GSE SYSTEMS INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

We are a leading provider of professional and technical engineering, staffing
services and simulation software to clients in the power and process industries.
We provide customers with simulation, engineering and plant services that help
clients reduce risks associated with operating their plants, increase revenue
through improved plant and employee performance, and lower costs through
improved operational efficiency. In addition, we provide professional services
that help clients fill key vacancies in their respective organizations,
primarily in procedures, engineering, technical support and training focused on
regulatory compliance and certification in the nuclear power industry. Our
operations also include interactive computer-based tutorials and simulation
software for the refining, chemical, and petrochemical industries.

Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve,
namely the power industries, delayed certain essential services and dramatically
cut back on non-essential services. Although these delays and reductions
impacted us, as an essential services provider to an essential industrial base,
we benefited from maintaining a baseline of business to continue and align
itself to the realities of the pandemic. Additionally, staffing shortages have
resulted in new opportunities for our Workforce Solutions segment. In 2021, the
effects of the pandemic still impacted the end markets we serve, but those
effects have been mitigated by a number of factors, including the following: the
pandemic largely has had a targeted effect on the population? a number of
vaccines in the market being distributed and, despite logistical challenges,
making substantial progress for those in most need? the economy of the United
States has not had as much disruption as was initially feared, which has
benefited our end markets? and most importantly our end markets seem poised to
contract  with us for essential services that had been delayed as a result of
the pandemic. As we begin 2022, we have publicly announced a number of
significant contract wins, which we hope will be a harbinger of a more
attractive business environment for the power industries we serve.

As a result of the COVID-19 pandemic, we have sought and obtained support
through various business assistance programs. We applied for and, on April 23,
2020, received the PPP Loan under the CARES Act, as administered by the SBA.  We
used the PPP Loan proceeds to sustain our business during the pandemic, as
intended, and we were eligible for full forgiveness of the loan under the CARES
act. On August 5, 2021, we received notice that full principal amount and all
accrued interest thereon of the PPP Loan was formally forgiven by the SBA.

In 2021, we participated in the Employee Retention Credit (ERC) program
available under the CARES Act. The Company recognized total cumulative ERC
credits of $7.2 million. We applied for $5.0 million in refunds from the IRS
with filing of our 941s and achieved $2.2 million in credits from unremitted
payroll taxes as allowed. For the three months ended March 31, 2022 we received
refunds of $1.1 million with a remaining receivable of $3.1 million at March 31,
2022. Subsequent to March 31, 2022 we received an additional $1.0 million in ERC
refunds.

On September 9, 2021, President Biden released the COVID-19 Action Plan, Path
Out of the Pandemic (the "Plan"), with the stated goal of getting more people
vaccinated. As part of the Plan, Executive Order 14042, Ensuring Adequate COVID
Safety Protocols for Federal Contractors (the "Order"), creates the Safer
Federal Workforce Task Force (the "Task Force"), which released guidance for
U.S. Government contractors and their subcontractors. This guidance included
mandatory vaccination of all employees working on or for a government contract,
either directly or indirectly, by January 4, 2022 (subject to medical and
religious exemptions). As a part of the Plan and Order, President Biden also
directed, the Department of Labor's Occupational Safety and Health
Administration ("OSHA") to issue an Emergency Temporary Standard ("ETS")
requiring that all employers with at least 100 employees ensure that their
U.S.-based employees are fully vaccinated for COVID-19 or obtain a negative
COVID-19 test at least once a week. On November 4, 2021, OSHA issued this ETS,
however the implementation of the ETS was blocked by federal appeals courts,
pending resolution of ongoing litigation challenging the constitutionality of
the ETS, and the ETS was withdrawn by OSHA on January 25, 2022. OSHA, however
has not withdrawn the proposed rule that would effectuate the same mandate, and
it cannot be known whether OSHA may reissue the ETS or otherwise issue new
emergency temporary standards imposing similar mandates. We have already
received notice by both government customers and prime contractors serving
government customers regarding the vaccination requirement and its application
to our business with those customers. As an employer of more than 100 employees,
we would also be subject to the ETS or a similar mandate should it become
effective. It is possible that additional jurisdictions where we do business may
impose similar mandates that would apply to our employees.  In addition, certain
of our customers may require vaccines for those of our employees who provide
on-site service at their facilities. We will continue to monitor the status of
these or other mandates or regulations and their application to us and our
business.

General Business Environment


We operate through two reportable business segments: Performance Improvement
Solutions and Workforce Solutions. The Workforce Solutions segment is referred
to as workforce solutions to account for the increasing activity outside of our
core nuclear industry focus. Each segment focuses on delivering solutions to
customers within our target markets. Marketing and communications, accounting,
finance, legal, human resources, corporate development, information systems and
other administrative services are organized at the corporate level. Business
development and sales resources are generally aligned with each segment to
support existing customer accounts and new customer development. The business
units collaborate to facilitate cross-selling and the development of new
solutions. The following is a description of our business segments:

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Performance Improvement Solutions (approximately 52% of revenue for the three months ended March 31, 2022


Our Performance Improvement Solutions segment primarily encompasses our power
plant high-fidelity simulation solutions, technical engineering services for
ASME programs, power plant thermal performance optimization, and interactive
computer-based tutorials/simulation focused on the process industry. The
Performance Solutions segment includes various simulation products, engineering
services, and operation training systems delivered across the industries we
serve primarily nuclear and fossil fuel power generation and 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.

