The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the Company, GSE, we, us, or our) and are unaudited. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted. The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 16, 2018.
The Company has two reportable segments as follows:
●
|
Performance Improvement Solutions (approximately 44% of revenue)
|
Our Performance Improvement Solutions segment primarily encompasses our technical engineering and power plant high-fidelity simulation solutions and interactive computer based tutorials/simulation focused on the process industry. This segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve: primarily nuclear and fossil fuel power generation, as well as the process industries. Our simulation solutions include the following: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, including operator training systems, for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industry processes and control systems to newly hired employees and for ongoing workforce development and training. GSE and its predecessors have been providing these services since 1976.
●
|
Nuclear Industry Training and Consulting (approximately 56% of revenue)
|
Nuclear Industry Training and Consulting provides highly specialized and skilled nuclear operations instructors, procedure writers, technical engineers, and other consultants to the nuclear power industry. These employees work at our clients' facilities under client direction. Examples of these highly skilled positions are senior reactor operations instructors, procedure writers, project managers, work management specialists, planners and training material developers. This business is managed through the Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the Company's product and service portfolio. GSE and its predecessors have been providing these services since 1997.
Financial information about the two business segments is provided in Note 18 of the accompanying condensed consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. The Company's most significant estimates relate to revenue recognition on contracts with customers,
allowance for doubtful accounts,
product warranties, valuation of goodwill and intangible assets acquired, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.
Revenue recognition
The Company derives its 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 the training and consulting service contracts through both the Performance Improvement Solutions segment and Nuclear Industry Training and Consulting segment.
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. 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 the Company, 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 the Company's revenue recognition as a significant change in the estimates can cause the Company's 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 will not be 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 will be
evaluated on a case by case basis to determine if it provides more than just assurance that the product operates as intended, which requires carve-out as a separate performance obligation.
Revenue from the sale of standalone software licenses, which do not require significant modification or customization is recognized upon its 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 deliverables 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, the Company is compensated based on the number of hours of approved time provided by temporary workers and the bill rates which are fixed per type of work, as well as approved expenses incurred. The 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 temporary 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 over the service period using the cost-to-cost input method as the Company's performance does not create an asset with an alternative use to the Company, 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.
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.
2.
|
Recent Accounting Pronouncements
|
Accounting pronouncements recently adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which provides guidance for revenue recognition
. Subsequently, the FASB issued a series of updates to the revenue recognition guidance in ASC 606,
Revenue from Contracts with Customers
(ASC 606)
. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, the new accounting standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for the fiscal year ending December 31, 2018 and interim periods therein.
We adopted ASU 2014-09 and all the related updates (collectively, the new revenue standard) on January 1, 2018
using the modified retrospective transition method. The new revenue standard was applicable
to (1) all new contracts
entered into after January 1, 2018 and (ii) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance. We recognized the cumulative effect of initially applying the new revenue standard as an increase of $0.7 million to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
This adoption primarily affected our software license sales with multiple deliverables, which typically include the following elements: license, installation and training services and PCS. Under the legacy
revenue recognition standard, due to the lack of vendor specific objective evidence (VSOE), revenue was recognized ratably over the PCS period. Under the new revenue standard, the total transaction price is allocated to the identified performance obligations based on their relative standalone selling prices, and revenue is recognized as the performance obligations are satisfied.
The impact of adoption on our consolidated statement of operations and balance sheet was as follows (
in thousands
):
Income Statement
|
|
For the Three Months Ended June 30, 2018
|
|
For the Six Months Ended June 30, 2018
|
|
|
As Reported
|
|
Balance without adoption of ASC 606
|
|
Effect of Change
|
|
As Reported
|
|
Balance without adoption of ASC 606
|
|
Effect of Change
|
Revenue
|
|
$
|
24,698
|
|
$
|
24,862
|
|
$
|
(164)
|
|
$
|
47,593
|
|
$
|
47,714
|
|
$
|
(121)
|
Gross profit
|
|
|
6,340
|
|
|
6,504
|
|
|
(164)
|
|
|
11,238
|
|
|
11,359
|
|
|
(121)
|
(Benefit) provision for income taxes
|
|
|
(449)
|
|
|
(326)
|
|
|
123
|
|
|
(190)
|
|
|
(95)
|
|
|
95
|
Net income (loss)
|
|
|
981
|
|
|
1,022
|
|
|
(41)
|
|
|
(515)
|
|
|
(489)
|
|
|
(26)
|
Balance Sheet
|
|
June 30, 2018
|
|
|
As Reported
|
|
Balance without adoption of ASC 606
|
|
Effect of Change
|
Contract receivables, net
|
|
$
|
19,221
|
|
$
|
19,231
|
|
$
|
(10)
|
Deferred tax assets
|
|
|
6,387
|
|
|
6,533
|
|
|
(146)
|
Billings in excess of revenue earned
|
|
|
9,557
|
|
|
10,342
|
|
|
(785)
|
Accumulated deficit
|
|
|
(42,730)
|
|
|
(43,359)
