10-Q 1 brhc20052747_10q.htm 10-Q
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 March 31, 2023
  
       
   
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)

6940 Columbia Gateway Dr., Suite 470, Columbia MD
  
21046
(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 ☒   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 ☒   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 ☒

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, $0.01 Par Value
  
GVP
  
The NASDAQ Capital Market

There were 23,560,808 shares of common stock, with a par value of $0.01 per share outstanding as of April 30, 2023.

GSE SYSTEMS INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

   
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements (unaudited)
  
 
3
  4
  5
  6
 
7
 
8
Item 2.
24
Item 3.
33
Item 4.
34
PART II.
34
Item 1.
34
Item 1A.
34
Item 2.
34
Item 3
34
Item 4
 34
Item 5.
34
Item 6.
35

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

   
March 31, 2023
    
December 31, 2022
  
   
(unaudited)
        
ASSETS
  
Current assets:
            
Cash and cash equivalents
  
$
1,265
    
$
2,789
  
Restricted cash, current
    500       1,052  
Contract receivables, net of allowance for credit loss
    
10,464
      
10,064
  
Prepaid expenses and other current assets
    
1,282
      
2,165
  
Total current assets
    
13,511
      
16,070
  
                 
Equipment, software and leasehold improvements, net
    
724
      
772
  
Software development costs, net
    
567
      
574
  
Goodwill
    
6,299
      
6,299
  
Intangible assets, net
    
1,526
      
1,687
  
Restricted cash - long term     1,078       535  
Operating lease right-of-use assets, net
    
386
      
506
  
Other assets
    
52
      
53
  
Total assets
  
$
24,143
    
$
26,496
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Current portion of long-term note
   $
2,693
     $
3,038
  
Accounts payable
    
1,560
      
1,262
  
Accrued expenses
    
2,045
      
2,084
  
Accrued compensation
    
1,935
      
1,071
  
Billings in excess of revenue earned
    
4,104
      
4,163
  
Accrued warranty
    
292
      
370
  
Income taxes payable
    
1,723
      
1,774
  
Derivative liabilities
     484       603  
Other current liabilities
    
831
      
1,286
  
Total current liabilities
    
15,667
      
15,651
  
                 
Long-term note, less current portion
    
-
      
310
  
Operating lease liabilities noncurrent
    
110
      
160
  
Other noncurrent liabilities
    
192
      
144
  
Total liabilities
    
15,969
      
16,265
  
                 
Commitments and contingencies (Note 16)
            
                 
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, 25,159,719 and 24,046,806 shares issued, 23,560,808 and 22,447,895 shares outstanding, respectively
    
252
      
240
  
Additional paid-in capital
    
83,860
      
82,911
  
Accumulated deficit
    
(72,935
)
    
(69,927
)
Accumulated other comprehensive (loss) income
    
(4
)
    
6
Treasury stock at cost, 1,598,911 shares
    
(2,999
)
    
(2,999
)
Total stockholders’ equity
    
8,174
      
10,231
  
Total liabilities and stockholders’ equity
  
$
24,143
    
$
26,496
  

The accompanying notes are an integral part of these consolidated financial statements.
 
3
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)

   
Three months ended
  
   
March 31, 2023
    
March 31, 2022
  
             
Revenue
   $ 10,873     $ 12,275  
Cost of revenue
     8,478       9,848  
Gross profit
     2,395       2,427  
                 
Operating expenses:
                
Selling, general and administrative
     4,788       4,507  
Research and development
     181       142  
Depreciation
     48       72  
Amortization of intangible assets
     161       260  
Total operating expenses
     5,178       4,981  
                 
Operating loss
     (2,783 )     (2,554 )
                 
Other income and (expenses), net
               
Interest expense, net
     (286 )     (148 )
Change in fair value of derivative instruments, net
     69       (581 )
Other income, net
     10       16  
Loss before income taxes
     (2,990 )     (3,267 )
                 
(Benefit from) provision for income taxes
     (39 )     167  
Net loss
   $ (2,951 )   $ (3,434 )
                 
Net loss per common share - basic and diluted
   $ (0.13 )   $ (0.16 )
                 
Weighted average shares outstanding used to compute net loss per share - basic and diluted
     22,933,894       20,980,046  

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

4
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)

