GSE SYSTEMS, INC. We are a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in their respective organizations, primarily in procedures, engineering, technical support and training focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries. Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve, namely the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although these delays and reductions impacted us, as an essential services provider to an essential industrial base, we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. Additionally, staffing shortages have resulted in new opportunities for our Workforce Solutions segment. In 2021, the effects of the pandemic still impacted the end markets we serve, but those effects have been mitigated by a number of factors, including the following: the pandemic largely has had a targeted effect on the population? a number of vaccines in the market being distributed and, despite logistical challenges, making substantial progress for those in most need? the economy ofthe United States has not had as much disruption as was initially feared, which has benefited our end markets? and most importantly our end markets seem poised to contract with us for essential services that had been delayed as a result of the pandemic. As we end 2021 and begin 2022, we have had a number of significant contract wins that have been publicly announced, which we hope will be a harbinger of a more attractive business environment for the power industries we serve. As a result of the COVID-19 pandemic, we have sought and obtained support through various business assistance programs. We applied for and, onApril 23, 2020 , received the PPP Loan under the CARES Act, as administered by the SBA. The application for receipt of the PPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan bore interest at a rate of 1% per annum and would mature onApril 23, 2022 , with the first payment deferred untilSeptember 2021 . We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to the Lender substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. The Lender reviewed our application for forgiveness and associated documentation, and onFebruary 26, 2021 forwarded our application to the SBA with the Lender's determination that the loan is fully forgivable. OnAugust 5, 2021 , we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA. During the second quarter of 2021, we performed analysis to determine our first quarter 2021 eligibility for the Employee Retention Credit available under the CARES Act . We amended certain payroll tax filings and applied for a refund of$2.4 million dollars inApril 2021 . For the second quarter of 2021, we have applied for a refund of$1.8 million dollars from theIRS with the timely filing of Form 941 and have already recognized a benefit of$900,000 in value from unremitted payroll taxes as allowable. For the third quarter of 2021, we have applied for a refund of$1.0 million from theIRS with the timely filing of Form 941 and have recognized a benefit of$1.4 million in value from unremitted payroll taxes as allowable. Subsequent to the year end, we received refunds of$1.1 million , which was included in the other current assets balance atDecember 31, 2021 . We entered into a contract with a subcontractor to purchase large equipment from Siemens in order to build a simulator for project Slovenske Elektrarne Mochovce Full Scope Simulator Upgrade inDecember 2018 . The total contract price was about$2.7 million and included VAT taxes of approximately$450,000 . We paid the VAT taxes and had pursued the collection of this VAT refund for a couple of years. InMay 2021 , we were informed that this VAT refund was no longer collectable. As a result, we wrote off this VAT receivable during 2021. 30
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OnSeptember 9, 2021 ,President Biden released the COVID-19 Action Plan, Path Out of the Pandemic (the "Plan"), with the stated goal of getting more people vaccinated. As part of the Plan, Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (the "Order"), creates theSafer Federal Workforce Task Force (the "Task Force "), which released guidance forU.S. Government contractors and their subcontractors. This guidance included mandatory vaccination of all employees working on or for a government contract, either directly or indirectly, byJanuary 4, 2022 (subject to medical and religious exemptions). As a part of the Plan and Order,President Biden also directed, theDepartment of Labor's Occupational Safety and Health Administration ("OSHA") to issue an Emergency Temporary Standard ("ETS") requiring that all employers with at least 100 employees ensure that theirU.S. -based employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week. OnNovember 4, 2021 ,OSHA issued this ETS, however the implementation of the ETS was blocked by federal appeals courts, pending resolution of ongoing litigation challenging the constitutionality of the ETS, and the ETS was withdrawn byOSHA onJanuary 25, 2022 .OSHA , however has not withdrawn the proposed rule that would effectuate the same mandate, and it cannot be known whetherOSHA may reissue the ETS or otherwise issue new emergency temporary standards imposing similar mandates. We have already received notice by both government customers and prime contractors serving government customers regarding the vaccination requirement and its application to our business with those customers. As an employer of more than 100 employees, we would also be subject to the ETS or a similar mandate should it become effective. It is possible that additional jurisdictions where we do business may impose similar mandates that would apply to our employees. In addition, certain of our customers may require vaccines for those of our employees who provide on-site service at their facilities. We will continue to monitor the status of these or other mandates or regulations and their application to us and our business. 31
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Table of Contents Results of Operations.