|
|
|
629
|
In August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15). The new guidance addresses eight specific cash flow issues and applies to all entities that are required to present a statement of cash flows. ASU 2016-15 was effective for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. We adopted ASU 2016-15 on January 1, 2018, on a retrospective basis. Upon the adoption of ASU 2016-15, cash payments made to settle a contingent consideration liability from an acquisition in excess of the amount recognized at the acquisition date are classified as operating activities, which were previously presented as financing activities. The comparative statement of cash flows has been restated to include only the payments made to settle the contingent liability related to the original amount recognized at the acquisition date in the financing activities; previously, the payment of $0.3 million related to fair value adjustment and interest accretion of the contingent liability was included in financing activities. Upon the adoption of ASU 2016-15, it was reclassified as operating activity.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash
(ASU 2016-18). The new guidance applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. This update is intended to reduce diversity in cash flow presentation of restricted cash and restricted cash equivalents and requires entities to include all cash and cash equivalents, both restricted and unrestricted, in the beginning-of-period and end-of-period totals presented on the statement of cash flows. We adopted ASU 2016-18 effective January 1, 2018, on a retrospective basis. As the result of the adoption of ASU 2016-18, we restated the statement of cash flows for the comparative period to include both restricted and unrestricted cash in the beginning-of-period and end-of-period totals, and eliminated the transfers between restricted and unrestricted cash in the statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations: Clarifying the definition of a Business
, which amends the definition of a business. ASU 2017-01 was effective for acquisitions commencing on or after December 15, 2017, with early adoption permitted. We adopted ASU 2017-01 effective January 1, 2018. ASU 2017-01 is applied prospectively to acquisitions commencing on or after the effective date.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation
(ASU 2017-09). The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance on ASC 718,
Compensation – Stock Compensation
. Entities are required to apply modification accounting for any change to an award, except for a change that is deemed to be purely administrative in nature. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in ASC 718. The amendments in this update were effective for all entities and for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted ASU 2017-09 effective January 1, 2018, on a prospective basis. The adoption of this standard did not have a significant impact to our financial statements or financial statement disclosures.
Accounting pronouncements not yet adopted
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Company's consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. We are currently evaluating the potential impact of the adoption of ASU 2017-04 on our consolidated financial statements.
3.
|
Basic and Diluted Income (Loss) per Common Share
|
Basic income (loss) per share is based on the weighted average number of outstanding common shares for the period. Diluted income (loss) per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised.
The number of common shares and common share equivalents used in the determination of basic and diluted earnings per share were as follows:
(in thousands, except for share amounts)
|
Three months ended
|
|
|
Six months ended
|
|
June 30,
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
981
|
|
$
|
827
|
|
$
|
(515)
|
|
|
$
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic income (loss) per share
|
|
19,651,441
|
|
|
19,196,133
|
|
|
19,580,046
|
|
|
|
19,154,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
|
377,682
|
|
|
365,112
|
|
|
-
|
|
|
|
317,497
|
Adjusted weighted-average shares outstanding and assumed conversions for diluted income (loss) per share
|
|
20,029,123
|
|
|
19,561,245
|
|
|
19,580,046
|
|
|
|
19,471,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
|
|
374,833
|
|
|
564,833
|
|
|
714,821
|
|
|
|
564,833
|
True North
On May 11, 2018, GSE, through its wholly-owned subsidiary GSE Performance Solutions, Inc. (Performance Solutions), entered into a membership interest purchase agreement with Donald R. Horn, Jenny C. Horn, and True North Consulting LLC (the True North Purchase Agreement) to purchase 100% of the membership interests in True North Consulting LLC (True North) for $9.75 million. The purchase price was subject to customary pre- and post-closing working capital adjustments, resulting in total consideration of $9.9 million. The True North Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions subject to certain limitations. An escrow of $1.5 million was funded
from the cash paid to the sellers
of True North at the closing and is available to GSE to promote retention of key personnel and satisfy indemnification claims for 18 months after the closing. The acquisition of True North was completed on an all-cash transaction basis. In connection with the acquisition, we issued a $10.3 million term loan to finance the transaction (including the transaction costs). See Note 14.
Debt
, for further details of the loan.
True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complimentary talent pool to our employee base.
The following table summarizes the consideration paid to acquire True North and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of June 30, 2018, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, accrued compensation and the residual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of True North, net of cash acquired" line caption.
(
in thousands
)
Total purchase price
|
|
$
|
9,941
|
|
|
|
|
Purchase price allocation:
|
|
|
|
Cash
|
|
|
150
|
Contract receivables
|
|
|
2,345
|
Prepaid expenses and other current assets
|
|
|
4
|
Property, and equipment, net
|
|
|
1
|
Intangible assets
|
|
|
3,911
|
Accounts payable, accrued expenses
|
|
|
(1,420)
|
Accrued compensation
|
|
|
(137)
|
Total identifiable net assets
|
|
|
4,854
|
Goodwill
|
|
|
5,087
|
Net assets acquired
|
|
$
|
9,941
|
The fair value of the assets acquired includes gross trade receivables of $2.3 million, of which the Company expects to collect in full. GSE did not acquire any other class of receivable as a result of the acquisition of True North.
