average amortization period:
 
Intangible Assets
 
Weighted average amortization period
   
Fair Value
 
   
(in years)
   
(in thousands)
 
Customer relationships
   
15
   
$
4,898
 
Tradename
   
10
     
1,172
 
Non-compete agreements
   
5
     
728
 
Total
         
$
6,798
 

DP Engineering contributed revenue of $6.5 million to GSE for the period from February 15, 2019 to September 30, 2019.


2018 Acquisition
 
True North
 
On May 11, 2018, GSE, through its wholly-owned subsidiary Performance Solutions, entered into a membership interest purchase agreement with Donald R. Horn, Jenny C. Horn, and True North Consulting LLC (the "True North Purchase Agreement") to purchase 100% of the membership interests in True North Consulting LLC ("True North") for $9.75 million. The purchase price was subject to customary pre- and post-closing working capital adjustments, resulting in total consideration of $9.9 million. The True North Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions subject to certain limitations. An escrow of $1.5 million was funded from the cash paid to the sellers of True North at the closing and is available to GSE to promote retention of key personnel and satisfy indemnification claims arising within 18 months after the closing. The acquisition of True North was completed on an all-cash transaction basis. In connection with the acquisition, we drew down a $10.3 million term loan to finance the transaction (including the transaction costs). See Note 12, for further details of the loan.
 
True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complementary talent pool to our employee base.
 
The following table summarizes the consideration paid to acquire True North and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. The Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of September 30, 2019, the Company had finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, accrued compensation and the residual amount allocated to goodwill.

(in thousands)
Total purchase price
 
$
9,915
 
         
 Purchase price allocation:
       
Cash
   
306
 
Contract receivables
   
1,870
 
Prepaid expenses and other current assets
   
8
 
Property, and equipment, net
   
1
 
Intangible assets
   
5,088
 
Accounts payable, accrued expenses
   
(1,744
)
Accrued compensation
   
(353
)
 Total identifiable net assets
   
5,176
 
 Goodwill
   
4,739
 
 Net assets acquired
 
$
9,915
 

The fair value of the assets acquired includes gross trade receivables of $1.9 million, of which the Company has collected in full as of September 30, 2019. GSE did not acquire any other class of receivable as a result of the acquisition of True North.

The goodwill is primarily attributable to a broader engineering service offering to new and existing customers, the workforce of the acquired business and the significant synergies expected to arise after the acquisition of True North. The total amount of goodwill is tax deductible. All of the $4.7 million of goodwill was assigned to our Performance segment.

The Company identified other intangible assets of $5.1 million, including customer relationships, tradename, non-compete agreements, and alliance agreements, with amortization periods of four years to fifteen years. The fair value of the intangible assets is finalized per final valuations for these assets.

The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related weighted average amortization period:

Intangible Assets
 
Weighted average amortization period
   
Fair Value
 
   
(in years)
   
(in thousands)
 
Customer relationships
   
15
   
$
3,758
 
Tradename
   
10
     
582
 
Non-compete agreements
   
4
     
221
 
Alliance agreements
   
5
     
527
 
Total
         
$
5,088
 

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for GSE, True North and DP Engineering as if the business combinations had occurred on January 1, 2018.

Three months ended September 30,
   
Nine months ended September 30,
 
   
2019
   
2018
   
2019
   
2018
 
   
(unaudited and in thousands)
 
                         
Revenue
 
$
20,031
   
$
26,932
   
$
68,667
   
$
89,679
 
Net loss
   
(919
)
   
(1,204
)
   
(5,371
)
   
(1,509
)

The pro forma financial information for all periods presented has been calculated after applying GSE's accounting policies and has also included pro forma adjustments resulting from these acquisitions, including amortization charges of the intangible assets identified from these acquisitions, interest expenses related to the financing transaction in connection with the acquisition of DP Engineering, and the related tax effects as if aforementioned companies were combined as of January 1, 2018.

For the nine months ended September 30, 2019, the Company has incurred $0.6 million of selling, general and administrative costs related to the acquisition of DP Engineering. Due to a triggering event described in Note 8, an impairment test was conducted, which resulted in substantially writing down the estimated fair value of goodwill and some of the definite-lived intangible assets initially recognized upon the acquisition. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma loss for the nine months ended September 30, 2019, in the table above.
 
