GSE Systems (GVP) Risk Analysis

Our business could expose us to third party claims with respect to product, environmental and other similar liabilities. Although we have sought protection from these potential liabilities through a variety of legal and contractual provisions as well as through liability insurance, the effectiveness of such protections has not been fully tested. Certain of our products and services are used by the nuclear power industry primarily in operator training. Although our contracts for such products and services typically contain provisions designed to protect us from potential liabilities associated with such use, there can be no assurance that we would not be materially adversely affected by claims or actions which may potentially arise due to factors that may be outside of our direct control.

We believe that our success will depend in large part on our ability to maintain and enhance our current product line, develop new products, maintain technological competitiveness and meet an expanding range of customer needs. Our product development activities are aimed at the development and expansion of our library of software modeling tools, the improvement of our display systems and workstation technologies, and the advancement and upgrading of our simulation technology. The life cycles for software modeling tools, graphical user interfaces, and simulation technology are variable and largely determined by competitive pressures and the evolution of software and standards that may be controlled by third parties. Consequently, we will need to continue to make significant investments in research and development to enhance and expand our capabilities in these areas and to maintain our competitive advantage. We cannot control, and we may be unable to predict accurately, the development and evolution of these competitive pressures and external software and standards. We may be unable to monetize our investment in research and development in a timely manner, or at all. Unexpected or excessive delays in realizing a return on these investments may have a material and adverse effect on our cash position, results of operations, and financial condition.

Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems, and maintenance of backup and protective systems), cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third parties, civil or regulatory liability for loss of sensitive or protected information such as personal data, incident response costs, diminution in the value of our investment in research, development and engineering, loss of intellectual property, and increased cyber security protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

Our businesses operate in highly competitive environments with both domestic and foreign competitors, many of whom have substantially greater financial, marketing, and other resources than we do. The principal factors affecting competition in our industries include price, technological proficiency, ease of system configuration and use, product reliability, applications expertise, engineering support, local presence, personal relationships, and the relative financial stability of the competitor. We believe competition in the simulation fields may further intensify in the future as a result of advances in technology, consolidations and strategic alliances among competitors, increased costs required to develop new technology and the increasing importance of software content in systems and products. Because our business has a significant international component, changes in the value of the dollar could adversely affect our ability to compete internationally and could reduce our profitability on international business opportunities that we do win. Any of these competitive factors, or any combination of two or more factors, could make it more difficult for us to bid successfully on new projects, or to complete projects at profit margins that we consider reasonable. An inability or reduced ability to win new work would have a material adverse impact on our backlog and revenue, and an inability or reduced ability to secure reasonable profit margins on projects awarded to us would have a material adverse impact on our profitability and overall results of operations.

General economic downturns impacting our key customers and global markets can adversely affect our business operations, demand for our products and our financial results. The global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including higher interest rates, relatively high levels of inflation, strained supply chains and expectations of lower economic growth, which have put pressure on our business. For example, Russia's invasion of Ukraine in the first quarter of 2022 and the resulting geopolitical responses lessened international demand for our simulation products. When challenging macroeconomic conditions such as these exist, our customers may delay, decrease or cancel purchases from us and may also delay payment or fail to pay us altogether. Suppliers may have difficulty filling our orders and distributors may have difficulty getting our products to customers, which may affect our ability to meet customer demands and result in a loss of business. Weakened global economic conditions may also result in unfavorable changes in our product prices and product mix and lower profit margins. All of these factors could have a material adverse effect on demand for our products, our financial condition and our results of operations.

Sales of products and services to end users outside the United States accounted for approximately 12% of our consolidated revenue in 2023 and 16% of consolidated revenue in 2022. Consequently, our businesses are subject to a variety of risks that are specific to international operations, including the following: - export laws and regulations that could erode our profit margins or restrict the export of some or all of our products;- compliance with the U.S. Foreign Corrupt Practices Act and similar non-U.S. regulations;- the burden and cost of compliance with foreign laws, treaties and technical standards generally, as well as responding to changes in those requirements;- contract award and funding delays;- potential restrictions on transfers of funds;- potential difficulties in accounts receivable collection;- currency fluctuations, including costs and potentially limited availability of viable hedging options;- import and export duties and value added or other taxes;- transportation and communication delays and interruptions;- differences in insurance availability and coverage in some jurisdictions;- difficulties involving strategic alliances and managing foreign sales agents or representatives;- uncertainties arising from foreign local business practices and cultural considerations; and - potential military conflicts and political risks, including particularly the current conflict between Russia and Ukraine - potential disruption of our international business due to the worldwide COVID-19 virus outbreak. In December 2019, an outbreak of the COVID-19 virus was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared the COVID-19 virus a global pandemic. The pandemic adversely affected our international customers' operations, our employees, and our employee productivity. It also impacted the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in costs, delays or disruptions in performance. These supply chain effects, and the direct effect of the virus and the disruption on our employees and operations, from COVID-19, or from other national or global health related outbreaks, may negatively impact both our ability to meet customer demand and our revenue and profit margins. In late February 2022, following rising tensions between the regions, Russian military forces launched significant military action against Ukraine, and sustained tension, conflict, and disruption in the region is expected. We do not have employees or operations in Russia or Ukraine, but we do have customers who do business in these countries or surrounding countries. Such operations and customers may be adversely affected by the continued conflict and any related disruptions, sanctions or other governmental actions. While we have and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of our foreign business, we cannot ensure that such measures will be adequate. During the years ended December 31, 2023 and 2022, we did not have revenues greater than 10% from any individual foreign country.

In March 2020, the World Health Organization declared the COVID-19 virus a global pandemic and then-President Donald J. Trump declared a national emergency in the United States. This pandemic caused substantial disruptions to populations, including economic markets and businesses, worldwide.  Regulations and restrictions to ensure public safety, adopted at varying times and extents in the affected locations, had serious adverse impacts on economic markets and the operation of businesses in those locations. The COVID-19 pandemic increased macroeconomic and stock market volatility and uncertainty. Parts of our business were and continue to be adversely affected by the COVID-19 pandemic. In response to the pandemic, varying restrictions were implemented, either by government order or by voluntary measures, such as temporary closures or restrictions on business operations, and/or the imposition of social distancing, quarantine, remote work, or other limitations on in-person meetings. The timing and severity of these imposed restrictions varied and, while most have been lifted, restrictions could be reinstated at any time. These disruptions adversely affected our customers' operations and our business, most prominently by increasing costs and delaying customer projects and expenditures. The reemergence of the COVID-19 pandemic or the emergence of other regional epidemics or global pandemics, depending upon their duration and severity, could have a material adverse effect on our business. Depending on the severity and duration of these disruptions and the subsequent supply chain effects, customer demand, our ability to meet demand, and our revenue and profit margins, may continue to be negatively impacted. Due to the uncertainty of the severity and duration of these potential events, the extent and effectiveness of containment and mitigation measures that may be taken by governmental authorities or voluntarily, to the extent an epidemic or global pandemic may adversely impact our business, such impact may also heighten other risks set forth in this Section 1A – Risk Factors.