The goodwill is primarily attributable to broader engineering service offering to new and existing customers, the workforce of the acquired business and the significant synergies expected to arise after the acquisition of True North. The total amount of goodwill is expected to be tax deductible. All of the $5.1 million of goodwill was assigned to our Performance Improvement Solutions segment. As of the report date, the Company is still evaluating the impact of the True North acquisition on our reporting units. As discussed above, the goodwill amount is provisional pending receipt of the final valuations of various assets and liabilities.
The Company identified other intangible assets of $3.9 million, including customer contracts and relationships, tradename, non-compete agreements, and alliance agreements, with amortization periods of four to 15 years. The fair value of the intangible assets is provisional pending receipt of the final valuations for these assets.
Absolute
On September 20, 2017, GSE, through Performance Solutions, acquired 100% of the capital stock of Absolute Consulting, Inc. (Absolute) for $8.8 million pursuant to the Stock Purchase Agreement by and among Performance Solutions and the sellers of Absolute. The purchase price was subject to a customary working capital adjustment resulting in total consideration of $9.5 million.
An indemnification escrow of $1.0 million was funded from the cash paid to the sellers and is available to GSE and Performance Solutions to satisfy indemnification claims until September 20, 2019.
The acquisition of Absolute was completed on an all-cash transaction basis.
Absolute is a provider of technical consulting and staffing solutions to the global nuclear power industry. Located in Navarre, Florida, Absolute has established long-term relationships with blue-chip customers primarily in the nuclear power industry. The acquisition of Absolute is expected to strengthen the Company's global leadership in nuclear training and consulting solutions, add new capacities to our technical consulting and staffing solutions offerings and bring highly complementary customers, while deepening relationships with existing clients.
The following table summarizes the consideration paid to acquire Absolute and the fair value of the assets acquired and liabilities assumed at the date of the transaction.
(in thousands)
|
|
|
|
|
Total purchase price
|
$
|
9,521
|
|
|
|
Purchase price allocation:
|
|
|
Cash
|
$
|
455
|
Contract receivables
|
|
5,121
|
Prepaid expenses and other current assets
|
|
68
|
Property, and equipment, net
|
|
184
|
Intangible assets
|
|
2,569
|
Accounts payable, accrued expenses, and other liabilities
|
|
(78)
|
Accrued compensation
|
|
(1,617)
|
Total identifiable net assets
|
|
6,702
|
Goodwill
|
|
2,819
|
Net assets acquired
|
$
|
9,521
|
The goodwill is primarily attributable to the additional capacities to offer broader solutions to new and existing customers and the expected enhanced cost and growth synergies as a result of the acquisition. The total amount of goodwill that is expected to be tax deductible is $2.8 million. All of the $2.8 million of goodwill was assigned to our Nuclear Industry Training and Consulting segment.
The fair value of the assets acquired includes gross trade receivables of $5.1 million, which was collected in full after acquisition. GSE did not acquire any other class of receivable as a result of the acquisition of Absolute.
The Company identified $2.6 million of other intangible assets, including customer relationships and trademarks/names, with amortization periods of three to 10 years. The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related weighted average amortization period:
Intangible Assets
|
|
Weighted average amortization period
|
|
Fair Value
|
|
|
(in years)
|
|
(in thousands)
|
Customer relationships
|
|
10
|
|
$
|
1,856
|
Trademarks/Names
|
|
3
|
|
|
713
|
Total
|
|
|
|
$
|
2,569
|
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for GSE, True North, and Absolute as if the business combinations had occurred on January 1, 2017.
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(
unaudited and in thousands
)
|
Revenue
|
$
|
25,892
|
|
$
|
30,413
|
|
$
|
50,763
|
|
$
|
57,768
|
Net income (loss)
|
|
615
|
|
|
459
|
|
|
(1,368)
|
|
|
(512)
|
True North contributed revenue of $1.3 million and net income of $0.2 million to the Company for the period from May 11, 2018 to June 30, 2018.
The pro forma financial information for all periods presented has been calculated after applying GSE's accounting policies and has also included pro forma adjustments resulting from these acquisitions, including amortization charges of the intangible assets identified from these acquisitions, interest expenses related to the financing transaction in connection with the acquisition of True North, and the related tax effects as if aforementioned companies were combined as of January 1, 2017.
For the period ended June 30, 2018, the Company has incurred $0.5 million of transaction costs related to the acquisition of True North. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma earnings for the six months ended June 30, 2017, in the table above.
The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 1, 2017, nor is it intended to be an indication of future operating results.
5.
|
Restructuring Activities
|
On December 27, 2017, the board of GSE Systems, Inc. approved an international restructuring plan to streamline and optimize the Company's global operations. Beginning in December 2017, GSE has been in the process of consolidating its engineering services and R&D activities to Maryland and ceasing an unprofitable non-core business in the U.K. As a result, the Company closed its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improve Company productivity by eliminating duplicate employee functions and increasing GSE's focus on its core business, improving efficiency and maintaining the full range of engineering capabilities while reducing costs and organizational complexity.