For the nine months ended September 30, 2018, the Company has incurred $0.5 million of selling, general and administrative costs related to the acquisition of True North. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma loss for the nine months ended September 30, 2018, in the table above.
 
The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 1, 2018, nor is it intended to be an indication of future operating results.


5.
Restructuring Activities

International Restructuring
 
On December 27, 2017, the board of GSE approved an international restructuring plan to streamline and optimize the Company's global operations. Beginning in December 2017, GSE has been in the process of consolidating its engineering services and R&D activities to Maryland and ceasing an unprofitable non-core business in the United Kingdom (UK). As a result, the Company closed its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improve Company productivity by eliminating duplicate employee functions, increasing GSE's focus on its core business, improving efficiency and maintaining the full range of engineering capabilities while reducing costs and organizational complexity.
 
GSE eliminated approximately 40 positions since 2017 due to these changes, primarily in Europe and India, and will continue to undertake other cost-savings measures. The international restructuring plan is expected to be completed by the end of 2019. As a result of these efforts, GSE expects to record a total restructuring charge of approximately $2.2 million, primarily related to the international workforce reductions, contract termination costs and asset write-offs due to the exit activities. As of September 30, 2019, we had recorded total restructuring charges of $2.0 million since 2017. We incurred $2,000 of costs during the nine months ended September 30, 2019. We recognized $1.3 million of restructuring cost for the year ended December 31, 2018. In addition to the restructuring costs recognized to date, the Company has an estimated $1.3 million of cumulative translation adjustments that will be charged against net loss and an estimated $1.0 million of tax benefits that will be realized upon liquidation of these foreign entities. GSE expects to recognize the remaining restructuring costs, currency translation adjustments and tax benefits by the end of 2019.
 
For the nine months ended September 30, 2019,  we made payments related to our restructuring for employee termination benefits and other legal expenses in the amount of $54,000 that had been previously accrued.
 
DP Engineering Restructuring

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 Engineer of Choice contract was being terminated.  Accordingly, the Company took the necessary measures to reduce DP’s workforce by approximately 12 FTE’s and in addition terminated one of its office leases early resulting in one-time costs of $293,000 being paid in the quarter.  This reduction in force aligns the workforce to the current level of business going forward. 

Collectively, for the nine months ended September 30, 2019, the Company recorded restructuring charges of approximately $0.7 million, of which $0.3 million related to DP Engineering severance and lease termination and $0.4 million related to an executive departure related to the suspension of the Company’s acquisition strategy.

6.
Contingent Consideration

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, Business Combinations, 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.

In connection with the acquisition of DP Engineering on February 15, 2019, the Company recognized the estimated fair value of contingent consideration for $1.2 million. During the nine months ended September 30, 2019, as a result of the triggering event described in Note 8, an impairment test was conducted on DP Engineering's goodwill and definite-lived intangible assets and the Company determined the $1.2 million of contingent consideration recognized upon acquisition of DP Engineering has reduced to zero since the related earn-out payment is no longer expected to be paid. We have recorded this reduction as an offset to selling, general and administrative expenses in unaudited consolidated statements of operations. There was no contingent liability as of September 30, 2019.

7.
Contract Receivables
 
Contract receivables represent the Company's unconditional rights to consideration due from a broad base of both domestic and international customers. All contract receivables are considered to be collectible within twelve months.

The components of contract receivables are as follows:

(in thousands)
 
September 30,
   
December 31,
 
   
2019
   
2018
 
             
Billed receivables
 
$
8,281
   
$
15,998
 
Unbilled receivables
   
8,754
     
5,506
 
Allowance for doubtful accounts
   
(469
)
   
(427
)
Total contract receivables, net
 
$
16,566
   
$
21,077
 

Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce our receivables to their net realizable value when it is probable that the Company will not be able to collect all amounts according to the contractual terms of the receivable. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, specific identification and review of customer accounts. During the nine months ended September 30, 2019 and 2018, the Company did not record any allowances for doubtful accounts. The minor fluctuation on the balance of allowances for doubtful accounts was due to foreign currency exchange rates.

During October 2019, the Company invoiced $6.3 million of the September 30, 2019 unbilled amounts.

As of September 30, 2019, the Company had one customer that accounted for 26.3% its consolidated contract receivables. As of December 31, 2018, the Company had one customer that accounted for 16.8% of its consolidated contract receivables.
 