Our engineering solutions include the following: (1) in-service testing for
engineering programs focused on ASME OM code including Appendix J, balance of
plant programs, and thermal performance; (2) in-service inspection for specialty
engineering including ASME Section XI; (3) software solutions; and (4)
mechanical design, civil/structural design, electrical, instrumentation and
controls design, digital controls/cyber security, and fire protection for
nuclear power plant
design modifications. Our GSE True North Consulting and GSE DP Engineering
businesses typically work as either the engineer of choice or specialty engineer
of choice for our clients under master services agreements and are included in
our Performance Improvement Solutions segment due to their service offerings.
GSE has been providing these engineering solutions and services since 1995.

Workforce Solutions (approximately 48% of revenue for the three months ended
March 31, 2022


Workforce Solutions 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 Hyperspring and Absolute subsidiaries. The business model,
management focus, margins and other factors clearly separate the business line
from the rest of the Company's product and service portfolio. GSE has been
providing these services since 1997.

Business Strategy

Serve existing customers and adjacencies with compelling solutions, with a focus on decarbonization:


Our objective has been to create a leading business focused on decarbonizing the
power industries by providing a diverse set of highly unique and essential
services and technologies. We are now one of the leading, publicly traded
engineering and technology companies serving the zero-carbon energy sector of
nuclear power and adjacent nuclear markets in Department of Energy, US Navy and
related defense sectors. As a result of this effort and established leadership
position in key sectors, we are positioned to expand into essential clean energy
opportunities that may arise such as wind, solar, hydrogen production, and
others. In 2022, we will keenly focus on organic growth in the sectors we serve
by: cross selling and upselling in our existing markets as we focus on
delivering significant value to our customers in a manner of excellence; create
new and compelling solutions in-house as a result of advancing our technology
offerings in sponsorship with industry early adopters focused on critical
business need; develop  new services as a result of combining our expertise;
expand into compelling adjacent markets such as clean energy as they may arise
with renewed sales focus.

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Cross-sell and upsell into existing markets:


For the past several years, we have devoted considerable time and effort to
diversify the Company's solutions capabilities for the nuclear power sector via
a rollup of essential services providers to the industry. To ensure efficient
and streamlined operations for the business, we have brought all of the
engineering services together into one organization under one leader, and the
Workforce Solutions teams together as one team under one leader. The business
units operate uniformly within their respective structure. As such, the
opportunity to cross-sell the capabilities across the entire customer base is
greatly enhanced. This further differentiates us as a unique provider to
industry vs. providers of specific niche services. The unified go-to-market
efforts, such as cross-selling capability should lead to greater share of
available spending within the customer base, which in turn should lead to
significant upselling opportunity. As a result of a rejuvenated marketing
effort, we are equipped to take this new approach to market. In particular, with
the US government rejoining the Paris Climate Agreement and driving to
decarbonize the energy grid by 2035, and create a carbon neutral economy by
2050, decarbonization of the energy sector will require significant investment
for decades to come. As a key provider of essential services to the power
sector, with a focus on decarbonization, we are poised to benefit from and
exploit this investment.

Organic growth through new and compelling technology:


While managing through the pandemic, in parallel, our leadership was
investigating compelling opportunities by which we could utilize our
capabilities to create significant value for the industry and advance the
efforts of decarbonizing the power sector. As a result, we have identified a
robust pipeline of new and compelling technology solutions to develop and take
to market. Net new solutions, such as Data Validation and Reconciliation ("DVR")
and Thermal System Monitoring ("TSM"), have created new revenue streams with the
potential of on-going annuities through license revenue, software maintenance
and services revenue. More on DVR and TSM below. GSE has announced a handful of
new wins for these new solutions, which were created through our unique
combination of our industry/engineering know-how and software development
capabilities. As we have demonstrated in the past few years, small wins over
time accrue into meaningful revenue on an on-going basis. This is a key element
of our organic growth thesis: focusing on creating and bringing to market
compelling technology solutions.

Focus on compelling adjacencies in clean energy, defense, and national labs:


Research and development (R&D). We invest in R&D to deliver unique solutions
that add value to our end-user markets. Our software tools leverage the high-end
expertise of our experienced staff in helping plants operate better and more
efficiently. Our software technology together with our deep staff expertise
supports multiple industries including the nuclear industry, as a part of the
larger decarbonization drive. Our software technology includes decision-support
tools for engineering simulation supporting design and plant commissioning,
operational performance tools, and training platform.