The following table sets forth the results of operations for the periods presented expressed as a percentage of revenue.
($ in thousands) Years ended December 31,
2021 % 2020 %
Revenue $ 55,183 100.0 % $ 57,620 100.0 %
Cost of revenue 43,325 78.5 % 42,835 74.3 %
Gross profit 11,858 21.5 % 14,785 25.7 %
Operating expenses
Selling, general and administrative 14,908 27.0 % 15,765 27.4 %
Research and development 626 1.1 % 686 1.2 %
Restructuring charges 798 1.4 % 1,297 2.3 %
Loss on impairment 3 - 4,302 7.5 %
Depreciation 284 0.5 % 330 0.6 %
Amortization of definite-lived intangible assets 1,213 2.2 % 1,943 3.4 %
Total operating expenses 17,832 32.3 % 24,323 42.2 %
Operating loss (5,974 ) (10.8 %) (9,538 ) (16.6 %)
Interest expense (159 ) (0.3 %) (623 ) (1.1 %)
Gain (loss) on derivative instruments, net 19 0.0 % (17 ) 0.0 %
Other income (expense), net 16,884 30.6 % (4 ) 0.0 %
Income (loss) before taxes 10,770 19.5 % (10,182 ) (17.7 %)
Provision for income taxes 163 0.3 % 355 0.6 %
Net income (loss) $ 10,607 19.2 % $ (10,537 ) (18.3 %)
Comparison of the Years Ended
Revenue. Revenue for the year endedDecember 31, 2021 , totaled$55.2 million , which was 4.2% less than the$57.6 million of revenue for the year endedDecember 31, 2020 . (in thousands) Year ended December 31, 2021 2020 Change Revenue: $ %
Performance Improvement Solutions
(14.2 )% Workforce Solutions 27,043 24,830 2,213 8.9 % Total revenue$ 55,183 $ 57,620 (2,437 ) (4.2 )% Performance Improvement Solutions revenue decreased 14.2% from$32.8 million to$28.1 million for the years endedDecember 31, 2020 and 2021, respectively. The decrease of revenue was primarily due to several significant projects ending in the prior fiscal year. We recorded total Performance Improvement Solutions orders of$30.0 million and$26.2 million for the years endedDecember 31, 2021 and 2020, respectively. For the year endedDecember 31, 2021 , Workforce Solutions revenue increased 8.9% to$27.0 million compared to revenue of$24.8 million for the year endedDecember 31, 2020 . The increase in revenue was primarily due a significant new customer obtained in Q1 2021. We recorded total new orders of$26.5 million and$19.1 million for the years endedDecember 31, 2021 and 2020, respectively. 32
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As ofDecember 31, 2021 , our backlog was$41.3 million ,$31.8 million was attributed to the Performance Improvement Solutions segment and$9.5 million was attributed to the Workforce Solutions segment. As ofDecember 31, 2020 , our backlog was$40.4 million with$30.3 million attributed to the Performance Improvement Solutions segment and$10.1 million attributed to the Workforce Solutions segment. The increase in our backlog over fiscal year 2020 was primarily due to higher orders in the Performance Improvement Solutions during fiscal year 2021. Gross profit. Gross profit was$11.9 million , or 21.5% of revenue, for the year endedDecember 31, 2021 compared to$14.8 million , or 25.7% of revenue, for the year endedDecember 31, 2020 . ($ in thousands) Years ended December 31, 2021 % 2020 % Gross profit: Performance Improvement Solutions$ 8,124 28.9 %$ 11,395 34.8 % Workforce Solutions 3,734 13.8 % 3,390 13.7 % Consolidated gross profit$ 11,858 21.5 %$ 14,785 25.7 % The Performance Improvement Solutions segment's gross profit decreased by$3.3 million during fiscal year 2021 over fiscal year 2020. The decrease is primarily related to lower revenue and several significant projects completed in the prior year.