8
Goodwill and Intangible Assets
 
Intangible Assets Subject to Amortization
 
Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for customer relationships which are recognized in proportion to the related projected revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. The Company does not have any intangible assets with indefinite useful lives, other than goodwill.

As discussed in Note 4, we recognized definite-lived intangible assets of $6.8 million upon acquisition of DP Engineering on February 15, 2019, including customer contracts and relationships, trademarks and non-compete agreements, with amortization periods of 5 to 15 years. Amortization of our definite-lived intangible assets is recognized on a straight-line basis over the estimate useful life of the associated assets.
 
Following the February 23, 2019 event occurring at a DP Engineering customer location and subsequent receipt of the Notice of Suspension on February 28, 2019, the Company concluded that DP Engineering's relationship with it's largest customer has been adversely impacted. The DP Engineering customer contracts and relationships were the major component of the definite-lived intangible assets recognized in connection with the acquisition of DP Engineering. Accordingly, the Company determined that a triggering event had occurred requiring an interim assessment of whether a potential impairment of definite-lived intangible asset impairment test was necessary.
 
Therefore, the impairment test of the definite-lived intangible assets recognized upon the acquisition of DP Engineering was also conducted according to ASC 350, Intangibles-Goodwill and other.
 
The interim impairment test was based on the present value of revised cash flow projected for five to fifteen years. The result of the impairment test indicated that the current estimated fair value of noted definite-lived intangible assets had declined below their initial estimated fair value. As a result, the Company recognized an impairment charge of $3.4 million at March 31, 2019. The fair value of definite-lived intangible assets recognized upon the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment according to purchase price allocation rules. The impairment charge of $3.4 million on definite-lived intangible assets was recorded within "Loss on impairment" in our consolidated statements of operations. Due to the August 6th Notice of Termination of the EOC agreement with DP Engineering, the Company performed  additional impairment testing as of September 30th, 2019 and at this time have determined no further impairment is needed.


Changes in the gross carrying amount, accumulated amortization, addition and impairment of definite-lived intangible assets from December 31, 2018 through September 30, 2019 were as following:

(in thousands)
   
For the Nine Months Ended September 30, 2019
 
   
Beginning Gross
   
Accumulated
   
Addition
   
Impairment
   
Net
 
   
Carrying Amount
   
Amortization
                   
Amortized intangible assets:
                             
Customer relationships
 
$
6,833
   
$
(3,411
)
 
$
4,898
   
$
(3,370
)
 
$
4,950
 
Trade names
   
1,295
     
(621
)
   
1,172
     
-
     
1,846
 
Developed technology
   
471
     
(471
)
   
-
     
-
     
-
 
Non-contractual customer relationships
   
433
     
(433
)
   
-
     
-
     
-
 
Noncompete agreement
   
221
     
(167
)
   
728
     
-
     
782
 
Alliance agreement
   
527
     
(145
)
   
-
     
-
     
382
 
Others
   
167
     
(167
)
   
-
     
-
     
-
 
Total
 
$
9,947
   
$
(5,415
)
 
$
6,798
   
$
(3,370
)
 
$
7,960
 

(in thousands)
 
As of December 31, 2018
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortized intangible assets:
                 
Customer relationships
 
$
6,831
   
$
(2,375
)
 
$
4,456
 
Trade names
   
1,295
     
(318
)
   
977
 
Developed technology
   
471
     
(471
)
   
-
 
Non-contractual customer relationships
   
433
     
(433
)
   
-
 
Noncompete agreements
   
221
     
(35
)
   
186
 
Alliance agreement
   
527
     
(66
)
   
461
 
Others
   
167
     
(167
)
   
-
 
Total
 
$
9,945
   
$
(3,865
)
 
$
6,080
 

Amortization expense related to definite-lived intangible assets totaled $0.5 million and $0.6 million for the three months ended September 30, 2019 and 2018, and $1.6 million and $1.1 million for the nine months ended September 30, 2019, and 2018, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:
 
(in thousands)
     
Years ended December 31:
     
2019 (remainder)
 
$
495
 
2020
   
1,974
 
2021
   
1,471
 
2022
   
1,152
 
2023
   
868
 
Thereafter
   
2,000
 
Total
 
$
7,960
 


Goodwill
 
The Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company tests 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. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, which are the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includes Hyperspring and Absolute).