One area of significant recent enhancement is in improving the thermal
performance of power plants. We have introduced the next generation platform in
TSM, providing the technology platform to centralize and continuously monitor
plant thermal performance. The solution benefits our customers by automating
standardized reporting in modern dashboards available to engineers and decision
makers across the fleet, leveraging automation to facilitate troubleshooting
plant performance issues, reducing time and error with direct access to source
data, and applying industry guidelines for problem resolution. This platform
also supports integration with DVR (implemented by True North) that enhances the
quality of data for plant performance insights, analysis and decision making,
providing a solution to better detect and identify faulty measurements/sensors
and thus reduce maintenance costs by focusing on critical components.

In the area of engineering simulations, we deliver nuclear core and
Balance-of-Plant modeling and visualization systems to the industry. To address
the nuclear industry's need for more accurate simulation of both normal and
accident scenarios, we provide our DesignEP® and RELAP5-HD® solutions. Our
entire JADETM suite of simulation software, including industry leading
JTOPMERET® and JElectricTM software, provides the most accurate simulation of
Balance-of-Plant and electrical systems available to the nuclear and fossil
plant simulation market. The significant enhancements we have made to our
SimExec® and OpenSimTM platforms enables customers to be more efficient in the
daily operation of their simulators. We have brought SimExec® and OpenSimTM
together into a next generation unified environment that adds new capabilities
as requested by clients and driven by market need.

Additionally, enhancements to training content and delivery continue through the
EnVision On-Demand platform, allowing our customers to access training content
from anywhere in synchronous and asynchronous modes, thus increasing their
efficiency and reducing infrastructure costs. We intend to continue to make
pragmatic and measured investments in R&D that first and foremost are driven by
the market and complement our growth strategy. Such investments in R&D may
result in on-going enhancement of existing solutions as well as the creation of
new solutions to serve our target markets, ensuring that we add greater value
that is easier to use, at lower total cost of ownership than any alternative
available to customers. We have pioneered a number of industry standards and
intend to continue to be one of the most innovative companies in our industry.
During the three months ended March 31, 2022 and 2021, we have made R&D
investments totaling  $0.1 million and $0.2 million, respectively.

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Strengthen and develop our talent while delivering high-quality solutions.


Over the past several years, we have assembled a unique and highly experienced
group of talent through organic growth and strategic acquisition. Our
engineering team comprised of design, simulation, regulatory compliance, and
performance optimization capabilities are unique to the industry and capable of
addressing the entire power generation life cycle.

Our experienced employees and management team are our most valuable resources.
The continued integration of our team in parallel with attracting, training, and
retaining top talent is critical to our success. To achieve our goals, we intend
to remain focused on providing our employees with opportunities to increase
client contact within their areas of expertise and to expand and deepen our
service offerings. As we refine our product and service areas to best align with
the critical areas listed above, we will also integrate and apply our composite
employee talent to the fullest extent possible combining employee personal and
professional growth opportunities with fulfillment of cutting-edge industry
needs. Performance-based incentives including opportunities for stock ownership,
bonuses and competitive benefits as benchmarked to our industry and locations
will also be utilized to ensure continuity of our approach.

We have developed a strong reputation for quality services based upon our
industry-recognized depth of experience, ability to attract and retain quality
professionals, and exceptional expertise across multiple service sectors. As we
continue to integrate and leverage our individual company components assembled
over the past several years, our capabilities and reputation will further
strengthen.

Employees

Ash or March 31, 2022we had approximately 302 employees, which includes approximately 194 employees in our Performance segment and approximately 108 employees in our Workforce Solutions segment.

backlog


As of March 31, 2022, we had approximately $40.1 million of total gross revenue
backlog, which included $31.9 million of Performance backlog and $8.2 million of
Workforce Solutions backlog. With respect to our backlog, it includes only those
amounts that have been funded and authorized and does not reflect the full
amounts we may receive over the term of such contracts. Our backlog includes
future expected revenue at contract rates, excluding contract renewals or
extensions that are at the discretion of the client. We calculate backlog
without regard to possible project reductions or expansions or potential
cancellations unless and until such changes may occur.

Backlog is expressed in terms of gross revenue and, therefore, may include significantly estimated amounts of third-party or pass-through costs to subcontractors and other parties. Because backlog is not a US GAAP measurement, our computation of backlog may not necessarily be comparable to that of our industry peers.