The Workforce Solutions segment's gross profit increased by
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses totaled
($ in thousands) Years ended
2021 % 2020 %
Selling, general and administrative expenses:
Corporate charges $ 10,305 69.1 % $ 10,881 69.0 %
Business development 3,024 20.3 % 3,364 21.3 %
Facility operation & maintenance (O&M) 872 5.8 % 928 5.9 %
Provision for loss on legal settlement - 0.0 % 477 3.0 %
Bad debt expense 691 4.6 % 103 0.7 %
Other 16 0.1 % 12 0.1 %
Total $ 14,908 100.0 % $ 15,765 100.0 %
Corporate charges decreased $0.6 million in 2021 compared to 2020. The decrease
was primarily due to a reduction of external legal, audit, and consultants fees
of $0.8 million . Additionally, the Company saw a reduction in realized foreign
exchange rate loss of $0.3 million during the fiscal year 2021.
Business development charges decreased
Facility O&M expenses decreased
Provision for loss on legal settlement. OnAugust 17, 2020 , Absolute entered into a Settlement Agreement with the plaintiffs (Joyce), which resulted a final settlement cost, including plaintiff's attorney fees of approximately$1.4 million . OnSeptember 29, 2020 , the Company received$952 thousand from a general escrow account, originally set up as part of the Company's purchase of Absolute during fiscal 2017. The Company presented the loss on Joyce legal settlement and the benefit from the proceeds from the release of escrow from the Absolute transaction in selling, general and administrative expenses, in the amount of$477 thousand for the year endedDecember 31, 2020 . There were no similar transactions during the same period of 2021. 33
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Bad debt expense. We recorded bad debt expense of$691 thousand and$103 thousand for the years endedDecember 31, 2021 andDecember 31, 2020 , respectively. GSE's bad debt allowance is based on historical trends of past due accounts, write-offs, and specific identification and review of customer accounts. Included in the current year provision is an impairment of unbilled receivables of$824 thousand related to a customer contract with our GSE Beijing entity offset by$133 thousand recovery of bad debt from previously written off balances. As ofDecember 31, 2021 , management considered the following factors when assessing the unbilled receivable balance in question for impairment: the overall geopolitical environment, the Company's inability to travel toChina to meet with the customer to resolve their concerns, and the restrictions on restarting the project due to both regulatory constraints and our ability to meet future milestones. Based on these factors we determined that the unbilled was impaired and a reserve for unbilled was recorded resulting in bad debt expense of$824 thousand . We will continue to pursue billing and collections of this balance. Research and development. Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled$0.6 million and$0.7 million for both the years endedDecember 31, 2021 and 2020, respectively. Restructuring charges. Restructuring charges totaled$0.8 million and$1.3 million for the years endedDecember 31, 2021 and 2020, respectively. OnDecember 27, 2017 , the Board ofGSE Systems, Inc. approved an international restructuring plan to streamline and optimize the Company's global operations. Under this international restructuring plan, we have incurred cumulative restructuring charges of$3.9 million . The Company expects no future charges relating to the international restructuring plan, excluding any tax impacts and cumulative translation adjustments from the final disposal of foreign entities. Additionally, during the third quarter of 2019, the Company implemented a restructuring plan as a result of the work suspension of DP Engineering's largest customer and subsequent notification onAugust 6, 2019 that the EOC contract was being terminated. This plan was put in place to align the workforce with the expected level of business moving forward. Under this restructuring plan, we have incurred total restructuring of$2.6 million . In the twelve months endingDecember 31, 2020 , we recorded$1.0 million to international restructuring, and$0.2 million of related employee termination benefits. The decrease in our 2021 restructuring plan charges was mainly due to final charges related to the liquidation of ourSweden operations during the period, pursuant to our foreign restructuring plan. Loss on impairment of goodwill and definite-lived intangible assets. We recognized a$3 thousand ROU asset impairment during the fiscal year 2021. We recognized a$4.3 million intangible asset impairment during the fiscal year 2020.
