Acquisition

12 Months Ended

Dec. 31, 2012

Acquisition [Abstract]

Acquisition

3.  Acquisitions

The following tables summarize the purchase prices and purchase price allocation for the acquisitions completed during the years ended December 31, 2011 and 2010.  A description of the acquired businesses during each year is summarized below the table.

	(Dollars in thousands)
Acquired company	EnVision Systems, Inc.		TAS Holdings Ltd.
Acquisition date	1/4/2011		4/26/2010
Cash purchase price	$	1,200	$	1,289
Fair value of contingent consideration		1,998		740
Payable to EnVision Shareholders - contracts receivable		687		-
Working capital retained by EnVision Shareholders - cash		109		-
Total purchase price	$	3,994	$	2,029
Purchase price allocation:
Cash	$	553	$	68
Contract receivables		1,124		594
Prepaid expenses and other current assets		62		17
Property and equipment, net		22		496
Intangible assets		1,509		735
Goodwill		1,854		865
Other assets		321		-
Total assets		5,445		2,775
Accounts payable, accrued expenses, and other liabilities		429		703
Billings in excess of revenue earned		46		43
Deferred tax liability		976		-
Total liabilities		1,451		746
Net assets acquired	$	3,994	$	2,029

EnVision Systems, Inc.

On January 4, 2011, (the “Closing Date”) the Company completed the acquisition of all outstanding common stock of EnVision Systems, Inc. (“EnVision”), acquiring 100% ownership in EnVision.  EnVision is headquartered in Madison, NJ and has an Indian subsidiary based in Chennai, India.  EnVision’s tutorials and simulation models serve the entry-level training market for the oil & gas, refining, and specialty chemicals industries.  EnVision operates as a wholly-owned subsidiary of GSE and has been re-named GSE Envision LLC.  The purchase price allocation includes $1.5 million of intangible assets, which consists of $438,000 for contractual customer relationships, $433,000 for non-contractual customer relationships, $471,000 for developed technology, $152,000 of in-process research and development and $15,000 related to domain names and other marketing related intangibles.  These intangible assets are being amortized over three to eight years.  None of the goodwill recorded for financial statement purposes is deductible for tax purposes.

EnVision’s results of operations are included in the consolidated financial statements for the period beginning January 4, 2011.

Pro forma results.  Our consolidated financial statements include the operating results of EnVision as of the date of acquisition.  For the twelve months ended December 31, 2011 and 2010, the unaudited pro forma financial information below assumes that our material business acquisition of EnVision occurred on January 1, 2010.

(in thousands except per share data)	(unaudited)
	Twelve Months ended
	December 31,
Pro forma financial information including the acquisition of EnVision		2011		2010
Revenue	$	51,126	$	50,410
Operating income (loss)		2,590		(708)
Net income (loss)		3,163		(1,711)
Earnings (loss) per common share — basic	$	0.17	$	(0.09)
Earnings (loss) per common share — diluted	$	0.17	$	(0.09)

TAS Holdings Ltd.

Effective April 26, 2010, GSE Systems Inc., through its wholly owned subsidiary GSE Systems, Ltd. (“GSE UK”), completed the acquisition of TAS Holdings Ltd. (“TAS”), a provider of engineering consulting, specializing in electrical system design, instrumentation and controls engineering and automation engineering.  GSE UK acquired 100% of the outstanding common stock of TAS.  The purchase price allocation includes $735,000 of intangible assets.  These intangible assets included contractual and non-contractual customer relationships, customer backlog, trademarks, domain names, and other marketing related intangibles.  These assets are being amortized over an estimated useful life of one to ten years.  In 2011, the Company accelerated the amortization related to one of their contractual customer relationships due to the completion of TAS’s contract with the customer.  The Company recognized approximately $116,000 of additional amortization as a result of this acceleration during 2011.  None of the goodwill recorded for financial statement purposes is deductible for tax purposes.  TAS’ results of operations are included in the consolidated financial statements for the period beginning April 26, 2010.

Contingent Consideration

ASC Topic 805 requires that contingent consideration be recognized at fair value on the acquisition date and be re-measured each reporting period with subsequent adjustments recognized in the consolidated statement of operations. We estimate the fair value of contingent consideration liabilities based on financial projections of the acquired companies and estimated probabilities of achievement and discount the liabilities to present value using a weighted-average cost of capital. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisitions are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to, and volatility in, our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods, 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.

As of December 31, 2012 and 2011, contingent consideration included in the other current liabilities on the consolidated balance sheet totaled $1.6 million and $923,000, respectively.  As of December 31, 2012 and 2011, we also had accrued contingent consideration totaling $902,000 and $2.0 million, respectively, which is included in other long-term liabilities on the consolidated balance sheet and represents the portion of contingent consideration estimated to be payable greater than twelve months from the balance sheet date.