Product and Services

Performance Improvement Solutions


Our engineering team, comprised of design, simulation, regulatory compliance,
and performance optimization capabilities are unique to the industry and capable
of addressing the entire power generation life cycle. As we move forward in
alignment with client and industry goals targeting clean energy production and
overall decarbonization we are positioned to be at the forefront in three
critical areas:

• optimization of existing generation assets

• design support and deployment of advanced reactor designs

• integration with renewable power sources

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Optimizing Existing Generation Assets


As the existing fleet of nuclear reactors age and competitive pressures
increase, we find ever increasing significance in being able to provide value to
their continued operation.  Maximizing power production through a variety of
methods such as digital verification and reconciliation, a statistical based
analysis used to lower uncertainty, and thus increase recognized power output is
instrumental in helping these facilities face current competitive pressures.
Other approaches involving safe reduction of testing and inspection requirements
or performance periodicities are also at the forefront of our cost saving
techniques with defined services and products providing a clear and positive
return on investment. In all cases, these efforts are aligned with keeping this
important source of carbon free base power economically and technically viable.

Advanced Reactor Designs & Deployment


Designers of first-of-a-kind plants or existing plants need a highly accurate
dynamic simulation platform to model a wide variety of design assumptions and
concepts from control strategies to plant behavior to human factors. Because new
builds and upgrades to existing plants result in deployment of new technology,
often involving the integration of disparate technologies for the first time, a
high-fidelity simulator enables designers to model the interaction between
systems in advance of construction. With our combination of simulation
technology and expert engineering, we were chosen to build first-of-a-kind
simulators for the AP1000, PBMR, and small modular reactors such as those being
built by NuScale.  Going forward, we also envision many of the optimization
techniques and strategies currently emphasized for the existing reactor fleet
incorporated with new-build prototypes as they begin to add value and assume a
larger component of our clean, carbon free, power requirements.

Renewable Integration


A significant component of overall decarbonization regarding power generation
will ultimately fall to renewable sources such as wind, solar, and hydro
generation. These technologies are individually well on their way towards
assuming a significant share of the overall generation make-up and are expected
to significantly increase. One of the particular needs is the ability to safely
and efficiently integrate these renewable sources with our existing and planned
nuclear generation. We are on the cutting edge, working closely with academia
and industry support organizations to design, model, and evaluate creative
approaches to support this integration. Base load production, renewable
availability, and other pertinent factors are at the core of the solutions we
are exploring.

Engineering Solutions for Decarbonization


With overall decarbonization as our primary focus, we will blend our current and
future efforts in those areas described above to best support that goal
positioning our Engineering team as recognized leaders in the pursuit of Clean
Energy. An overview highlighting many areas of our current and planned
involvement as well as the associated benefits is summarized below:

With nuclear power being such a high percentage of carbon free power generation,
the continued safe and efficient operation of these plants is critical to
meeting decarbonization goals. We help the industry achieve these goals through
better training and provide engineering services to optimize performance while
maintaining regulatory compliance. Our focus is on products and services to
improve the efficiency and lower operating costs for existing power generation
assets as well as help the next generation of carbon free power plants achieve
design approval and plant startup as quickly as possible.

Training plant operators and engineers is critical to safe operations and
continued viability of the industry. Using state-of-the-art modeling tools
combined with our leading nuclear power modeling expertise, we provide
simulation solutions that achieve unparalleled fidelity and accuracy. We have
also adapted these solutions to provide highly accurate training across a
variety of delivery platforms. These include universal or generic simulators
which are excellent in teaching fundamental concepts, systems, and plant
behaviors. They are also used by academia for research on improved plant
operations, human factors design and the development of automated procedures and
decision support systems for the next generation of reactors. Our part task
simulators and virtual control panels are cost effective solutions enabling
customers broader freedom in where they deliver simulation training and opening
the door for plant engineers and maintenance staff to access high fidelity
training without interrupting the operator training program. Our full scope
simulators use the most sophisticated modeling technology. For these reasons, we
have delivered more nuclear power plant simulators than any other company in the
world.

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Even prior to the COVID pandemic, we had delivered training products though the
cloud. This delivery method reduces our customers infrastructure and ownership
costs and provides anytime, anywhere access to rich learning content. Innovative
Critical Thinking Exercises enable autonomous simulation training to take place,
reducing the burden on instructors and increasing training touch time for
students and employees. All of which enable the training organization to be more
flexible and efficient.

Our simulation solutions not only address industry training needs, but are used
for simulation assisted engineering, the process of using simulation to
virtually test and commission plant designs prior to construction.  Because new
builds and upgrades to existing plants result in deployment of new technology,
our high-fidelity simulator enables designers to model the interaction between
systems in advance of construction. With our combination of simulation
technology and expert engineering, we were chosen to build first-of-a-kind
simulators for the AP1000, PBMR, and small modular reactors such as those being
built by NuScale. This technique reduces design costs, accelerates design
approvals, de-risks projects, and provides clients with a tool to sell their new
plant designs to both customers and regulators.  In essence, enabling our
customers to get to market faster.

Beyond training, our technology is used to improve the efficiency of existing
power generation assets. Our TSM System provide live insights into plant
operations, by monitoring performance of key plant equipment, analyzes
degradation and advises actions to be taken. When combined with DVR techniques,
we can help reduce operating and maintenance cost. DVR enhances the quality of
data for analysis and decision making, providing a solution to better detect and
identify faulty measurements/sensors and thus reduce maintenance costs by
focusing on critical components.