Depreciation. Depreciation expense totaled
Amortization of definite-lived intangible assets. Amortization expense related to definite-lived intangible assets totaled$1.2 million and$1.9 million for the years endedDecember 31, 2021 and 2020, respectively. The decrease in amortization expense was primarily due to the reduction in the carrying value of DP Engineering's intangible assets, due to the$4.3 million impairment in Q1 2020. Additionally, certain intangible assets such as Customer Contracts & Relationships have larger amortization the earlier they are in their useful lives. Interest expense. Interest expense totaled$0.2 million and$0.6 million for the years endedDecember 31, 2021 and 2020. The decrease was due to a reduction in total indebtedness during the fiscal year 2021. Gain (loss) on derivative instruments, net. The Company periodically enters into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated trade receivables. The Company had not designated the contracts as hedges and recognized a loss on the change in the estimated fair value of the contracts of$17 thousand for the years endedDecember 31, 2020 . We had no foreign exchange contracts outstanding as ofDecember 31, 2021 . The foreign currency denominated trade receivables, unbilled receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is also included in gain (loss) on derivative instruments net in the consolidated statements of operations. For the years endedDecember 31, 2021 and 2020, the Company incurred a gain of$19 thousand and$15 thousand , respectively, related to the remeasurement of such assets and liabilities. Other income (expense), net. The Company recognized$16.9 million of other income, net and$(4) thousand of other expense, net for the years endedDecember 31, 2021 and 2020, respectively. The increase was primarily due to the recording of$10.1 million PPP loan forgiveness by SBA and$7.2 million Employee Retention Credit during the period, offset by VAT write-off of$0.5 million , We paid VAT taxes for a subcontractor equipment purchase and had pursued the collection of this VAT refund for a couple of years. InMay 2021 , we were informed that this VAT refund was no longer collectable. 34
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Provision for Income Taxes. The Company files tax returns inthe United States federal jurisdiction and in several state and foreign jurisdictions. Because of the net operating loss carryforwards, the Company is subject toU.S. federal and state income tax examinations for tax years 2000, and forward, and is subject to foreign tax examinations by tax authorities for the years 2016 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.
The Company's tax expense in 2021 was
The significant change of$0.8 million in net operating loss carryforwards was primarily driven by the release of theU.S. uncertain tax position on theU.K. worthless stock deduction which originally offset the federal and state net operating losses. The difference between the effective rate and statutory rate primarily resulted from a change in valuation allowance, permanent differences, including PPP loan forgiveness and foreign restructuring, accruals related to uncertain tax positions, the tax impact of stock compensation forfeitures, foreign tax expense, and state tax expense. Please see Note 15 for additional information.
Coronavirus Aid, Relief and Economic Security Act
OnMarch 27, 2020 ,the United States enacted the Cares Act. The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact our consolidated financial statements include removal of certain limitations on utilization of net operating losses and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. OnApril 23, 2020 , we received$10 million in funds under the Paycheck Protection Program (PPP), a part of the CARES Act. OnAugust 5, 2021 , the Company was notified that theSmall Business Administration ("SBA") had forgiven the PPP loan including all accrued interest thereon was forgiven. Employee retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share ofSocial Security tax equal to 70% of the qualified wages they pay to employees.
Consolidated Appropriations Act
OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021 (CAA) was signed into law. The CAA included additional funding through tax credits as part of its economic package for 2021. We evaluated these items in our tax computation as ofDecember 31, 2021 and determined that the items do not have a material benefit on our consolidated financial statements as ofDecember 31, 2021 .
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, management makes several
estimates and assumptions that affect our reported amounts of assets,
liabilities, revenues and expenses. Those accounting estimates that have the
most significant impact on our operating results and place the most significant
demands on management's judgment are discussed below. For all of these
policies, management cautions that future events rarely develop exactly as
forecasted, and the best estimates may require adjustment.
Revenue Recognition. We derive our revenue through three broad revenue streams:
1) System Design and Build ("SDB"), 2) software, and 3) training and consulting
services. We recognize revenue from SDB and software contracts mainly through
the Performance Improvement Solutions segment and revenue from training and
consulting services through both the Performance Improvement Solutions segment
and Workforce Solutions segment.