On February 15, 2019, we acquired DP Engineering (as described in Note 4) and preliminarily recorded goodwill and identified intangible assets as part of the acquisition. On February 23, 2019, an unexpected event occurred at one of DP Engineering's significant customers and all pending work for that customer was suspended pending a root cause analysis on February 28, 2019. While that analysis is now complete, and virtually all of the suspended projects have been restarted, the customer terminated the existing contract on August 6th 2019. The Company determined that the notice of suspension was a triggering event necessitating a goodwill impairment test.
 
On May 10, 2019, the Company determined that a material impairment had occurred, requiring an assessment for impairment to be completed related to $5.6 million of goodwill recorded in the acquisition.
 
The impairment test used an income-based approach with discounted cash flow method, and market-based approach including both guideline public company method and merger and acquisition method.
 
The impairment test results indicated that the current estimated fair value of goodwill recorded from the acquisition of DP Engineering had declined below its initial estimated fair value at the acquisition date. As a result, the Company recognized an impairment charge of $2.1 million to write down the goodwill on DP Engineering. The fair value of goodwill recognized from the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment based upon the preliminary purchase price allocation. The Company determined that the impact of the suspension of obtaining new contracts from that customer resulted in a material downward revision to DP Engineering's revenue and profitability forecasts when compared to the acquisition date valuation. The impairment charge on goodwill was recorded within "Loss on impairment" in our consolidated statements of operations. Due to the August 6th Notice of Termination of the EOC agreement with DP Engineering, the Company performed, under ASC 350 guidance, additional impairment testing as of September 30th, 2019 and at this time have determined no further impairment is needed.
 
Changes in the net carrying amount of goodwill from December 31, 2018 through September 30, 2019 were due to the acquisition of DP Engineering, and were comprised of the following items:
 
(in thousands)
   
Performance Improvement Solutions
   
Nuclear Industry Training and Consulting
   
Total
 
Balance, January 1, 2019
 
$
4,739
   
$
8,431
   
$
13,170
 
Acquisition
   
5,633
     
-
     
5,633
 
Dispositions
   
-
     
-
     
-
 
Goodwill impairment loss
   
(2,094
)
   
-
     
(2,094
)
Balance, September 30, 2019
 
$
8,278
   
$
8,431
   
$
16,709
 


9.
Fair Value of Financial Instruments
 
ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
The levels of the fair value hierarchy established by ASC 820 are:
 
Level 1:  inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
Level 2:  inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  A Level 2 input must be observable for substantially the full term of the asset or liability. The Monte Carlo model was used to calculate the fair value of level 2 instrument liability award. The inputs used are current stock price, expected term, risk-free rate, number of trials, volatility and interest rates.
 
Level 3:  inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The contingent consideration was based on EBITDA.
 
At September 30, 2019, and December 31, 2018, the Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate fair value based upon their short-term nature.
 
As of September 30, 2019, the Company had four standby letters of credit totaling $1.2 million which represent performance bonds on four contracts.
 
For the three and nine months ended September 30, 2019, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at September 30, 2019.

The following table presents assets and liabilities measured at fair value at September 30, 2019:

(in thousands)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant
Other Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total
 
                         
Money market funds
 
$
375
   
$
-
   
$
-
   
$
375
 
Foreign exchange contracts
   
-
     
68
     
-
     
68
 
Total assets
 
$
375
   
$
68
   
$
-
   
$
443
 
                                 
Liability awards
 
$
-
   
$
(18
)
 
$
-
   
$
(18
)
Interest rate swap contract
   
-
     
(192
)
   
-
     
(192
)
Total liabilities
 
$
-
   
$
(210
)
 
$
-
   
$
(210
)
                                 


Money market funds at both September 30, 2019 and December 31, 2018 are included in cash and cash equivalents in the respective consolidated balance sheets.