Our EP-Plus software suite provides one common platform for all engineering
programs, helping client engineers keep track of engineering program inspection
and monitoring requirements aimed at safe plant operations. This reduces the
engineering workload of our customers, saving costs and enabling staff to focus
on the most critical activities.

All of these technologies leverage the vast experience and industry expertise of our engineering team. Our engineering team helps our clients throughout the entire plant lifecycle. We are the Engineer of Choice (“EOC”) in areas such as:

• Design engineering for plant mechanical, electrical, I&C, civil and structural,

fire protection and cyber systems

• Engineering programs addressing ASME codes, balance of plant programs other

regulatory programs and economic driven programs such as plant thermal

performance

• Simulation engineering for nuclear, thermal and process plant training and

   virtual commissioning



We see organic growth through closer integration of these engineering activities and technologies to provide solutions to improve the performance of our customers’ people and plants.

Workforce Solutions


As our customers' experienced employees retire or pursue other opportunities,
access to industry experts to operate and train existing and new employees how
to operate nuclear plants is essential to ensure safe, ongoing plant operation.
In addition, operating and training needs change over time and sometimes our
clients require fixed-price, discrete projects, new or updated methods, or
specialized courses in contrast to straight staff augmentation. The industry
needs operating personnel, including procedure writers, engineers, operators and
instructors who can step in and use, as well as, update the client's operating
methods, procedures, training material and more. Finding technical professionals
and instructors, who know the subject, can perform the work or teach it to
others and can adapt to the client's culture is critical. We provide qualified
professionals, instructors and turnkey projects/courses that work within the
client's system and complement the operating or training methods they already
have in place. Examples of our training program courses include senior reactor
operator ("SRO") certification, generic fundamentals training, and simulation
supervisor training. We also provide expert support through workforce solutions,
consulting, or turnkey projects for procedure writing, technical engineers,
project managers, training material upgrade and development, outage execution,
planning and scheduling, corrective actions programs, and equipment reliability.
Our Workforce Solutions segment include traditional staffing services, such as
temporary and direct hire, as well as customized approaches in which we work
with our customers to evaluate their specific needs and put together a strategic
plan specifically to meet their unique needs. Workforce solutions is not only a
complement to our other service offerings; it often leads the way as the
preferred method for many of our clients to execute entire projects and/or
supplement their own staff during project peak periods or with specialized skill
sets that are often hard to find.  Our staffing experts give our customers the
ability to ramp up quickly, eliminate risks, and provide more flexible options
as situations often demand.

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In addition to the core training and staffing business lines in the nuclear
sector, we continue to see significant organic growth opportunity with our
Workforce Solutions segment by expanding our service offerings to meet the
evolving needs of the energy industry as well as other opportunities that
support decarbonization and major infrastructure projects. Due to the experience
within our team, we are well positioned to expand our Workforce Solutions
segment offerings through our existing relationships and industry knowledge.
This growth is occurring both with existing and new customers. We are placing a
greater emphasis on cross-selling the services offered by our Workforce
Solutions segment with our Performance Improvement Solutions segment. The
Workforce Solutions segment continues expanding our footprint with companies
dedicated to the support of decarbonization, and our success is showing with
contract awards, scope expansion, and targeted opportunities to support
engineering, manufacturing, and construction projects with companies dedicated
to clean energy solutions. We have continued to better position us to support
these opportunities with strategic hires and staff alignment. As the recent
increases in employment transition have demonstrated, companies must also be
able to adapt quickly to evolving staffing needs. This has certainly been
demonstrated with companies adjusting and allowing more employees to work from
home, but it's not the only answer.  Employees are making changes in their
professional lives for many reasons, and our workforce solutions offer our
customers added support and more flexibility to support ever changing needs. In
fact, Workforce Solutions is uniquely positioned for growth in these types of
employment environments. Our flexible solutions, and specialized industry
experience position us both for current and future staffing needs.

We recognize the necessity to listen to the needs of our customers and provide
the right solution. Whether the answer is one of our traditional service
offerings or putting together a customized approach, we have the capabilities to
help our customers get the job done.  We  bring together the collection of
skills we have amassed over more than 40 years beginning with its traditional
roots in custom high-fidelity simulation and training solutions for the power
industries, extended through the acquisition of specialized engineering
capabilities, enhanced by the entry and intermediate level training solutions of
EnVision, backed by the extensive Workforce Solutions services of Absolute and
Hyperspring, and now strengthened by our ability to successfully adapt,
diversify, and offer a solutions based approach with our Workforce Solutions.