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The SDB contracts are typically fixed-price and consist of initial design,
engineering, assembly and installation of training simulators which include
hardware, software, labor, and post contract support ("PCS") on the software. We
generally have two main performance obligations for an SDB contract: the
training simulator build and PCS period. The training simulator build
performance obligation generally includes hardware, software, and labor. The
transaction price under the SDB contracts is allocated to each performance
obligation based on its standalone selling price. We recognize the training
simulator build revenue over the construction and installation period using the
cost-to-cost input method as our performance creates or enhances assets with no
alternative use to us, and we have an enforceable right to payment for
performance completed to date. Cost-to-cost input method best measures the
progress toward complete satisfaction of the performance obligation. PCS revenue
is recognized ratably over the service period, as PCS is deemed as a stand-ready
obligation.
In applying the cost-to-cost input method, we use the actual costs incurred to
date relative to the total estimated costs to measure the work progress toward
the completion of the performance obligation and recognize revenue accordingly.
Estimated contract costs are reviewed and revised periodically as the work
progresses, and the cumulative effect of any change in estimates is recognized
in the period in which the change is identified. Estimated losses are recognized
in the period such losses are identified. Uncertainties inherent in the
performance of contracts include labor availability and productivity, material
costs, change order scope and pricing, software modification and customer
acceptance issues. The reliability of these cost estimates is critical to our
revenue recognition as a significant change in the estimates can cause the our
revenue and related margins to change significantly from the amounts estimated
in the early stages of the project.
The SDB contracts generally provide a one-year base warranty on the systems. The
base warranty is not accounted for as a separate performance obligation under
the contract because it does not provide the customer with a service in addition
to the assurance that the completed project complies with agreed-upon
specifications. Warranties extended beyond our typical one-year period, if any,
are evaluated on a case by case basis to determine if it provides more than just
assurance that the product operates as intended, which would require carve-out
as a separate performance obligation.
Revenue from the sale of perpetual standalone and term software licenses, which
do not require significant modification or customization, is recognized upon its
delivery to the customer. Revenue from the sale of cloud-based
subscription-based software licenses is recognized ratably over the term of such
licenses following delivery to the customer. Delivery is considered to have
occurred when the customer receives a copy of the software and is able to use
and benefit from the software.
A software license sale contract with multiple performance obligations typically
includes the following elements: license, installation and training services and
PCS. The total transaction price of a software license sale contract is
typically fixed and is allocated to the identified performance obligations based
on their relative standalone selling prices. Revenue is recognized as the
performance obligations are satisfied. Specifically, license revenue is
recognized when the software license is delivered to the customer; installation
and training revenue is recognized when the installation and training is
completed without regard to a detailed evaluation of the point in time criteria
due to the short-term nature of the installation and training services (one to
two days on average); and PCS revenue is recognized ratably over the service
period, as PCS is deemed as a stand-ready obligation.
The contracts within the training and consulting services revenue stream are
either time and materials ("T&M") based or fixed-price based. Under a typical
T&M contract, we are compensated based on the number of hours of approved time
provided by workers and the bill rates which are fixed per type of work, as well
as approved expenses incurred. Our customers are billed on a regular basis, such
as weekly, biweekly or monthly. In accordance with Accounting Standards
Codification ("ASC") 606-10-55-18, we elected to apply the "right to invoice"
practical expedient, under which we recognize revenue in the amount to which we
have the right to invoice. The invoice amount represents the number of hours of
approved time worked by each worker multiplied by the bill rate for the type of
work, as well as approved expenses incurred. Under a typical fixed-price
contract, we recognize the revenue on a percentage of completion basis as it
relates to construction contracts with revenue recognized based on project
delivery over time. Revenue from the sale of short-term contracts with a
delivery period of one month or less is recognized in the month completed.
For contracts with multiple performance obligations, we allocate the contract
price to each performance obligation based on its relative standalone selling
price. We generally determine standalone selling prices based on the prices
charged to customers.