The following table presents assets and liabilities measured at fair value at December 31, 2018:

(in thousands)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant
Other Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total
 
                         
Money market funds
 
$
824
   
$
-
   
$
-
   
$
824
 
Foreign exchange contracts
   
-
     
43
     
-
     
43
 
Total assets
 
$
824
   
$
43
   
$
-
   
$
867
 
                                 
Liability awards
 
$
-
   
$
(118
)
 
$
-
   
$
(118
)
Interest rate swap contract
   
-
     
(103
)
   
-
     
(103
)
Total liabilities
 
$
-
   
$
(221
)
 
$
-
   
$
(221
)

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the nine months ended September 30, 2019:

(in thousands)
     
Balance, January 1, 2019
 
$
-
 
Issuance of contingent consideration in connection with acquisitions
   
1,200
 
Change in fair value
   
(1,200
)
Balance, September 30, 2019
 
$
-
 


10.
Derivative Instruments

In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We may seek to control a portion of these risks through a risk management program that includes the use of derivative instruments.

Foreign Currency Risk Management

The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates and minimize credit exposure by limiting counterparties to nationally recognized financial institutions.

As of September 30, 2019, the Company had one foreign exchange contract outstanding of approximately 1.0 million Euro. The contract is set to expire in March 2020. At December 31, 2018, the Company had contracts outstanding of approximately 3.2 million Euro at fixed rates.

Interest Rate Risk Management

As discussed in Note 12, the Company entered into a term loan to finance the acquisition of True North in May 2018 and revised on June 28, 2019. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2.00% and 2.75% depending on the overall leverage ratio of the Company. As part of our overall risk management policies, in June 2018, the Company entered into a pay-fixed, receive-floating interest rate swap contract with a notional amount of $9.0 million to reduce the impact associated with interest rate fluctuations. The notional value amortizes monthly in equal amounts based on the 5-year principal repayment terms. The terms of the swap require the Company to pay interest on the basis of a fixed rate of 3.02%, and the Company will receive interest on the basis of one-month USD-LIBOR-BBA-Bloomberg.

The Company reports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the derivative’s fair value. The estimated net fair values of the derivative contracts on the consolidated balance sheets are as follows:

   
September 30,
   
December 31,
 
(in thousands)
 
2019
   
2018
 
Prepaid expenses and other current assets
           
Foreign exchange contracts
 
$
68
   
$
43
 
Total asset derivatives
   
68
     
43
 
                 
Other liabilities
               
Interest rate swaps
   
(192
)
   
(103
)
Total liability derivatives
   
(192
)
   
(103
)
                 
Net fair value
 
$
(124
)
 
$
(60
)

The Company has not designated the derivative contracts as hedges. The changes in the fair value of the derivative contracts are included in gain (loss) on derivative instruments, net, in the consolidated statements of operations.

The foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into 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 three and nine months ended September 30, 2019 and 2018, the Company recognized a net (loss) gain on its derivative instruments as outlined below:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(in thousands)
 
2019
   
2018
   
2019
   
2018
 
                         
Interest rate swap - change in fair value
 
$
(1
)
 
$
(28
)
 
$
(89
)
 
$
(39
)
Foreign exchange contracts-change in fair value
   
(45
)
   
(14
)
   
25
     
(178
)
Remeasurement of related contract receivables,
 billings in excess of revenue earned, and
 subcontractor accruals
   
(15
)
   
(17
)
   
(5
)
   
(89
)
Loss on derivative instruments, net
 
$
(61
)
 
$
(59
)
 
$
(69
)
 
$
(306
)



11.
Stock-Based Compensation

The Company recognizes compensation expense for all equity-based compensation awards issued to employees and directors that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date. The Company recognized $0.2 million and $0.4 million of stock-based compensation expense related to equity awards for the three months ended September 30, 2019 and 2018, respectively, and recognized $1.2 million and $1.4 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 2019 and 2018, respectively, under the fair value method. In addition to the equity-based compensation expense recognized, the Company also recognized income of $(55,000) and expense of $105,000 of stock-based compensation related to the change in the fair value of cash-settled restricted stock units (RSUs) during the three months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded a net reduction of $88,000 and an increase of $165,000 in the fair value of cash-settled RSUs, respectively.

During the three and nine months ended September 30, 2019, the Company granted approximately 8,500 and 508,500 time-based RSUs with an aggregate fair value of $0.02 million and $1.4 million, respectively. For the three and nine months ended September 30, 2018, the Company granted approximately 0 and 400,000 time-based RSUs with an aggregate fair value of $0.0 million and $1.3 million, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, a portion vest one year after grant and the remainder vest annually in equal amounts over the course of three years. The fair value of the time-based RSUs is expensed ratably over the requisite service period, which ranges from one year to three years.