   
Three months ended
  
   
March 31, 2023
    
March 31, 2022
  
Net loss
   $ (2,951 )   $ (3,434 )
Cumulative translation adjustment
     (10 )     181  
Comprehensive loss
   $ (2,961 )   $ (3,253 )

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

5
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Common Stock
                    
Treasury Stock
      
Three Months Ended
  
Shares
    
Amount
    
Additional
Paid-in
Capital
     Accumulated
Deficit
    
Accumulated
Other
Comprehensive
Loss
     Shares    
Amount
    
Total
  
                                                 
Balance, January 1, 2023
    
24,047
    
$
240
    
$
82,911
    
$
(69,927
)
  
$
6
      
(1,599
)
  
$
(2,999
)
  
$
10,231
  
                                                                 
Adoption of ASC 326 Current Expected Credit Losses (CECL)
    -       -       -       (57 )     -       -       -       (57 )
                                                                 
Adjusted balance, January 1, 2023
    24,047       240       82,911       (69,984 )     6       (1,599 )     (2,999 )     10,174  
                                                                 
Stock-based compensation expense
    
-
      
-
      
274
      
-
      
-
      
-
      
-
      
274
  
Common stock issued for RSUs vested
    
121
      
2
      
(2
)
    
-
      
-
      
-
      
-
      
-
  
Shares withheld to pay taxes
    
-
      
-
      
(58
)
    
-
      
-
      
-
      
-
      
(58
)
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
(10
)
    
-
      
-
      
(10
)
Repayment of convertible note in shares
     992       10       735       -       -       -       -       745  
Net loss
    
-
      
-
      
-
      
(2,951
)
    
-
      
-
      
-
      
(2,951
)
Balance, March 31, 2023
    
25,160
    
$
252
    
$
83,860
    
$
(72,935
)
  
$
(4
)
    
(1,599
)
  
$
(2,999
)
  
$
8,174
  

Balance, January 1, 2022
    
22,533
    
$
225
    
$
80,505
    
$
(54,584
)
  
$
(104
)
    
(1,599
)
  
$
(2,999
)
  
$
23,043
  
Stock-based compensation expense
    
-
      
-
      
359
      
-
      
-
      
-
      
-
      
359
  
Common stock issued for RSUs vested
    
76
      
1
      
(1
)
    
-
      
-
      
-
      
-
      
-
  
Shares withheld to pay taxes
    
-
      
-
      
(86
)
    
-
      
-
      
-
      
-
      
(86
)
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
181
      
-
      
-
      
181
  
Net income
    
-
      
-
      
-
      
(3,434
)
    
-
      
-
      
-
      
(3,434
)
Balance, March 31, 2022
    
22,609
    
$
226
    
$
80,777
    
$
(58,018
)
  
$
77
      
(1,599
)
  
$
(2,999
)
  
$
20,063
  

6
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

   
Three months ended
  
   
March 31, 2023
    
March 31, 2022
  
Cash flows from operating activities:
            
Net loss
  
$
(2,951
)
  
$
(3,434
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
                
Goodwill and intangible asset impairment charge
     -       -  
Depreciation
    
48
      
72
  
Amortization of intangible assets
    
161
      
260
  
Amortization of capitalized software development costs
    
84
      
83
  
Amortization of deferred financing costs
    
7
      
3
  
Amortization of debt discount
     303       129  
Loss on debt settled in shares
    106       -  
Stock-based compensation expense
    
285
      
408
  
Credit loss expense
    
32
      
-
  
Change in fair value of derivative instruments, net
    
(69
)
    
581
  
Deferred income taxes
     2       55  
Changes in assets and liabilities:
                
Contract receivables, net
    
(486
)
    
846
  
Prepaid expenses and other assets
    
876
      
943
  
Accounts payable, accrued compensation and accrued expenses
    
1,252
      
1,028
  
Billings in excess of revenue earned
    
(61
)
    
150
  
Accrued warranty
    
(94
)
    
15
  
Other liabilities
    
(336
)
    
(56
)
Net cash (used in) provided by operating activities
    
(841
)
    
1,083
  
                 
Cash flows from investing activities:
                
Capital expenditures
    
-
      
(81
)
Capitalized software development costs
    
(77
)
    
(106
)
Net cash used in investing activities
    
(77
)
    
(187
)

               
Cash flows from financing activities:
                