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Impairment of Intangible Assets, includingGoodwill . Our intangible assets impairment analysis includes the use of undiscounted cash flow and discounted cash flow models that require management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates and future economic factors that may impact each asset group. We review goodwill and intangible assets for impairment annually as ofDecember 31 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We test goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined byU.S. GAAP (See Note 7). Accounting Standards Update ("ASU") 2011-08, Intangibles -Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. An entity is not required to perform step one of the goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount (Step 0). If the Step 0 test indicates the fair value of a reporting unit is less than its carrying value, then additional impairment testing is required in accordance with the provisions of ASC 350, Intangibles -Goodwill and Other. ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation.Goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, limited to the carrying value of the goodwill. As ofDecember 31, 2020 , we performed a quantitative step 1 analysis and have concluded that the estimated fair values of each of our reporting units as ofDecember 31, 2020 , is more likely than not, greater than their respective carrying values. Our goodwill impairment analysis includes the use of a discounted cash flow model that requires management to make assumptions regarding estimates of growth rates used to forecast revenue, operating margin and terminal value as well as determining the appropriate risk-adjusted discount rates and other factors that impact fair value determinations. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparable. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present. Capitalization of Computer Software Development Costs. In accordance withU.S. GAAP, we capitalize computer software development costs incurred after technological feasibility has been established, but prior to the release of the software product for sale to customers. Once the product is available to be sold, we amortize the costs, on a straight-line method, over the estimated useful life of the product, which is typically three years. As ofDecember 31, 2021 , we have net capitalized software development costs of$0.5 million . On an annual basis, and more frequently as conditions indicate, we assess the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expected to be generated by the sale of the product. If the undiscounted cash flows are not sufficient to recover the unamortized software costs, we will write-down the investment to its estimated fair value based on future discounted cash flows. The excess of any unamortized computer software costs over the related net realizable value is written down and charged to operations. Included in capitalized software development costs are certain expenses associated with the development software services. These are similarly capitalized, although not subjected to the same recoverability considerations. Significant changes in the sales projections could result in an impairment with respect to the capitalized software that is reported on our consolidated balance sheets. Deferred Income Tax Valuation Allowance. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Management makes a regular assessment of the ability to realize our deferred tax assets. In making this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of our deferred tax liabilities and projected future taxable income in making this assessment. A valuation allowance is recorded to reduce the total deferred income tax asset to its realizable value. As ofDecember 31, 2021 , our largest deferred tax asset was$6.2 million of net operating losses. It primarily relates to aU.S. net operating loss carryforward of$6.2 million ;$4.5 million of the net operating loss carryforward expires in various amounts between 2023 and 2037;$1.7 million of the net operating loss carryforward is an indefinite-lived deferred tax asset. We do not believe that it is more likely than not that we will be able to realize our deferred tax assets for ourU.S. and foreign deferred tax assets as ofDecember 31, 2021 , and therefore we have recorded a$9.4 million valuation allowance for our net deferred tax assets. The Company has a deferred tax liability in the amount of$0.1 million atDecember 31, 2021 related to the portion of goodwill which cannot be offset by deferred tax assets 37
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Liquidity and Capital Resources.
As of
For the years ended
• A
primarily driven by increased collections due to large milestone payments of
large projects in the prior year.
• A
expenses) mainly driven by a reduction of external legal and audit fees in
2021.
• A
to COVID-19. Net cash used in investing activities. For the year endedDecember 31, 2021 , net cash used in investing activities was$0.8 million compared to net cash of$0.3 million used in investing activities in the prior year. The increase in cash outflow in 2021 was primarily related to the systems implementation, see note 10 for further details. Net cash used in financing activities. For the years endedDecember 31, 2021 and 2020, net cash used in financing activities totaled$2.2 million and$6.1 million , respectively. The decrease in cash used in financing activities of$3.8 million was driven by a$2.0 million repayment of line of credit in 2021 compared to a repayment on term loans of$18.5 million offset by proceeds of the PPP Loan of$10 million .
Paycheck Protection Program Loan ("PPP Loan")
We applied for and, onApril 23, 2020 , received a payroll protection program loan in the amount of$10.0 million (the "PPP Loan") under the CARES Act, as administered by the SBA. The application for receipt of the PPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan bore interest at a rate of 1% per annum and would mature onApril 23, 2022 , with the first payment deferred untilSeptember 2021 . We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to the Lender substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. The Lender reviewed our application for forgiveness and associated documentation, and onFebruary 26, 2021 forwarded our application to the SBA with the Lender's determination that the loan is fully forgivable. OnAugust 5, 2021 , we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA.