GSE eliminated approximately 40 positions due to these changes, primarily in Europe and India, and will undertake other cost-savings measures. The restructuring plan is expected to be completed by the end of 2018. As a result of these efforts, GSE expects to record a restructuring charge of approximately $2.0 million, primarily related to workforce reductions, contract termination costs and asset write-offs due to the exit activities. As of June 30, 2018, we had recorded a restructuring charge of $1.8 million. In addition to the restructuring costs in the table below, the Company has an estimated $1.6 million of cumulative translation adjustments that will be charged against net income and an estimated $1.0 million of tax benefits that will be realized upon liquidation of these foreign entities. GSE expects to recognize the remaining restructuring costs, currency translation adjustments and tax benefits by the end of 2018.
The following tables summarize the restructuring costs and restructuring liabilities:
(
in thousands
)
|
|
June 30, 2018
|
|
|
Total Expected Costs
|
|
Costs Incurred to Date
|
|
Expected Costs Remaining
|
Employee termination benefits
|
|
$
|
831
|
|
$
|
831
|
|
$
|
-
|
Lease termination costs
|
|
|
604
|
|
|
604
|
|
|
-
|
Assets write-offs/impairment
|
|
|
222
|
|
|
222
|
|
|
-
|
Other restructuring costs
|
|
|
342
|
|
|
183
|
|
|
159
|
Total Restructuring costs
|
|
$
|
1,999
|
|
$
|
1,840
|
|
$
|
159
|
The restructuring costs related to our Performance Improvement Solutions segment and are included in the consolidated statements of operations within the "Restructuring charges" line caption.
|
|
Employee termination benefits
|
|
Lease termination costs
|
|
Other Restructuring costs
|
|
Total
|
Balance as of January 1, 2018
|
|
$
|
465
|
|
$
|
-
|
|
$
|
33
|
|
$
|
498
|
Accruals
|
|
|
366
|
|
|
604
|
|
|
137
|
|
|
1,107
|
Payments
|
|
|
(503)
|
|
|
(624)
|
|
|
(170)
|
|
|
(1,297)
|
Currency translation and other adjustments
|
|
|
(11)
|
|
|
70
|
|
|
-
|
|
|
59
|
Balance as of June 30, 2018
|
|
$
|
317
|
|
$
|
50
|
|
$
|
-
|
|
$
|
367
|
The accrued employee termination benefits were included in "accrued compensation" line, and the accrued lease termination costs were included in "accrued expenses" in the consolidated balance sheets.
6.
|
Contingent Consideration
|
Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805,
Business Combinations
, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.
As of December 31, 2017, the remaining contingent consideration, related to our acquisition of Hyperspring in 2014 was $1.7 million, all of which was paid in January 2018. There was no contingent liability as of June 30, 2018.
Contract receivables represent the Company's unconditional rights to considerations due from a broad base of both domestic and international customers. All contract receivables are considered to be collectible within twelve months.
The components of contract receivables are as follows:
(in thousands)
|
June 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Billed receivables
|
$
|
9,544
|
|
$
|
8,154
|
Unbilled receivables
|
|
9,928
|
|
|
5,980
|
Allowance for doubtful accounts
|
|
(251)
|
|
|
(137)
|
Total contract receivables, net
|
$
|
19,221
|
|
$
|
13,997
|
Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce our receivables to their net realizable value when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the receivable. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, and specific identification and review of customer accounts. During three and six months ended June 30, 2018 and 2017, the Company recorded allowances for doubtful accounts of $117,000 and $118,000, respectively.
During July 2018, the Company invoiced $3.8 million of the unbilled amounts related to the balance at June 30, 2018.
As of June 30, 2018 and December 31, 2017, the Company had one customer that accounted for 26.6% and 26.7%, respectively, of its consolidated contract receivables.
8.
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the following:
(in thousands)
|
June 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Inventory
|
$
|
444
|
|
$
|
755
|
Income taxes receivable
|
|
387
|
|
|
418
|
Prepaid expenses
|
|
402
|
|
|
549
|
Other current assets
|
|
816
|
|
|
1,073
|
Total prepaid expenses and other current assets
|
$
|
2,049
|
|
$
|
2,795
|
At June 30, 2018 and December 31, 2017, prepaid expenses and other current assets are comprised primarily of inventory and other current assets. Inventory is being purchased to support the construction of three major nuclear simulation projects related to a significant contract that was executed during the first quarter of 2016. Inventory is recorded at the lower of cost or net realizable value in accordance with ASC 330,
Inventory.
Other current assets primarily includes value-added tax receivables and cash deposited in a Swedish tax account.
9.
|
Software Development Costs, Net
|
Certain computer software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenue and is determined using the straight-line method over the remaining estimated economic life of the product, typically three years. On an annual basis, and more frequently as conditions indicate, the Company assesses 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, the Company will write down the carrying amount of such asset to its estimated fair value based on the future discounted cash flows. The excess of any unamortized computer software costs over the related fair value is written down and charged to operations.
Software development costs capitalized were $167,000 and $272,000 for the three and six months ended June 30, 2018, respectively, and $59,000 and $88,000 for the three and six months ended June 30, 2017, respectively. Total amortization expense was $85,000 and $203,000 for the three and six months ended June 30, 2018, respectively, and $117,000 and $234,000 for the three and six months ended June 30, 2017, respectively.
