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 June 30, 2024
  
       
   
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 3,471,677 shares of common stock, with a par value of $0.01 per share outstanding as of August 9, 2024.

Table of Contents to the Second Quarter 2024 Form 10-Q
   
Page
PART I.
3
Item 1.
 3
 
3
 
4
 
5
 
6
  8
  9
  9
  10
  11
  11
  11
  11
  12
  13
  18
  18
  19
  19
  20
Item 2.
 22
  General Business Overview
22
  Backlog
26
  Results of Operations
26
  Critical Accounting Policies and Estimates
30
  Liquidity and Capital Resources
30
  Non-GAAP Measures
30
Item 3.
 31
Item 4.
 32
PART II.
 32
Item 1.
 32
Item 1A.
 32
Item 2.
32
Item 3
 32
Item 4
33
Item 5.
33
Item 6.
34
  Signatures
 36

2
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
June 30, 2024
    
December 31, 2023
  
   
(unaudited)
        
   
(in thousands, except
per share and
per share data)
  
ASSETS
  
Current assets:
            
Cash and cash equivalents
  
$
1,254
    
$
2,250
  
Restricted cash, current
    379       378  
Contract receivables, net of allowance for credit loss
    
9,391
      
10,166
  
Prepaid expenses and other current assets
    
553
      
879
  
Total current assets
    
11,577
      
13,673
  
                 
Equipment, software and leasehold improvements, net
    
650
      
754
  
Software development costs, net
    
761
      
750
  
Goodwill
    
4,908
      
4,908
  
Intangible assets, net
    
997
      
1,179
  
Restricted cash - long term     1,086       1,083  
Operating lease right-of-use assets, net
    
297
      
413
  
Other assets
    
45
      
45
  
Total assets
  
$
20,321
    
$
22,805
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Current portion of long-term note
  
$
1,200
    
$
810
  
Accounts payable
    
2,388
      
3,300
  
Accrued expenses
    
1,768
      
1,053
  
Accrued legal settlements
     529       1,010  
Accrued compensation
    
2,146
      
1,086
  
Billings in excess of revenue earned
    
4,974
      
5,119
  
Accrued warranty
    
166
      
176
  
Income taxes payable
    
1,776
      
1,701
  
Derivative liabilities
     1,861       1,132  
Other current liabilities
    
358
      
956
  
Total current liabilities
    
17,166
      
16,343
  
                 
Long-term note, less current portion
    
-
      
637
  
Operating lease liabilities, noncurrent
    
301
      
357
  
Other noncurrent liabilities
    
80
      
126
  
Total liabilities
    
17,547
      
17,463
  
                 
Commitments and contingencies (Note 12)
    
     
 
                 
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, 3,466,522 and 3,194,030 shares issued, 3,306,631 and 3,034,139 shares outstanding, respectively
    
34
      
32
  
Additional paid-in capital
    
87,253
      
86,983
  
Accumulated deficit
    
(81,554
)
    
(78,708
)
Accumulated other comprehensive income
    
40
      
34
  
Treasury stock at cost, 159,891 shares
    
(2,999
)
    
(2,999
)
Total stockholders’ equity
    
2,774
      
5,342
  
Total liabilities and stockholders’ equity
  
$
20,321
    
$
22,805
  

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

3
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
   
For the Three
Months Ended
    
For the Six
Months Ended
  
   
June 30,
2024
    
June 30,
2023
    
June 30,
2024
    
June 30,
2023
  
    (in thousands, except per share data)
  
Revenue
  
$
11,725
    
$
12,387
    
$
23,008
    
$
23,260
  
Cost of revenue
    
8,051
      
9,172
      
16,118
      
17,650
  
Gross profit
    
3,674
      
3,215
      
6,890
      
5,610
  
Operating expenses:
                                
Selling, general and administrative
    
3,070
      
3,653
      
7,430
      
8,441
  
Research and development
    
118
      
154
      
347
      
335
  
   Restructuring charges
     64       -       64       -  
Depreciation
    
50
      
53
      
108
      
101
  
Amortization of intangible assets
    
83
      
131
      
182
      
292
  
Total operating expenses
    
3,385
      
3,991
      
8,131
      
9,169
  
Operating income (loss)
    
289
      
(776
)
    
(1,241
)
    
(3,559
)
                                 
Interest expense, net
    
(258
)
    
(767
)
    
(717
)
    
(1,053
)
Change in fair value of derivative instruments, net
    
(736
)
    