Credit Facilities
OnDecember 29, 2016 , we entered a 3-year$5.0 million revolving line of credit facility ("RLOC") with theCitizens Bank, N.A. (the "Bank") to fund general working capital needs and acquisitions. OnMay 11, 2018 , we entered into the Amended and Restated Credit and Security Agreement (the "Credit Agreement" or the "Credit Facility") to (a) expand the RLOC to include a letter of credit sub-facility and not be subject to a borrowing base and (b) to add a$25.0 million term loan facility, available to finance permitted acquisitions over the following 18 months. The credit facility was subject to certain financial covenants and reporting requirements and was scheduled to mature onMay 11, 2023 and accrue interest at the USD LIBOR, plus a margin that varies depending on our overall leverage ratio. We subsequently amended and ratified the Credit Agreement a number of times, and as a part of the Eighth Amendment and Reaffirmation Agreement, we repaid the entire outstanding balance on the term loan facility. Due to a projected violation of the leverage ratio at the end of the first quarter of 2021, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date ofMarch 29, 2021 (See FN 13). 38
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Following the Ninth Amendment, we experienced continued delays in commencing new projects and thus our ability to recognize revenue was delayed for some contracts. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic started to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan resulted in breaching the Minimum Liquidity ratio subsequent to bothJune 30, 2021 and atSeptember 30, 2021 as well as projected breaching of the Leverage and Fixed Charges ratio covenant. OnNovember 12, 2021 , due to these covenant violations, we signed the Tenth Amendment and Reaffirmation Agreement with an effective date ofNovember 12, 2021 to adjust the thresholds for future covenants to ease the risk of non-compliance. Per the Tenth Amendment, we received a waiver for the fixed charge coverage ratio and leverage ratio for the quarters endingSeptember 30 andDecember 31, 2021 , and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. RLOC Amount" means (i)$3,500,000 (ii) on each date a payment in the amount of$250,000 is made pursuant to Subsection 2.1.5(d), the RLOC Amount immediately prior to such payment reduced by$250,000 and (iii) onMarch 31, 2022 and on eachJune 30 ,September 30 ,December 31 andMarch 31 thereafter, the RLOC Amount immediately prior to each such date reduced by$37,500 . In addition, we agreed, byDecember 31, 2021 , we will pay the Bank$250,000 to be applied to the principal amount outstanding under the RLOC. Commencing onMarch 31, 2022 and on eachJune 30 ,September 30 ,December 31 andMarch 31 thereafter, we will pay the Bank$75,000 to be applied to the principal amount outstanding under the RLOC. In addition, within the fifth (5th) Business Day after we have received, subsequent toNovember 1, 2021 , Employee Retention Credits in an aggregate amount not less than$500,000 , we will pay the Bank$250,000 to be applied to the principal amount outstanding under the RLOC. We are also required to maintain a minimum of$2.25 million in aggregateUSA liquidity. We incurred$15 thousand of amendment fee related to this amendment. During the year endedDecember 31, 2021 , we repaid for$2 million and had a draw of$0.8 million on our RLOC. As ofDecember 31, 2021 , we had outstanding borrowings of$1.8 million under the RLOC and four letters of credit totaling$1.1 million outstanding to certain of our customers. The total borrowing capacity under RLOC was$3.25 million as ofDecember 31, 2021 . After consideration of letters of credit and the$0.5 million reserved for issuance of new letters of credit, there was no amount available for borrowing under the RLOC. Subsequent to the year endedDecember 31, 2021 , the Company issued a Convertible Note (further described in Note 24 to Consolidated Financial Statements). The proceed received from this Note were used to repay in full, all outstanding indebtedness owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. We will continue to maintain a cash management account and certain letters of credit with Citizens and, accordingly, have entered into a certain Cash Management Agreement with Citizens, as well as certain Cash Pledge Agreements in amounts corresponding to the current outstanding letters of credits with customers (as further described in Note 13 to the Consolidated Financial Statements).
Foreign Exchange
A portion of our international sales revenue has been and may be received in a currency other than the currency in which the expenses relating to such revenue are paid. Accordingly, we periodically enter into forward foreign exchange contracts to manage the market risks associated with the fluctuations in foreign currency exchange rates. As ofDecember 31, 2021 , we did not hold a position in forward foreign exchange contracts.
Other Matters
Management believes inflation has not had a material impact on our operations.