10.
|
Goodwill and Intangible Assets
|
The Company's intangible assets include amounts recognized in connection with business acquisitions, including customer relationships, trade names, non-compete agreements and alliance agreements.
The Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company tests goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, which are the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includes Hyperspring and Absolute). The change in the net carrying amount of goodwill from December 31, 2017 through June 30, 2018 was comprised of the following items:
(
in thousands
)
|
|
Performance Improvement Solutions
|
|
Nuclear Industry Training and Consulting
|
|
Total
|
Balance, January 1, 2018
|
|
$
|
-
|
|
$
|
8,431
|
|
$
|
8,431
|
Acquisition
|
|
|
5,087
|
|
|
-
|
|
|
5,087
|
Balance, June 30, 2018
|
|
$
|
5,087
|
|
$
|
8,431
|
|
$
|
13,518
|
No events or circumstances occurred during the current reporting period that would indicate impairment of such goodwill.
Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for customer relationships which are recognized in proportion to the related projected revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. The Company does not have any intangible assets with indefinite useful lives, other than goodwill. There were no indications of impairment of intangible assets during the current reporting period. The increase in intangible assets during the period three and six months ended June 30, 2018 was due to the acquisition of True North. See Note 4,
Acquisitions
for details.
11.
|
Fair Value of Financial Instruments
|
ASC 820,
Fair Value Measurement
(ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The levels of the fair value hierarchy established by ASC 820 are:
Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.
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.
At June 30, 2018, and December 31, 2017, the Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate fair value based upon their short-term nature.
As discussed in Note 14,
Debt
, we issued new term loan to finance the acquisition of True North. As of June 30, 2018, the carrying amount of the long-term debt was $9.5 million. The carrying value of the Company's long-term debt approximated its fair value
based on Level 2 inputs since the debt carries a variable interest rate that is tied to the current LIBOR rate plus an applicable spread
.
For the three and six months ended June 30, 2018, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3. The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at June 30, 2018.
The following table presents assets and liabilities measured at fair value at June 30, 2018:
(in thousands)
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Money market funds
|
$
|
1,396
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,396
|
Foreign exchange contracts
|
|
-
|
|
|
32
|
|
|
-
|
|
|
32
|
Total assets
|
$
|
1,396
|
|
$
|
32
|
|
$
|
-
|
|
$
|
1,428
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability awards
|
$
|
-
|
|
$
|
(302)
|
|
$
|
-
|
|
$
|
(302)
|
Interest rate swap contract
|
|
-
|
|
|
(11)
|
|
|
-
|
|
|
(11)
|
Total liabilities
|
$
|
-
|
|
$
|
(313)
|
|
$
|
-
|
|
$
|
(313)
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds at both June 30, 2018 and December 31, 2017 are included in cash and cash equivalents in the respective consolidated balance sheets.
The following table presents assets and liabilities measured at fair value at December 31, 2017:
(in thousands)
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Money market funds
|
$
|
3,240
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,240
|
Foreign exchange contracts
|
|
-
|
|
|
201
|
|
|
-
|
|
|
201
|
Total assets
|
$
|
3,240
|
|
$
|
201
|
|
$
|
-
|
|
$
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability awards
|
$
|
-
|
|
$
|
(242)
|
|
$
|
-
|
|
$
|
(242)
|
Contingent consideration
|
|
-
|
|
|
-
|
|
|
(1,701)
|
|
|
(1,701)
|
Total liabilities
|
$
|
-
|
|
$
|
(242)
|
|
$
|
(1,701)
|
|
$
|
(1,943)
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the six months ended June 30, 2018:
(in thousands)
|
|
|
|
|
|
|
Balance, January 1, 2018
|
$
|
1,701
|
Payments made on contingent liabilities
|
|
(1,701)
|
Change in fair value
|
|
-
|
Balance, June 30, 2018
|
$
|
-
|
12.
|
Derivative Instruments
|
In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We may seek to control a portion of these risks through a risk management program that includes the use of derivative instruments.
Foreign Currency Risk Management
The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates and minimize credit exposure by limiting counterparties to nationally recognized financial institutions.
As of June 30, 2018, the Company had foreign exchange contracts outstanding of approximately 112.5 million Japanese Yen and 0.2 million Australian Dollars at fixed rates. The contracts expire on various dates through December 2018. At December 31, 2017, the Company had contracts outstanding of approximately 162.5 million Japanese Yen, 24,000 Euro, and 0.2 million Australian Dollars at fixed rates.
Interest Rate Risk Management
As discussed in Note 14,
Debt
, the Company entered into a new term loan to finance the acquisition of True North in May. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company. As part of our overall risk management policies, in June 2018, the Company entered into a pay-fixed, receive-floating interest rate swap contract with a notional amount of $9.0 million to
reduce the impact associated with interest rate fluctuations
. The notional value amortizes monthly in equal amounts based on the five-year principal repayment terms. The terms of the swap require the Company to pay interest on the basis of a fixed rate of 3.02%, and GSE will receive interest on the basis of one-month USD-LIBOR-BBA-Bloomberg.