Results of Operations

The following table sets forth our results of operations, expressed in thousands of dollars and as a percentage of revenue:

                                                                    Three months ended
(in thousands)                                           March 31, 2022            March 31, 2021
                                                         $            %            $            %
Revenue                                               $ 12,275       100.0 %    $ 13,104       100.0 %
Cost of revenue                                          9,848        80.2 %      10,176        77.7 %
Gross profit                                             2,427        19.8 %       2,928        22.3 %

Operating expenses:
Selling, general and administrative                      4,507        36.5 %       3,734        28.5 %
Research and development                                   142         1.2 %         157         1.2 %
Restructuring charges                                        -         0.0 %         808         6.2 %
Loss on impairment                                           -         0.0 %           -         0.0 %
Depreciation                                                72         0.6 %          76         0.6 %
Amortization of intangible assets                          260         2.1 %         340         2.6 %
Total operating expenses                                 4,981        40.6 %       5,115        39.0 %
Operating loss                                           2,554       (20.9 )%     (2,187 )     (16.8 )%
Interest expense, net                                     (148 )      (1.2 )%        (54 )      (0.4 )%
Change in fair value of derivative instruments, net       (581 )      (4.9 )%          -         0.0 %
Other income, net                                           16         0.1 %           1         0.0 %
Loss before income taxes                                (3,267 )     (26.6 )%     (2,240 )     (17.1 )%
Provision for (benefit from) income taxes                  167         1.4 %         (35 )      (0.3 )%
Net loss                                              $ (3,434 )     (28.0 )%   $ (2,205 )     (16.8 )%



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revenue


Revenue for the three months ended March 31, 2022 totaled $12.3 million, which
was 6% less than the $13.1 million of revenue for the three months ended March
31, 2021.

                                                       Three months ended
(in thousands)                      March 31, 2022      March 31, 2021           Change
Revenue:                                                                      $          %
Performance Improvement Solutions   $         6,397     $         7,081       (684 )     (10 )%
Workforce Solutions                           5,878               6,023       (145 )      (2 )%
Total revenue                       $        12,275     $        13,104       (829 )      (6 )%



Performance Improvement Solutions revenue decreased 10% from $7.1 million to
$6.4 million for the three months ended March 31, 2022 and 2021, respectively.
The decrease of revenue was primarily due to a decline in software license sales
as well as software maintenance renewals. We recorded total Performance
Improvement Solutions orders of $6.4 million and $5.6 million for the three
months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022, Workforce Solutions revenue decreased
2% to $5.9 million compared to revenue of $6.0 million for the three months
ended March 31, 2021. The decrease in revenue was due to a minor reduction in
staffing needs from our major customers. We recorded total new orders of $4.7
million and $7.4 million for the three months ended March 31, 2022 and 2021,
respectively.

As of March 31, 2022, our backlog was $40.1 million, of which, $31.9 million was
attributed to the Performance segment and $8.2 million was attributed to the
Workforce Solutions segment. As of December 31, 2021, our backlog was $41.3
million with $31.8 million attributed to our Performance segment and $9.5
million to Workforce Solutions.

gross profit

Gross profit was $2.4 million or 19.8% of revenue and $2.9 million or 22.3% of revenue for the three months ended March 31, 2022 and 2021, respectively.

                                                  Three months ended
                                        March 31, 2022          March 31, 2021
(in thousands)                           $           %           $           %
Gross profit:

Performance Improvement Solutions $1,815 28.4% $2,192

 31.0 %
  Workforce Solutions                      612       10.4 %        736       12.2 %
Total gross profit                    $  2,427       19.8 %   $  2,928       22.3 %



The Performance Improvement Solutions segment's gross profit decreased by $0.4
million during three months ended March 31, 2022 over three months ended March
31, 2021. The decrease is primarily related to lower revenue and a shift in
product mix to lower margin projects.

The Workforce Solutions segment's gross profit decreased by $0.1 million during
three months ended March 31, 2022 over three months ended March 31, 2021. The
decrease in gross profit was primarily driven by a product mix shift in the
Workforce Solutions business that had new contracts undertaken at lower margins
compared to prior year.

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Selling, general and administrative expenses (“SG&A”)


SG&A expenses totaled $4.5 million and $3.7 million for the three months ended
March 31, 2022 and 2021, respectively. Fluctuations in the components of SG&A
spending were as follows.

                                                                            Three months ended
(in thousands)                                   March 31, 2022          %            March 31, 2021          %

Selling, general and administrative expenses:
Corporate charges                               $          3,482           77.3 %    $          2,758          73.9 %
Business development                                         839           18.6 %                 767          20.5 %
Facility operation & maintenance (O&M)                       177            3.9 %                 200           5.4 %
Bad debt expense                                               -            0.0 %                   4           0.1 %
Other                                                          9            0.2 %                   5           0.1 %
Total                                           $          4,507          100.0 %    $          3,734         100.0 %



Corporate charges

During the three months ended March 31, 2022, corporate charges increased by
$0.7 million over the same period of the prior year. The increase was primarily
due to an increase of stock compensation expense of $0.3 million and an increase
in corporate bonus accrual of $0.3 million in Q1 2022.