Repayment of line of credit
    
-
      
(1,817
)
Repayment of insurance premium financing
    
(243
)
    
(282
)
Proceeds from issuance of long-term debt and warrants
    
-
      
5,750
  
Payments of debt issuance and original discount on issuance of long-term debt and warrants
    -       (968 )
Principal repayment of convertible note
     (319 )     -  
Tax paid for shares withheld
    
(58
)
    
(86
)
Net cash (used in) provided by financing activities
    
(620
)
    
2,597
  
                 
Effect of exchange rate changes on cash
    
5
      
(12
)
Net (decrease) increase in cash, cash equivalents and restricted cash
    
(1,533
)
    
3,481
  
Cash, cash equivalents and restricted cash at beginning of the period
    
4,376
      
3,550
  
Cash, cash equivalents and restricted cash at the end of the period
  
$
2,843
    
$
7,031
  
                 
Cash and cash equivalents   $ 1,265     $ 5,448  
Restricted cash, current     500       -  
Restricted cash included in other long-term assets     1,078       1,583  
Total cash, cash equivalents and restricted cash   $ 2,843     $ 7,031  
                 
Supplemental cash flow disclosures:                
Non-cash financing activities
                
Repayment of convertible note in shares
   $ 745     $ -  
Discount on issuance of convertible note
   $ -     $ 750  

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

7
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

GSE Systems, Inc. is a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. References in this report to “GSE” or “we” or “our” or “the Company” are to GSE Systems, Inc. and our subsidiaries, collectively.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2022 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission on April 17, 2023.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired including the determination of fair value in impairment tests, valuation of long-lived assets to be disposed of, valuation of stock-based compensation awards, the recoverability of deferred tax assets, and valuation of warrants and derivative liability related to our convertible note. Actual results of these and other items not listed could differ from these estimates and those differences could be material.

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 U.S. GAAP. 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 30, 2024.

8
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 8-K on November 8, 2022, to disclose receipt of this letter. The Company had 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, and if compliance was not achieved within the initial 180 calendar days we could petition NASDAQ for an additional period of 180 calendar days in which to increase the stock price. Anticipating that it would not regain compliance with the NASDAQ minimum closing bid price requirement by May 3, 2023, on April 19, 2023, the Company submitted a request for an additional 180-day period within which to regain compliance.  On May 4, 2023, the Company received a letter from NASDAQ advising that the 180-day extension – expiring on October 30, 2023 – had been granted due to the facts that the Company:

•
had met the market value of publicly held shares requirement for continuing listing,
•
had met all other listing requirements for NASDAQ (other than bid price requirement), and
•
had provided written notice to NASDAQ with a plan of how it intends to regain compliance with the bid price requirement during the second 180-day period.

The Company’s plan to regain compliance includes continuing to monitor the closing bid price of its Common Stock and, if appropriate, implementing available options including, but not limited to, undertaking a reverse stock split of its outstanding securities at a ratio within the range of one-for-five to one-to-ten, which will have the initial effect of multiplying the trading price of the Company’s Common Stock by the same ratio. Because such an action requires stockholder approval, the Company has put the matter before its stockholders for approval at the 2023 annual meeting of stockholders, which is scheduled 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.  In furtherance of the Company’s plan to regain compliance, the Company has undertaken the following specific steps:

•
The Company’s Board of Directors considered and approved a resolution on April 3, 2023, to conduct a reverse stock split of one-for-five to one-to-ten, 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;
•
The Company filed a Definitive Proxy Statement with the SEC on May 2, 2023 containing this proposal and commenced mailing of notices to stockholders with instructions for obtaining copies of the proxy materials and voting their shares;
•
Stockholders will vote on the proposed reverse stock split at the annual meeting, which is scheduled to be held on June 12, 2023; and
•
If the reverse stock split is approved by stockholders, and if the closing bid price on the Company’s Common Stock does not increase, the Board of Directors will cause the Company to effectuate the reverse stock split in a manner intended to achieve compliance well in advance of October 30, 2023.