The Company reports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the derivative's fair value. The estimated net fair values of the derivative contracts on the consolidated balance sheets are as follows:
|
June 30,
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
32
|
|
$
|
201
|
Total asset derivatives
|
|
32
|
|
$
|
201
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
Interest rate swaps
|
|
(11)
|
|
|
-
|
Total liability derivatives
|
|
(11)
|
|
|
-
|
|
|
|
|
|
|
Net fair value
|
$
|
21
|
|
$
|
201
|
|
|
|
|
|
|
The Company has not designated the derivative contracts as hedges. The changes in the fair value of the derivative contracts are included in (loss) gain on derivative instruments, net, in the consolidated statements of operations.
The foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is also included in (loss) gain on derivative instruments, net, in the consolidated statements of operations.
For the three and six months ended June 30, 2018 and 2017, the Company recognized a net (loss) gain on its derivative instruments as outlined below:
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap - change in fair value
|
$
|
(11)
|
|
$
|
-
|
|
$
|
(11)
|
|
$
|
-
|
Foreign exchange contracts-change in fair value
|
|
(46)
|
|
|
157
|
|
|
(164)
|
|
|
71
|
Remeasurement of related contract receivables, billings in excess of revenue earned, and subcontractor accruals
|
|
(34)
|
|
|
158
|
|
|
(72)
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on derivative instruments, net
|
$
|
(91)
|
|
$
|
315
|
|
$
|
(247)
|
|
$
|
155
|
13.
|
Stock-Based Compensation
|
The Company recognizes compensation expense for all equity-based compensation awards issued to employees and directors that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date. The Company recognized $0.4 million and $0.6 million of stock-based compensation expense related to equity awards for the three months ended June 30, 2018 and 2017, respectively, and recognized $1.0 million and $1.3 million of stock-based compensation expense related to equity awards for the six months ended June 30, 2018 and 2017, respectively, under the fair value method. In addition to the equity-based compensation expense recognized, the Company also recognized $28,000 and $6,000 of stock-based compensation related to the change in the fair value of cash-settled restricted stock units (RSUs) during the three months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018 and 2017, the Company recorded an expense of $60,000 and a net reduction of $12,000 in the fair value of cash-settled RSUs, respectively.
During the three and six months ended June 30, 2018, the Company granted 178,434 and 388,526 time-based RSUs with an aggregate fair value of $0.6 million and $1.3 million, respectively. For the three and six months ended June 30, 2017, the Company granted 172,875 and 396,677 time-based RSUs with an aggregate fair value of $0.6 million and $1.4 million, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, a portion vest one year after grant and the remainder vest annually in equal amounts over the course of three years. The fair value of the time-based RSUs is expensed ratably over the requisite service period, which ranges from one to three years.
During the six months ended June 30, 2018 and 2017, the Company did not grant performance-based RSUs or stock options.
Citizens Bank
The Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs. On May 11, 2018, GSE and Performance Solutions (collectively, the Borrower) entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) with the Bank, amending and restating the Company's existing Credit and Security Agreement with the Bank, which included a $5.0 million asset-based revolving credit facility between the Borrower and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (b) a $25.0 million delayed draw term loan facility available to be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Borrower. The credit facilities mature in five years and bear interest at LIBOR plus a margin that varies depending on the overall leverage ratio of the Borrower and its subsidiaries. Revolving loans are interest-only with principal due at maturity, while term loans require monthly payments of principal and interest based on an amortization schedule. The Borrower's obligations under the Credit Agreement are guaranteed by GSE's wholly-owned subsidiaries Hyperspring, Absolute, and True North and by any future material domestic subsidiaries (collectively, the Guarantors). The credit facilities are secured by liens on all assets of the Borrower and the Guarantors.
RLOC
We intend to continue using the RLOC for short-term working capital needs and the issuance of letters of credit in connection with business operations. Letter of credit issuance fees range between 1.25% and 2% depending on the Company's overall leverage ratio, and the Company pays an unused RLOC fee quarterly based on the average daily unused balance.
At June 30, 2018, there were no outstanding borrowings under the RLOC and three letters of credit totaling $1.2 million. The amount available at June 30, 2018, after consideration of letters of credit was approximately $3.8 million.
Term Loan
As discussed in Note 4,
Acquisitions
, we acquired True North on May 11, 2018 for total consideration of approximately $9.9 million in cash. We drew down $10.3 million to finance the acquisition of True North, $0.5 million of which was repaid to the Bank on the same day. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. We also incurred $70,000 debt issuance costs and $75,000 loan origination fees related to the Credit Agreement. Debt issuance costs and loan origination fees are reported as a direct deduction from the carrying amount of the loan and are amortized over the term of the loan using the effective interest method.
At June 30, 2018, the outstanding long-term debt under the delayed draw term loan facility was as follows:
|
|
|
Long-term debt, net of discount
|
|
$
|
9,471
|
Less: current portion of long-term debt
|
|
|
(1,900)
|
Long-term debt, less current portion
|
|
$
|
7,571
|
The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the Borrower to satisfy certain financial covenants and restrict the Borrower's and Guarantors' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions after any applicable grace period could result in the obligations under the Credit Agreement becoming immediately due and payable and termination of the credit facilities. In addition to non-compliance with covenants and restrictions, the Credit Agreement also contains other customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the Bank may declare the obligations under the Credit Agreement to be immediately due and payable and may terminate the credit facilities. At June 30, 2018, the Company was in compliance with its financial covenants.