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EBITDA and Adjusted EBITDA Reconciliation (in thousands)
References to "EBITDA" mean net (loss) income, before taking into account
interest expense (income), provision for income taxes, depreciation and
amortization. References to Adjusted EBITDA exclude the impact of litigation,
loss on impairment, employee retention credit, PPP loan forgiveness,
restructuring charges, stock-based compensation expense, change in fair value of
derivative instruments, and VAT write-off. EBITDA and Adjusted EBITDA are not
measures of financial performance under generally accepted accounting principles
(GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating
profit, net income and other GAAP measures, are useful to investors to evaluate
our results because it excludes certain items that are not directly related to
our core operating performance that may, or could, have a disproportionate
positive or negative impact on our results for any particular period. Investors
should recognize that EBITDA and Adjusted EBITDA might not be comparable to
similarly-titled measures of other companies. This measure should be considered
in addition to, and not as a substitute for or superior to, any measure of
performance prepared in accordance with GAAP. A reconciliation of non-GAAP
EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure in
accordance with SEC Regulation G follows:
Three Months Ended Twelve Months Ended
December 31, December 31,
2021 2020 2021 2020
Net income (loss) $ (1,857 ) $ (1,469 ) $ 10,607 $ (10,537 )
Interest expense, net 24 67 159 623
Provision for income taxes 36 189 163 355
Depreciation and amortization 439 582 1,865 2,612
EBITDA (1,358 ) (631 ) 12,794 (6,947 )
Litigation (22 ) 568 (22 ) 477
Loss on impairment - - 3 4,302
Employee retention credit - - (7,162 ) -
PPP Loan and accumulated interest forgiveness - - (10,127 ) -
Restructuring charges - 1,102 798 1,297
Stock-based compensation expense 259 21 1,043 378
Change in fair value of derivative instruments (19 ) 52
(19 ) 17
Acquisition-related expense - 1 - 192
VAT write-off - - 450 -
Adjusted EBITDA $ (1,140 ) $ 1,113 $ (2,242 ) $ (284 )
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Adjusted Net (Loss) Income and Adjusted EPS Reconciliation (in thousands, except
per share amounts)
References to Adjusted net (loss) income exclude the impact of litigation, loss
on impairment, employee retention credit, PPP loan forgiveness, restructuring
charges, stock-based compensation expense, change in fair value of derivative
instruments, acquisition-related expenses, VAT write-off, amortization of
intangible assets related to acquisitions, release of valuation allowance, and
income tax expense impact of adjustments. Adjusted Net Income and adjusted
earnings per share (adjusted EPS) are not measures of financial performance
under GAAP. Management believes adjusted net income and adjusted EPS, in
addition to other GAAP measures, are useful to investors to evaluate our results
because they exclude certain items that are not directly related to our core
operating performance and non-cash items that may, or could, have a
disproportionate positive or negative impact on our results for any particular
period. These measures should be considered in addition to, and not as a
substitute for or superior to, any measure of performance prepared in accordance
with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to
GAAP net income, the most directly comparable GAAP financial measure, is as
follows:
Three Months ended Twelve Months ended
December 31, December 31,
2021 2020 2021 2020
(unaudited) (unaudited) audited auditedNet income (loss)$ (1,857 ) $ (1,469 ) $ 10,607 $ (10,537 ) Litigation (22 ) 568 (22 ) 477 Loss on impairment - - 3 4,302 Employee retention credit - - (7,162 ) - PPP Loan and accumulated interest forgiveness - - (10,127 ) - Restructuring charges - 1,102 798 1,297 Stock-based compensation expense 259 21 1,043 378 Change in fair value of derivative instruments (19 ) 52 (19 ) 17 Acquisition-related expense - 1 - 192 VAT write-off - - 450 - Amortization of intangible assets related to acquisitions 284 415 1,213 1,943 Valuation allowance 246 1,589 246 1,589 Income tax expense impact of adjustments 46 345 46 345 Adjusted net income (loss)$ (1,063 )
Diluted earnings (loss) per common share$ (0.09 )
Adjusted earnings (loss) per common share - Diluted
Weighted average shares outstanding - Diluted 20,901,005
20,646,910 20,761,191 20,439,157
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