If compliance is not achieved prior to October 30, 2023, and consequently a delisting letter is issued, the Company may request a hearing before the NASDAQ Hearing Panel with regard to delisting, which may have the effect of staying the delisting and provide the Company with the opportunity to present its further plans to regain compliance. If the Company’s Common Stock ceases to be listed on NASDAQ, Lind Global Fund II LP (“Lind Global”), as the holder of that certain two-year, secured, interest-free convertible promissory note in the amount of $5.75 million (the “Convertible Note”) (see Note 10 for further details), may deliver a notice of event of default together with a demand for payment to the Company for payment in full. If such a demand is delivered, the Company shall, within ten business days, pay all of the outstanding principal amount or, at its election, Lind Global may elect to convert all or a portion of the outstanding principal amount and the conversion price shall be adjusted to the lower of the then-current conversion price and 80% of the average of the three lowest daily variable average weighted prices during the twenty trading days prior to delivery. Additionally, if we are unable to maintain our listing on NASDAQ, it will constitute an event of default under the Convertible Note, which would trigger certain obligations under the Convertible Note including, but not limited to, causing an amount equal to 120% of the outstanding principal amount of the Convertible Note to immediately become due. Although there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement within the time period(s) permitted by NASDAQ or maintain compliance with any of the other NASDAQ continued listing requirements, we believe we will be able to remediate the noncompliance.

9
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. During the three months ended March 31, 2023, the Company generated a loss from operations of $2.8 million. As of March 31, 2023, the Company had domestic unrestricted cash and cash equivalents of $1.3 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.

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) to replace the incurred loss impairment methodology under U.S. GAAP. This ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which could result in earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model will require the Company to use a forward-looking expected credit loss impairment methodology for the recognition of credit losses for financial instruments at the time the financial asset is originated or acquired, and require a loss be incurred before it is recognized. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The new standard will apply to accounts receivable, loans, and other financial instruments. This standard is effective for the Company beginning January 1, 2023. The Company adopted the new guidance starting January 1, 2023 on a modified retrospective basis. The impact of this ASU is reflected in the consolidated financial statements and was not material.

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

Note 3 - Basic and Diluted Loss per Share

Basic earnings per share is based on the weighted average number of outstanding common shares for the period. Diluted earnings per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised. Basic and diluted earnings per share are based on the weighted average number of outstanding shares for the period.

The weighted average 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  
 
  
March 31,
  
   
2023
    
2022
  
Numerator:
            
Net loss attributed to common stockholders
   $ (2,951
 )
   $ (3,434
 )
                 
Denominator:
                
Weighted-average shares outstanding for basic earnings per share
     22,933,894
       20,980,046
  
                 
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
     22,933,894
       20,980,046
  
                 
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive
     2,856,032
       149,271
  

10
Note 4 - Coronavirus Aid, Relief and Economic Security Act

Employee Retention Credits (ERC)

Employee retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and extended through September 30, 2021. In 2021, we applied for $5.0 million in refunds from the Internal Revenue Service with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We recorded other income of $7.2 million related to the employee retention tax credits earned for the year ended December 31, 2021. As of March 31, 2023, we received cumulative employee retention tax credit refunds totaling $4.9 million of the $5.0 million in refunds sought, with remaining outstanding refunds receivable of $0.1 million which was included in the other current assets balance at March 31, 2023.

Note 5 - Contract Receivables

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

The components of contract receivables were as follows:

(in thousands)
  
March 31, 2023
   
December 31, 2022
 
             
Billed receivables
  
$
5,831
    
$
6,074
  
Unbilled receivables
    
5,859
      
5,146
  
Allowance for credit loss
    
(1,226
)
    
(1,156
)
Total contract receivables, net
  
$
10,464
    
$
10,064
  

During the fist quarter of 2023, the Company adopted ASU 2016-13, “Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.” This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including accounts receivable. Under the new guidance, an entity recognizes its estimate of lifetime expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its contract receivables based on three portfolio segments by customer geographic location:  North America, China, Rest of World (ROW). The determination of portfolio segments is based primarily on the qualitative consideration of the nature of the Company’s business operations and the characteristics of the underlying trade receivables.


The following table sets forth the activity in the allowance for credit losses for the three months ended March 31, 2023.


(in thousands)
      
Beginning balance at January 1, 2023
  
$
1,213
  
Current period provision for expected credit loss
    
9
  
Write-offs charged against the allowance, net of recoveries
    
-
  
Currency adjustment
    4  
Balance at March 31, 2023
  
$
1,226
  

During the three months ended March 31, 2023, we recorded credit loss expense of $32 thousand. We recorded no credit loss expense during the three months ended March 31, 2022.