171
      
(753
)
    
240
  
Other (loss) income, net
    
(47
)
    
(98
)
    
7
      
(88
)
Loss before income taxes
    
(752
)
    
(1,470
)
    
(2,704
)
    
(4,460
)
Expense (benefit) from income taxes    
102
      
28
      
142
      
(11
)
Net loss
  
$
(854
)
  
$
(1,498
)
  
$
(2,846
)
  
$
(4,449
)
                                 
Net loss per common share - basic and diluted
  
$
(0.26
)
  
$
(0.62
)
  
$
(0.89
)
  
$
(1.89
)
                                 
Weighted average shares outstanding used to compute net loss per share - basic and diluted
    
3,258,124
      
2,418,827
      
3,203,465
      
2,356,413
  

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

4
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)

   
For the Three
 Months Ended
    
For the Six
Months Ended
  
   
June 30,
2024
    
June 30,
2023
    
June 30,
2024
    
June 30,
2023
  
    (in thousands)
  
Net loss
  
$
(854
)
  
$
(1,498
)
  
$
(2,846
)
  
$
(4,449
)
Cumulative translation adjustment
    
(21
)
    
70
      
6
      
60
  
Comprehensive loss
  
$
(875
)
  
$
(1,428
)
  
$
(2,840
)
  
$
(4,389
)

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
        
Six Months Ended
  
Shares
    
Amount
    
Additional
Paid-in
Capital
    
Accumulated
Deficit
    
Accumulated Other
Comprehensive Loss
    
Shares
    
Amount
    
Total
  
                                                 
Balance, January 1, 2024
    
3,194
    
$
32
    
$
86,983
    
$
(78,708
)
  
$
34
      
(160
)
  
$
(2,999
)
  
$
5,342
  
                                                                 
Stock-based compensation expense
    
-
      
-
      
29
      
-
      
-
      
-
      
-
      
29
  
Common stock issued for RSUs vested
    
88
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Shares withheld to pay taxes
    
-
      
-
      
(69
)
    
-
      
-
      
-
      
-
      
(69
)
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
6
      
-
      
-
      
6
  
Repayment of convertible note in shares
     185       2       310       -       -       -       -       312  
Net loss
    
-
      
-
      
-
      
(2,846
)
    
-
      
-
      
-
      
(2,846
)
Balance, June 30, 2024
    
3,467
     $
34
     $
87,253
     $
(81,554
)
   $
40
      
(160
)
   $
(2,999
)
   $
2,774
  
                                                                 
Balance, January 1, 2023
    
2,405
    
$
24
    
$
83,127
    
$
(69,927
)
  
$
6
   
(160
)
  
$
(2,999
)
  
$
10,231
  
Adoption of ASC 326 Current Expected Credit Losses (CECL)
    -       -       -       (57 )     -       -       -       (57 )
Balance, January 1, 2023     2,405       24       83,127       (69,984 )     6       (160 )     (2,999 )     10,174  
                                                                 
Stock-based compensation expense
    
-
      
-
      
537
      
-
      
-
      
-
      
-
      
537
  
Common stock issued for RSUs vested
    
38
      
-
      
(2
)
    
-
      
-
      
-
      
-
      
(2
)
Shares withheld to pay taxes
    
-
      
-
      
(57
)
    
-
      
-
      
-
      
-
      
(57
)
Foreign currency translation adjustment
    
-
    

-
    

-
    

-
    

60
      
-
    

-
    

60
  
Repayment of convertible note in shares
     197       2       1,274       -       -       -       -       1,276  
Net loss
    
-
      
-
      
-
      
(4,449
)
    
-
      
-
      
-
      
(4,449
)
Balance, June 30, 2023
    
2,640
     $
26
     $
84,879
     $
(74,433
)
   $
66
      
(160
)
   $
(2,999
)
   $
7,539
  

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

6
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)


  
Common Stock
    
               
Treasury Stock
        
Three Months
  
Shares
    
Amount
    
Additional
Paid-in
Capital
    
Accumulated
Deficit
    
Accumulated Other
Comprehensive Loss
    
Shares
    
Amount
    
Total
  
                                                 
Balance, March 31, 2024
    
3,400
    
$
34
    
$
87,440
    
$
(80,700
)
  
$
61
      
(160
)
  
$
(2,999
)
  
$
3,836
  
                                                                 
Stock-based compensation expense
    
-
      
-
      
(263
)
    