The Company's 1995 long-term incentive program ("LTIP") provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and other Company employees. Vesting of the performance-vesting restricted stock units (PRSU's) is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.
 
During nine months ended September 30, 2019, the Company granted approximately 350,000 performance-based RSUs to employees with an aggregate fair value of $0.9 million. A cumulative adjustment reversing $150,000 of expense recognized in the first half of 2019 was recorded in the three-month period ended September 30, 2019 upon determination that vesting was no longer probable related to the revenue and EBITDA targets. During the three months ended September 30, 2019, the Company did not grant any performance-based RSUs. During the three and nine months ended September 30, 2018, the Company did not grant any performance-based RSUs. The Company did not grant any stock options during the three and nine months ended September 30, 2019 and 2018.


12.
Debt

The Company entered into a 3-year, $5.0 million revolving line of credit facility ("RLOC") with Citizens Bank National Association (the Bank) on December 29, 2016 to fund general working capital needs and provide funding for acquisitions. On May 11, 2018, GSE  entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) with the Bank, amending and restating the Company's existing Credit and Security Agreement with the Bank, which included a $5.0 million asset-based revolving credit facility between the Company and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (b) a $25.0 million delayed draw term loan facility available to be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Company. The credit facilities mature in five years and bear interest at one-month LIBOR plus a margin that varies depending on the overall leverage ratio of the Company and its subsidiaries. Revolving loans are interest-only with principal due at maturity, while term loans require monthly payments of principal and interest based on an amortization schedule. The Company's obligations under the Credit Agreement are guaranteed by the Company's wholly owned subsidiaries. The credit facilities are secured by liens on all assets of the Company. Attendant to the Company's acquisition of DP Engineering, the Company and the Bank entered into a Third Amendment and Reaffirmation Agreement and a Fourth Amendment and Reaffirmation Agreement on February 15, 2019 and March 20, 2019, respectively. On June 28, 2019, the Company and the Bank entered into a Fifth Amendment and Reaffirmation Agreement, which changed the fixed charge coverage ratio from 1.25, to four different ratios ranging from 1.05 to 1.25 among different time periods and changed the leverage ratio to: (i) 2.75 to 1.00 for the periods ending on June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020; (ii) 2.50 to 1.00 for the periods ending June 30, 2020 and September 30, 2020; (iii) 2.25 to 1.00 for the periods ending December 31st, March 31st, June 30th and September 30th thereafter.

RLOC

We intend to continue using the RLOC for short-term working capital needs and the issuance of letters of credit in connection with business operations. Letter of credit issuance fees range between 1.25% and 2% depending on the Company’s overall leverage ratio, and the Company pays an unused RLOC fee quarterly based on the average daily unused balance.

At September 30, 2019, there were no outstanding borrowings under the RLOC and four letters of credit totaling $1.2 million. The amount available at September 30, 2019, after consideration of letters of credit was approximately $3.8 million.

Term Loan

As discussed in Note 4, we acquired DP Engineering on February 15, 2019 for approximately $13.5 million in cash. The purchase price was subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5.0 million potentially payable in 2020 and 2021. We drew down $14.3 million to finance the acquisition of DP Engineering. The loan bears interest at the adjusted LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. There were no debt issuance costs and loan origination fees associated with the loan related for our acquisition of DP Engineering.

As discussed in Note 4, we also acquired True North on May 11, 2018 for approximately $9.75 million in cash.  The purchase price was subject to customary pre and post-closing working capital adjustments. We drew down $10.3 million to finance the acquisition of True North, $0.5 million of which was repaid to the Bank on the same day. The loan bears interest at the adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. We also incurred $70,000 debt issuance costs and $75,000 loan origination fees related to the Credit Agreement. Debt issuance costs and loan origination fees are reported as a direct deduction from the carrying amount of the loan and are amortized over the term of the loan using the effective interest method.

The outstanding long-term debt under the delayed draw term loan facility was as follows:

(in thousands)
 
September 30, 2019
   
December 31, 2018
 
Long-term debt, net of discount
 
$
19,746
   
$
8,512
 
Less: current portion of long-term debt
   
(4,778
)
   
1,902
 
Long-term debt, less current portion
 
$
14,968
   
$
6,610
 

The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions after any applicable grace period could result in the obligations under the Credit Agreement becoming immediately due and payable and termination of the credit facilities. In addition to non-complia