Business development expenses

Business development expense increased $0.1 million during the three months ended March 31, 2022 about the same period of the prior fiscal year. The increase was primarily due to higher commission costs and recruiting fees in Q1 2022.

Facility operation & maintenance (“O&M”)

Facility O&M expenses decreased $23 thousand for three months ended March 31, 2022respectively, compared to the same period in 2021. The decrease in facility O&M during fiscal 2022 was mainly due to lease terminations in the first half of 2021.

Bad debt expense


We recorded no bad debt expense during the three months ended March 31, 2022. We
recorded $4 thousand of bad debt expense during the three months ended March 31,
2021.

Research and development

Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled $142 thousand and $157 thousand for the three months ended March 31, 2022 and 2021, respectively.

restructuring


We recorded no restructuring charges during the three months ended March 31,
2022. We recorded $808 thousand restructuring charges during the three months
ended March 31, 2021. The decrease was mainly due to final charges related to
the liquidation of our Sweden operations in Q1 2021, pursuant to our foreign
restructuring plan.

Depreciation

We recorded depreciation expense of $72 thousand and $76 thousand for the three
months ended March 31, 2022 and 2021, respectively. The reduction of $4 thousand
for the three months ended March 31, 2022 over the same period in 2021 was due
primarily to additional assets becoming fully depreciated.

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled $0.3 million for both the three months ended March 31, 2022 and 2021.

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Interest expense, net


Interest expense totaled $148 thousand and $54 thousand for the three months
ended March 31, 2022 and 2021, respectively. The increase was mainly due to an
increase in total indebtedness compared to Q1 2021.

Change in fair value of derivative instruments, net

For the three months ended March 31, 2022we recognized a net loss of $0.6 million related to the change of fair value of the embedded derivative liability related to the Convertible Note and warrant liability.

Other income, net

For the three months ended March 31, 2022 and 2021, we recognized other income, net of $16 thousand and $1 thousandrespectively.

Income tax expense (benefit)


Income tax expense (benefit) for interim periods is determined using an estimate
of our annual effective tax rate, adjusted for discrete items arising in that
quarter. Total income tax expense of $167 thousand for the three months ended
March 31, 2022 was comprised mainly of current foreign and state tax expense and
deferred federal and state tax expense related to the portion of goodwill which
cannot be offset by deferred tax assets. Total income tax benefit of $(35)
thousand for the three months ended March 31, 2021 was comprised mainly of
foreign and state tax benefit.

Our income effective tax rate was (5.1)% and 1.6% for the three months ended
March 31, 2022 and 2021, respectively. The difference between our income tax
expense at an effective tax rate of (5.1)% and a benefit at the U.S. statutory
federal income tax rate of 21% was primarily due a change in valuation allowance
in our U.S. entity, the permanent disallowance of interest expense related to
disqualified debt, accruals related to uncertain tax positions for certain
foreign tax contingencies, and discrete item adjustments for U.S. and foreign
taxes. For the three months ended March 31, 2021, the difference between the
income tax benefit at an effective tax rate of 1.6% and a benefit at the U.S.
statutory federal income tax rate of 21% was primarily due to accruals related
to uncertain tax positions for certain foreign tax contingencies, a change in
tax valuation allowance in our U.S. and China subsidiaries, and discrete item
adjustments for U.S. and foreign taxes.

Critical Accounting Policies and Estimates


In preparing our consolidated financial statements, Management makes several
estimates and assumptions that affect our reported amounts of assets,
liabilities, revenues and expenses. Our most significant estimates relate to
revenue recognition on contracts with customers, product warranties, valuation
of goodwill and intangible assets acquired, valuation of long-lived assets to be
disposed, valuation of stock-based compensation awards and the recoverability of
deferred tax assets. These critical accounting policies and estimates are
discussed in the Management's Discussion and Analysis of Financial Condition and
Results of Operations section in our most recent Annual Report on Form 10-K,
filed with the SEC on March 31, 2022. In addition, in the quarter ending March
31, 2022, we established mark-to-market liabilities related to certain common
stock purchase warrants and certain embedded features included in our
convertible debt. The fair values of these are estimated upon issuance and at
each reporting period thereafter. For all accounting policies described in this
document, management cautions that future events rarely develop exactly as
forecasted and even our best estimates may require adjustment as facts and
circumstances change.

Liquidity and Capital Resources

Ash or March 31, 2022our cash, cash equivalents and restricted cash totaled
$7.0 millioncompared to $3.6 million ash or December 31, 2021

Ash or March 31, 2022we have a long-term restricted cash of $1.6 million† we had $1.1 million of restricted cash to secure four letters of credit with various customers and $0.5 million to secure our corporate credit card program.


For the three months ended March 31, 2022 and 2021, net cash provided by
operating activities were both $1.1 million and net cash used in operating
activities were $2.0 million, respectively. The increase in cash flows provided
by operating activities was primarily driven by an ERC refund increased
collections in the first quarter of 2022 and slower billing in the first quarter
of 2021.