-
      
-
      
-
      
-
      
(263
)
Common stock issued for RSUs vested
    
43
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Shares withheld to pay taxes
    
-
      
-
      
(4
)
    
-
      
-
      
-
      
-
      
(4
)
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
(21
)
    
-
      
-
      
(21
)
Repayment of convertible note in shares
     24       -       80       -       -       -       -       80  
Net loss
    
-
      
-
      
-
      
(854
)
    
-
      
-
      
-
      
(854
)
Balance, June 30, 2024
    
3,467
    
$
34
    
$
87,253
    
$
(81,554
)
  
$
40
      
(160
)
  
$
(2,999
)
  
$
2,774
  

    Common Stock
                         Treasury Stock
         
    Shares
    Amount      
Additional
Paid-in
Capital
      
Accumulated
Deficit
      
Accumulated
Other
Comprehensive
Loss
     Shares
    Amount
    Total
 
                                                                 
Balance, March 31, 2023
    
2,516
    
$
25
    
$
84,076
    
$
(72,935
)
  
$
(4
)
    
(160
)
  
$
(2,999
)
  
$
8,163
  
                                                                 
Stock-based compensation expense
    
-
      
-
      
263
      
-
      
-
      
-
      
-
      
263
  
Common stock issued for RSUs vested
    
26
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Shares withheld to pay taxes
    
-
      
-
      
1
      
-
      
-
      
-
      
-
      
1
  
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
70
      
-
      
-
      
70
  
Repayment of convertible note in shares
     98       1       539       -       -       -       -       540  
Net loss
    
-
      
-
      
-
      
(1,498
)
    
-
      
-
      
-
      
(1,498
)
Balance, June 30, 2023
    
2,640
    
$
26
    
$
84,879
    
$
(74,433
)
  
$
66
      
(160
)
  
$
(2,999
)
  
$
7,539
  

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

7
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
For the Six Months Ended
  
   
June 30, 2024
    
June 30, 2023
  
    (in thousands)
 
Cash flows from operating activities:
      
Net loss
  
$
(2,846
)
  
$
(4,449
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation
    
108
      
101
  
Amortization of intangible assets
    
182
      
292
  
Amortization of capitalized software development costs
    
197
      
167
  
Amortization of deferred financing costs
    
19
      
15
  
Amortization of debt discount
     702       556  
Loss on debt settled in shares
    72       145  
Stock-based compensation expense
    
20
      
531
  
Credit loss expense
    
65
      
30
  
Change in fair value of derivative instruments, net
    
753
      
(240
)
Deferred income taxes
     (1 )     6  
Foreign currency transaction loss
    -       135  
Changes in assets and liabilities:
                
Contract receivables
    
704
      
(254
)
Prepaid expenses and other assets
    
398
      
1,472
  
Accounts payable, accrued compensation and accrued expenses
    
899
      
1,724
  
Billings in excess of revenue earned
    
(140
)
    
(992
)
Accrued warranty
    
(62
)
    
(72
)
Other liabilities
    
(916
)
    
10
  
Net cash provided by (used in) operating activities
    
154
      
(823
)
 
                
Cash flows from investing activities:
                
Capital expenditures
    
(3
)
    
(13
)
Capitalized software development costs
    
(208
)
    
(239
)
Net cash used in investing activities
    
(211
)
    
(252
)

               
Cash flows from financing activities:
                
Repayment of insurance premium financing
    
(441
)
    
(486
)
Proceeds from issuance of long-term debt and warrants
    -       1,800
Payments of debt issuance and original discount on issuance of long-term debt and warrants
    -       (386 )
Principal repayment of convertible note
     (397 )     (768 )
Tax paid for shares withheld
    
(69
)
    
(77
)
Net cash (used in) provided by financing activities
    
(907
)
    
83
  
 
                
Effect of exchange rate changes on cash
    
(28
)
    
(29
)
Net decrease in cash, cash equivalents and restricted cash
    
(992
)
    
(1,021
)
Cash, cash equivalents and restricted cash at beginning of the period
    
3,711
      
4,376
  
Cash, cash equivalents and restricted cash at the end of the period
  
$
2,719
    
$
3,355
  
 
                
Cash and cash equivalents
   $ 1,254     $ 1,775  
Restricted cash, current
     379       500  
Restricted cash included in other long-term assets
     1,086       1,080  
Total cash, cash equivalents and restricted cash
   $