During the month of April 2023, we invoiced $3.0 million of the unbilled receivables as of March 31, 2023.

Our foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each reporting period into our functional currency, using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is included in other income, net in the consolidated statements of operations. During the three months ended March 31, 2023 and 2022, we recognized a gain on remeasurement of these foreign exchange contracts of $72 thousand and $3 thousand, respectively.

As of March 31, 2023, we had one customer that accounted for 17% of our consolidated contract receivables. As of December 31, 2022, we had no customer that accounted for 10% of our consolidated contract receivables.
Note 6 - Goodwill and Intangible Assets

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. Management concluded that no triggering events that occurred during the three months ended March 31, 2023 and 2022.

During September 30, 2022, we determined that the deterioration in sales, decline in revenues, delayed pipeline opportunities, and overall downward performance results and the forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. We performed an interim analysis and determined an impairment existed at September 30, 2022 in accordance with ASC 350 & ASC 360. As such, we recorded an impairment of the related goodwill and definite-lived intangible assets of $7.0 million and $0.5 million, for the three and nine months ended September 30, 2022, respectively.

Management determined there were no triggering events occured during the three months March 31, 2023.

Goodwill

The following table shows the gross carrying amount and impairment of goodwill:

(in thousands)

 
  
Goodwill
    
Accumulated
Impairment
    
Net
  

                 
Engineering
  
$
8,278
    
$
(3,370
)
  
$
4,908
  
Workforce Solutions
    
8,431
      
(7,040
)
    
1,391
  
Net book value at March 31, 2023
  
$
16,709
    
$
(10,410
)
  
$
6,299
  

(in thousands)

 
  
Goodwill
    
Accumulated
Impairment
    
Net
  

                 
Engineering
  
$
8,278
    
$
(3,370
)
  
$
4,908
  
Workforce Solutions
    
8,431
      
(7,040
)
    
1,391
  
Net book value at December 31, 2022
  
$
16,709
    
$
(10,410
)
  
$
6,299
  

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

(in thousands)
  
As of March 31, 2023
  
   
Gross
Carrying
Amount
    
Accumulated
Amortization
      Impairment    
Net
  
Amortized intangible assets:
                        
Customer relationships
  
$
8,628
    
$
(7,154
)
   $
(464 )  
$
1,010
  
Trade names
    
1,689
      
(1,218
)
     -      
471
  
Developed technology
    
471
      
(471
)
     -      
-
  
Non-contractual customer relationships
    
433
      
(433
)
     -      
-
  
Noncompete agreement
    
527
      
(495
)
     -      
32
  
Alliance agreement
    
527
      
(514
)
     -      
13
  
Others
    
167
      
(167
)
     -      
-
  
Total
  
$
12,442
    
$
(10,452
)
   $ (464 )  
$
1,526
  

12
(in thousands)
  
As of December 31, 2022
  
   
Gross
Carrying
Amount
    
Accumulated Amortization
    
Impairment
    
Net
  
Amortized intangible assets:
                        
Customer relationships
  
$
8,628
    
$
(7,050
)
  
$
(464
)
  
$
1,114
  
Trade names
    
1,689
      
(1,196
)
    
-
      
493
  
Developed technology
    
471
      
(471
)
    
-
      
-
  
Non-contractual customer relationships
    
433
      
(433
)
    
-
      
-
  
Noncompete agreement
    
527
      
(486
)
    
-
      
41
  
Alliance agreement
    
527
      
(488
)
    
-
      
39
  
Others
    
167
      
(167
)
    
-
      
-
  
Total
  
$
12,442
    
$
(10,291
)
  
$
(464
)
  
$
1,687
  

Amortization expense related to definite-lived intangible assets totaled $0.2 million and $0.3 million for the three months ended March 31, 2023 and 2022. 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:
      
2023 remainder
  
$
348
  
2024
    
332
  
2025
    
255
  
2026
    
204
  
2027
    
169
  
Thereafter
    
218
  
Total
  
$
1,526
  

Note 7 - Equipment, Software and Leasehold Improvements

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

(in thousands)
            
