GVP GSE Systems Incorporated

Q2 2016 OVERVIEW

• Revenue totaled $12.4 million, compared to $13.7 million in Q2 2015.
• Gross profit rose 24% to $3.6 million, or 29% of revenue, from $2.9 million, or 21% of revenue, in Q2 2015.
• Selling, general & administrative decreased 27% to $2.9 million, or 23% of revenue, from $4.0 million, or 29% of revenue, in Q2 2015.
• EBITDA totaled $0.4 million, up from an EBITDA loss of $1.2 million in Q2 2015.
• Adjusted EBITDA increased to $1.1 million from an adjusted EBITDA loss of $0.5 million in Q2 2015.
• Net income equaled $0.1 million, or $0.01 per diluted share, compared to a net loss of $1.5 million, or $(0.08) per diluted share, in Q2 2015.
• Adjusted net income, excluding the impact of restructuring charges, loss from the change in fair value of contingent consideration and stock-based compensation expense, increased to $0.9 million, or $0.05 per basic and diluted share, from an adjusted net loss of $0.8 million, or $(0.05) per basic and diluted share, in Q2 2015.

At June 30, 2016

• Cash and equivalents of $14.3 million, or $0.78 per diluted share, including $3.4 million of restricted cash.
• Working capital of $10.7 million and current ratio of 1.5x.
• $0 long-term debt.
• Backlog totaled $71.1 million, up 48% compared to year-end 2015 backlog of $47.9 million.

Subsequent Events

• Hired Emmett Pepe as GSE’s new Chief Financial Officer in July 2016.
• Appointed Jim Stanker to the Company’s Board of Directors and Audit Committee in August 2016.
• Chris Sorrells assumed the Chief Operating Officer role, on a permanent basis, in August 2016.

GSE Systems, Inc. (“GSE” or “the Company”) (NYSE MKT: GVP), the world leader in real-time high-fidelity simulation systems and training solutions to the power and process industries, today announced financial results for the second quarter (“Q2”) ended June 30, 2016.

Kyle J. Loudermilk, GSE’s President and Chief Executive Officer, said, “We are pleased to report GSE’s fourth consecutive quarter of positive adjusted EBITDA. In Q2 2016, GSE recorded significantly higher gross margins and lower operating expenses, reflecting our continuing efforts to reduce costs and focus on project profitability. We have reduced annualized operating expenses by more than $4 million since I joined GSE approximately one year ago. We also have continued to invest in resources for growth, hiring key leadership positions in the areas of technology, finance and operations. On that note, we are pleased to announce that Chris Sorrells, who has played an instrumental role in GSE’s operational turnaround, has agreed to assume the COO role on a permanent basis. Furthermore, we strengthened our financial and accounting leadership with the appointment of Emmett Pepe as our new CFO and Jim Stanker as a new member of our Board or Directors and Audit Committee. With the benefit of an enhanced leadership team and streamlined operations, we are now firmly focused on implementing our strategy to revitalize GSE’s growth.”

Q2 2016 RESULTS

Q2 2016 revenue decreased 9% to $12.4 million from $13.7 million in Q2 2015, reflecting a 1% increase in Performance Improvement Solutions revenue and a 25% decrease in Nuclear Industry Training and Consulting revenue due to a strategic shift in sales focus to higher margin assignments.

        (in thousands)

Three Months ended

June 30,

Six Months ended

June 30,

Revenue: 2016     2015 2016     2015 (unaudited) (unaudited) (unaudited) (unaudited) Performance Improvement Solutions $ 8,323 $ 8,213 $ 17,166 $ 17,046 Nuclear Industry Training and Consulting   4,092   5,441   8,225   10,621 Total Revenue $ 12,415 $ 13,654 $ 25,391   $ 27,667  

Performance Improvement Solutions orders totaled $5.8 million in Q2 2016 compared to $12.7 million in Q2 2015. Nuclear Industry Training and Consulting orders totaled $3.4 million in Q2 2016 compared to $6.1 million in Q2 2015.

Q2 2016 gross profit grew by 24% to $3.6 million, or 29% of revenue, from $2.9 million, or 21% of revenue, in Q2 2015.

        (in thousands)

Three Months ended

June 30,

Six Months ended

June 30,

Gross Profit: 2016     %     2015     % 2016     %     2015     % (unaudited)   (unaudited)   (unaudited)   (unaudited)   Performance Improvement Solutions $ 2,911 35.0 % $ 2,297 28.0 % $ 6,056 35.3 % $ 5,074 29.8 % Nuclear Industry Training and Consulting   649 15.9 %   590

10.8

%   1,128 13.7 %   1,107 10.4 % Total Gross Profit $ 3,560

28.6

% $ 2,887 21.1 % $ 7,184 28.3 % $ 6,181 22.3 %  

Performance Improvement Solutions gross profit for Q2 2016 increased 27% to $2.9 million, or 35% gross margin, from $2.3 million, or 28% gross margin, in Q2 2015. Nuclear Industry Training and Consulting gross profit for Q2 2016 increased 10% to approximately $649,000, or 16% gross margin, from approximately $590,000, or 11% gross margin, in Q2 2015.

Selling, general & administrative expenses in Q2 2016 decreased 27% to $2.9 million, or 23% of revenue, from $4.0 million, or 29% of revenue, in Q2 2015.