BB&T Bank
At June 30, 2018, the Company had one letter of credit with BB&T totaling $0.5 million, which expired and is pending release by the bank and customer. At June 30, 2018 and December 31, 2017, the cash collateral account with BB&T totaled $0.5 million and $1.0 million, respectively. The balances were classified as restricted cash on the consolidated balance sheets.
The Company accrues for estimated warranty costs at the time the related revenue is recognized based on historical experience and projected claims. The Company's SDB contracts generally provide a one-year base warranty on the systems. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.0 million, while the remaining $0.7 million is classified as long-term within other liabilities. The activity in the accrued warranty accounts is as follows:
(in thousands)
|
|
|
|
Balance, January 1, 2018
|
$
|
1,953
|
Current period provision
|
|
(93)
|
Current period claims
|
|
(146)
|
Currency adjustment
|
|
(5)
|
Balance at June 30, 2018
|
$
|
1,709
|
We generate revenue primarily through three broad revenue streams: 1) 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 the training and consulting service contracts through both the Performance Improvement Solutions segment and Nuclear Industry Training and Consulting segment.
The following table represents a disaggregation of revenue by type of goods or services for the three and six months ended June 30, 2018 and 2017, along with the reportable segment for each category:
(
in thousands
)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018
|
|
2017
(1)
|
|
2018
|
|
2017
(1)
|
Performance Improvement Solutions segment
|
|
|
|
|
|
|
|
|
|
|
|
|
System Design and Build
|
|
$
|
7,300
|
|
$
|
8,773
|
|
$
|
14,795
|
|
$
|
16,092
|
Software
|
|
|
546
|
|
|
1,091
|
|
|
1,415
|
|
|
1,547
|
Training and Consulting Services
|
|
|
3,018
|
|
|
1,822
|
|
|
4,555
|
|
|
3,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear Industry Training and Consulting segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Training and Consulting Services
|
|
|
13,834
|
|
|
5,439
|
|
|
26,828
|
|
|
12,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
24,698
|
|
$
|
17,125
|
|
$
|
47,593
|
|
$
|
33,467
|
(1)
Prior period amounts have not been adjusted under the modified retrospective transition method for the adoption of ASC 606.
SDB contracts are typically fixed-priced, and we receive payments based on a billing schedule as established in our contracts. The transaction price for software contracts is generally fixed. Fees for software are normally due in advance of or shortly after delivery of the software. Fees for PCS are normally paid in advance of the service period. For Training and Consulting Services, the customers are generally billed on a regular basis, such as weekly, biweekly or monthly, for services provided. Contract liability, which we classify as billing in excess of revenue earned, relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied.
The following table reflects the balance of contract liabilities and the revenue recognized in the reporting period that was included in the contract liabilities from contracts with customers:
(
in thousands
)
|
|
June 30, 2018
|
|
December 31, 2017
|
Billings in excess of revenue earned (BIE)
|
|
$
|
9,557
|
|
$
|
14,543
|
Revenue recognized in the period from amounts included in BIE at the beginning of the period
|
|
$
|
7,954
|
|
|
N/A
|
For an SDB contract, we generally have two main performance obligations: the training simulator build and PCS. The training simulator build generally includes hardware, software, and labor. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method. 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 the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.
For the three and six months ended June 30, 2018, the Company recognized revenue of $0.7 million related to performance obligations satisfied in previous periods.
As of June 30, 2018, the aggregate amount of transaction price allocated to the remaining performance obligations of SDB, software and fixed-price training and consulting services contracts is $31.3 million. The Company will recognize the revenue as the performance obligations are satisfied, which is expected to occur over the next 12 months.
Part of the training and consulting services contracts are T&M based. Under a typical T&M contract, the Company is compensated based on the number of hours of approved time provided by temporary workers and the bill rates, which are fixed per type of work, as well as approved expenses incurred. As part of our adoption of ASU 2014-09, we have elected to use the optional exemption under ASC 606-10-50-14(b), pursuant to which we have excluded disclosures of transaction prices allocated to remaining performance obligations under such contracts and when we expect to recognize the revenue.
The following table presents the (benefit) provision for income taxes and the effective tax rates:
(in thousands)
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
(Benefit) provision for income taxes
|
$
|
(449)
|
|
$
|
234
|
|
$
|
(190)
|
|
$
|
307
|
Effective tax rate
|
|
-84.4 %
|
|
|
22.1%
|
|
|
27.0 %
|
|
|
35.4%
|
The Company's income tax (benefit) provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. Tax expense in 2018 is comprised mainly of federal income tax expense, foreign income tax expense, and state taxes. Tax expense in 2017 is comprised mainly of foreign income tax expense, Alternative Minimum Tax, state taxes, and deferred tax expense relating to the tax amortization of goodwill.