   
March 31, 2023
    
December 31, 2022
  
Computer and equipment
  
$
2,363
    
$
2,363
  
Software
    
2,291
      
2,291
  
Leasehold improvements
    
659
      
659
  
Furniture and fixtures
    
839
      
838
  
     
6,152
      
6,151
  
Accumulated depreciation
    
(5,428
)
    
(5,379
)
Equipment, software and leasehold improvements, net
  
$
724
    
$
772
  

Depreciation expense was $48 thousand and $72 thousand for the three months ended March 31, 2023 and 2022, respectively.
Note 8 - Fair Value of Financial Instruments

ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1:  inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2:  inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

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

As of March 31, 2023 and December 31, 2022, we considered the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, contract receivable and accounts payable, to approximate fair value based upon their short-term nature.

Our convertible debt issued in February 2022 (See Note 10) includes certain embedded redemption features that are required to be bifurcated as embedded derivatives and measured at fair value on a recurring basis. We estimate the fair value using a Monte Carlo simulation based on estimates of our future stock price and assumptions about the possible redemption scenarios.

The Company used the Monte Carlo simulation model to determine the fair value of the Warrants and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of March 31, 2023 was estimated with the following assumptions.
 
Exercise Price
 $ 1.94  
       
Common Stock Price
 $ 0.70  
Risk Free Rate
   3.6 %
Volatility
   70.0 %
Term (in years)
3.9 yrs.  

The following table presents assets and liabilities measured at fair value at March 31, 2023:

(in thousands)
  
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
    
Significant
Other Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
  
                         
Derivative liability   $ -     $ -     $ 217     $ 217  
Warrant liability
     -       -       267       267  
Cash settled performance-vesting restricted stock units
     -       -       62       62  
 Total liabilities   $ -     $ -     $ 546     $ 546  

The following table presents assets and liabilities measured at fair value at December 31, 2022:

(in thousands)
  
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
    
Significant
Other Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
  
                         
Derivative liability   $ -     $ -     $ 285     $ 285  
Warrant liability
     -       -       267       267  
Cash settled performance-vesting restricted stock units
     -       -       51       51  
 Total liabilities   $ -     $ -     $ 603     $ 603  

The following table summarizes changes in the fair value of our Level 3 liabilities during the three months ended March 31, 2023.

(in thousands)
  
Embedded
Redemption Features
     Warrant    
Cash Settled
PRSUs
    Level 3 Total
 
Balance at December 31, 2022
  
$
285
     $ 267     $ 51     $ 603  
Change in FV included in gain on derivative instruments, net
     (68 )     -       -       (68 )
Stock compensation less payments made
     -
       -
       11
       11
  
Balance at March 31, 2023
  
$
217
     $ 267     $ 62     $ 546  

14
Note 9 - Stock-Based Compensation

We recognize compensation expense on a pro rata straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. We recognize the cumulative effect of a change in the number of awards expected to vest in compensation expense in the period of change. We have not capitalized any portion of our stock-based compensation. Our forfeiture rate is based on actuals.


During the three months ended March 31, 2023 and 2022, we recognized $0.3 million and $0.4 million of stock-based compensation expense related to equity awards, respectively, under the fair value method.



During the three months ended March 31, 2023, we granted approximately 45,000 restricted stock units (“RSUs”) with an aggregate fair value of approximately $33 thousand. During the three months ended March 31, 2022, we granted approximately 14,000 time-based RSUs with an aggregate fair value of approximately $24 thousand, respectively. During the three months ended March 31, 2023, we vested 184,949 RSUs compared to 121,540 RSUs vested during the three months ended March 31, 2022. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of one to three years.

GSE’s 1995 long-term incentive program (“LTIP”) provides for the issuance of performance-vesting and time-vesting RSUs to certain executives and employees. Vesting of the performance-vesting restricted stock units (“PRSU”) 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 Company’s Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSUs on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.

During the three months ended March 31, 2023, there were no PRSUs granted compared to 800,000 during the three months ended March 31, 2022, including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards, and a time-vesting restriction, which will vest in equal portions over the next 15 quarters ending December 31, 2025. During the three months ended March 31, 2023, we vested 50,000 PRSUs, of which, 12,500 PRSUs were cash-settled, respectively. No PRSUs were vested during the three months ended March 31, 2022. The market vesting criteria was achieved in April 2022 for the 800,000 PRSUs which will fully vest over the next 11 quarters.