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Net cash used in investing activities totaled both $0.2 million for the three months ended March 31, 2022 and 2021, respectively.


For the three months ended March 31, 2022 and 2021, net cash provided by
financing activities was $2.6 million and net cash used in financing activities
was $0.7 million, respectively. The increase in cash provided by financing
activities of $3.3 million was primarily driven by $4.8 million of proceeds
received from issuance of Convertible Note, offset by a $1.8 million repayment
of the line of credit during the three months ended March 31, 2022.

Paycheck Protection Program Loan


We applied for and, on April 23, 2020, received the PPP Loan under the CARES
Act, as administered by the SBA (further described in Note 4 to Consolidated
Financial Statements).  Citizens reviewed our application for forgiveness and
associated documentation, and on February 26, 2021 forwarded our application to
the SBA with Citizens' determination that the loan is fully forgivable. On
August 5, 2021, we received notice that full principal amount and all accrued
interest thereon of the PPP Loan was formally forgiven by the SBA

Credit Facilities


On February 23, 2022, the Company issued a Convertible Note (further described
in Note 10 to Consolidated Financial Statements). The proceeds received from the
Convertible Note were used to repay in full, all outstanding indebtedness of
$1.8 million owed to Citizens, and the Amended and Restated Credit and Security
Agreement between us, our subsidiaries, and Citizens has been terminated. As of
March 31, 2022, we had four letters of credit totaling $1.1 million outstanding
to certain customers which were secured with restricted cash.

Non-GAAP Financial Measures

Adjusted EBITDA


References to "EBITDA" mean net (loss) income, before taking into account
interest expense (income), provision for income taxes, depreciation and
amortization. References to Adjusted EBITDA exclude the impact of restructuring
charges, stock-based compensation expense and change in fair value of derivative
instruments. EBITDA and Adjusted EBITDA are not measures of financial
performance under generally accepted accounting principles (GAAP). Management
believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income
and other GAAP measures, are useful to investors to evaluate our results because
it excludes certain items that are not directly related to our core operating
performance that may, or could, have a disproportionate positive or negative
impact on our results for any particular period. Investors should recognize that
EBITDA and Adjusted EBITDA might not be comparable to similarly titled measures
of other companies. This measure should be considered in addition to, and not as
a substitute for or superior to, any measure of performance prepared in
accordance with GAAP. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to
the most directly comparable GAAP measure in accordance with SEC Regulation G
follows:

(in thousands)
                                                               Three months ended
                                                       March 31, 2022      March 31, 2021
Net loss                                              $         (3,434 )   $        (2,205 )
Interest expense, net                                              148                  54
Provision for income taxes                                         167                 (35 )
Depreciation and amortization                                      415                 513
EBITDA                                                          (2,704 )            (1,673 )
Restructuring charges                                                -                 808
Stock-based compensation expense                                   408                  38
Change in fair value of derivative instruments, net                581                   -
Adjusted EBITDA                                       $         (1,715 )   $          (827 )



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Adjusted Net (Loss) Income and Adjusted (Loss) Earnings per Share Reconciliation


References to Adjusted net (loss) income exclude the impact of restructuring
charges, stock-based compensation expense, change in fair value of derivative
instruments and amortization of intangible assets related to acquisitions.
Adjusted Net Income and adjusted earnings per share (adjusted EPS) are not
measures of financial performance under GAAP. Management believes adjusted net
income and adjusted EPS, in addition to other GAAP measures, are useful to
investors to evaluate our results because they exclude certain items that are
not directly related to our core operating performance and non-cash items that
may, or could, have a disproportionate positive or negative impact on our
results for any particular period. These measures should be considered in
addition to, and not as a substitute for or superior to, any measure of
performance prepared in accordance with GAAP. A reconciliation of non-GAAP
adjusted net income and adjusted EPS to GAAP net income, the most directly
comparable GAAP financial measure, is as follows:

(in thousands)                                                                                                    Three months ended
                                                                                                          March 31, 2022       March 31, 2021

Net loss                                                                                                 $         (3,434 )   $         (2,205 )
Restructuring charges                                                                                                   -                  808
Stock-based compensation expense                                                                                      408                   38
Change in fair value of derivative instruments, net                                                                   581                    -
Amortization of intangible assets related to acquisitions                                                             260                  340
Adjusted net loss                                                                                        $         (2,185 )   $         (1,019 )

Adjusted loss per common share - Diluted                                                                 $          (0.10 )   $          (0.05 )

Weighted average shares outstanding used to compute adjusted net loss per share – basic and diluted(1) 20,980,046

           20,628,669



(1) During the three months ended March 31, 2022 and 2021, we reported a GAAP
net loss and an adjusted net income. Accordingly there was no dilutive shares
from RSUs included in the adjusted earnings per share calculation that were
considered anti-dilutive when calculating the net loss per share.

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