Our effective tax rates were (84.4)% and 27.0% for the three and six months ended June 30, 2018. For the three months ended June 30, 2018, the difference between our effective tax rate of 27.0% and the U.S. statutory federal income tax rate of 21% was primarily due to permanent differences, accruals related to uncertain tax positions for certain foreign tax contingencies, and discrete item adjustments for the foreign taxes. For the six months ended June 30, 2018, the difference between the effective tax rate of (84.4)% and
the U.S. statutory federal income tax rate of 21% was primarily
due to changes in jurisdictional income and the inclusion of income from a new acquisition in the second quarter of 2018.
Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 1997 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 2014 forward for China, and 2015 forward for both India and the UK.
An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (
i.e.
, a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense.
The Company recognizes deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. The Company has evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its Chinese, Swedish and U.K. net deferred assets as of June 30, 2018. The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in the U.S. and India.
The Company recognizes the tax on GILTI as a period cost in the period the tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. For the three months ended June 30, 2018, there is no GILTI inclusion.
The Company has made an entity classification (CTB) election to treat GSE UK as a disregarded entity effective January 1, 2018. Therefore, as of January 1, 2018, GSE UK is treated as a branch of the US for tax purposes. Accordingly, GSE UK's 2018 activity has been included in the US Company's income tax (benefit) provision.
During the quarter ended June 30, 2018, the Company identified an immaterial error of $1.2 million, or $0.06 per share, in the December 31, 2017 financial statements related to the release of the valuation allowance against deferred tax assets attributable to windfall tax benefits recognized upon the adoption of ASU 2016-09. The portion relating to ASU 2016-09 should have been recorded to the consolidated statement of operations as an increase to our benefit for income taxes with a resulting increase to net income during the year ended December 31, 2017, however, the adjustment was recorded to accumulated deficit in the consolidated statement of changes in stockholders' equity. This had no impact to the ending accumulated deficit balance at December 31, 2017.
Additionally, the Company identified a $0.7 million classification error between deferred tax asset and deferred tax liability at December 31, 2017 due to improper netting of deferred taxes by jurisdiction. Accordingly, we reclassified $0.7 million of deferred tax liabilities, which was included in other liabilities to deferred tax assets in our December 31, 2017 consolidated balance sheet.
The Company evaluated the required changes and determined that their impact was not material. The financial statements for the year ended December 31, 2018 will reflect the correct comparative data.
The Company has two reportable business segments. The Performance Improvement Solutions segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example training applications include turnkey and custom training services, while engineering services include plant design verification and validation. The Company provides these services across all market segments. Contract terms are typically less than two years.
The Nuclear Industry Training and Consulting segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities. This business is managed through our Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.
As discussed in Note 4,
Acquisitions
, on May 11, 2018, GSE, through Performance Solutions, entered into the True North Purchase Agreement to purchase 100% of the membership interests in True North. True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complimentary talent pool to our employee base. For reporting purposes, True North is included in our Performance Improvement Solutions segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector. As of the report date, the Company is still evaluating the impact of the True North acquisition on our reporting units.
The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated income before income taxes:
(in thousands)
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Performance Improvement Solutions
|
$
|
10,864
|
|
$
|
11,686
|
|
$
|
20,765
|
|
$
|
21,356
|
Nuclear Industry Training and Consulting
|
|
13,834
|
|
|
5,439
|
|
|
26,828
|
|
|
12,111
|
|
|
24,698
|
|
|
17,125
|
|
|
47,593
|
|
|
33,467
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Performance Improvement Solutions
|
|
619
|
|
|
997
|
|
|
(171)
|
|
|
886
|
Nuclear Industry Training and Consulting
|
|
61
|
|
|
(192)
|
|
|
(277)
|
|
|
116
|
Change in fair value of contingent consideration, net
|
|
-
|
|
|
(43)
|
|
|
-
|
|
|
(297)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
680
|
|
|
762
|
|
|
(448)
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
(61)
|
|
|
18
|
|
|
(39)
|
|
|
45
|
(Loss) gain on derivative instruments, net
|
|
(91)
|
|
|
315
|
|
|
(247)
|
|
|
155
|
Other income (expense), net
|
|
4
|
|
|
(34)
|
|
|
29
|
|
|
(37)
|
Income (loss) before income taxes
|
$
|
532
|
|
$
|
1,061
|
|
$
|
(705)
|
|
$
|
868
|
Effective January 2018, and due to the acquisition of Absolute, the Performance Improvement Solutions allocated corporate overhead to the Nuclear Industry Training and Consulting segment. For the three months ended June 30, 2018 and 2017, a total of $1.0 million and $0.6 million of corporate overhead, respectively, was allocated to Nuclear Industry Training and Consulting segment. For the six months ended June 30, 2018 and 2017, a total of $2.1 million and $1.2 million of corporate overhead, respectively, was allocated to Nuclear Industry Training and Consulting segment. Prior period amounts were reclassified to reflect the change.
19.
|
Supplemental Cash Flow Information
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets:
|
|
June 30, 2018
|
|
December 31, 2017
|
Cash and cash equivalents
|
|
$
|
9,959
|
|
$
|
19,111
|
Restricted cash
|
|
|
523
|
|
|
960
|
Cash, cash equivalents, and restricted cash
|
|
$
|
10,482
|
|
$
|
20,071
|