Operating income for Q2 2016 was $0.2 million compared to an operating loss of $1.4 million in Q2 2015.

Net income for Q2 2016 was $0.1 million, or $0.01 per basic and diluted share, compared to a net loss of $1.5 million, or $(0.08) per basic and diluted share, in Q2 2015.

Q2 2016 adjusted net income, excluding the impact of restructuring charges, loss from the change in fair value of contingent consideration and stock-based compensation expense, increased to $0.9 million, or $0.05 per basic and diluted share, from an adjusted net loss of $0.8 million, or $(0.05) per basic and diluted share, in Q2 2015.

EBITDA (Earnings before interest, taxes, depreciation and amortization) for Q2 2016 was $0.4 million compared to an EBITDA loss of $1.2 million in Q2 2015.

Adjusted EBITDA, which excludes the impact of restructuring charges, loss from the change in fair value of contingent consideration and stock-based compensation expense, increased to $1.1 million in Q2 2016 from an adjusted EBITDA loss of approximately $0.5 million in Q2 2015.

Backlog at June 30, 2016, increased 48% to $71.1 million from $47.9 million at December 31, 2015. Backlog at June 30, 2016, included $64.7 million of Performance Improvement Solutions backlog and $6.4 million of Nuclear Industry Training and Consulting backlog.

GSE’s cash position at June 30, 2016, was $14.3 million, including $3.4 million of restricted cash, as compared to $14.6 million, including $3.6 million of restricted cash, at December 31, 2015.

CONFERENCE CALL

Management will host a conference call today at 4:30 pm Eastern Time to discuss Q2 results and other matters.

Interested parties may participate in the call by dialing:

• (877) 407-9753 (Domestic) or
• (201) 493-6739 (International)

The conference call will also be accessible via the following link:http://www.investorcalendar.com/IC/CEPage.asp?ID=175198

For those who cannot listen to the live broadcast, an online webcast replay will be available through November 15, 2016 at www.gses.com or via the following link:http://www.investorcalendar.com/IC/CEPage.asp?ID=175198

ABOUT GSE SYSTEMS, INC.

GSE Systems, Inc. is a world leader in real-time high-fidelity simulation, providing a wide range of simulation, training and engineering solutions to the power and process industries. Its comprehensive and modular solutions help customers achieve performance excellence in design, training and operations. GSE’s products and services are tailored to meet specific client requirements such as scope, budget and timeline. The Company has over four decades of experience, more than 1,100 installations, and hundreds of customers in over 50 countries spanning the globe. GSE Systems is headquartered in Sykesville (Baltimore), Maryland, with offices in St. Marys, Georgia; Huntsville, Alabama; Chennai, India; Nyk�ping, Sweden; Stockton-on-Tees, UK; and Beijing, China. Information about GSE Systems is available at www.gses.com.

FORWARD LOOKING STATEMENTS

We make statements in this press release that are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These statements reflect our current expectations concerning future events and results. We use words such as “expect,” “intend,” “believe,” “may,” “will,” “should,” “could,” “anticipates,” and similar expressions to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other important factors that could cause our actual performance or achievements to be materially different from those we project. For a full discussion of these risks, uncertainties, and factors, we encourage you to read our documents on file with the Securities and Exchange Commission, including those set forth in our periodic reports under the forward-looking statements and risk factors sections. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

GSE SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

            Three Months ended Six Months ended June 30, June 30,   2016         2015     2016         2015   (unaudited) (unaudited) (unaudited) (unaudited) Revenue $ 12,415 $ 13,654 $ 25,391 $

27,667

Cost of revenue   8,855     10,767     18,207    

21,486

    Gross profit 3,560 2,887 7,184 6,181   Selling, general and administrative 2,881 3,951 5,992 7,220 Restructuring charges 277 48 402 145 Depreciation 102 135 202 264 Amortization of definite-lived intangible assets   73     124     146     247   Operating expenses   3,333     4,258     6,742     7,876     Operating income (loss) 227 (1,371 ) 442 (1,695 )   Interest income, net 13 21 40 48 Loss on derivative instruments, net (17 ) (31 ) (135 ) (79 ) Other income (expense), net   (4 )   (41 )   98     (80 )   Income (loss) before income taxes 219 (1,422 ) 445 (1,806 )   Provision for income taxes   108     73     196     161     Net income (loss) $ 111   $ (1,495 ) $ 249   $ (1,967 )   Basic earnings (loss) per common share $ 0.01   $ (0.08 ) $ 0.01   $ (0.11 ) Diluted earnings (loss) per common share $ 0.01   $ (0.08 ) $ 0.01   $ (0.11 )   Weighted average shares outstanding - Basic   18,010,949     17,887,859     17,956,622     17,887,859   Weighted average shares outstanding - Diluted   18,262,413     17,887,859     18,194,039     17,887,859      

GSE SYSTEMS, INC AND SUBSIDIARIES

Selected Balance Sheet Data (in thousands)

      (unaudited)     (audited)   June 30, 2016 December 31, 2015 Cash and cash equivalents $ 10,903 $ 11,084 Restricted cash – current 1,658 1,771 Current assets 30,108 28,414 Long-term restricted cash 1,735 1,779 Total assets 40,684 39,371   Current liabilities $ 19,439 $ 19,708 Long-term liabilities 1,945 1,295 Stockholders' equity 19,300 18,368  

EBITDA and Adjusted EBITDA Reconciliation (in thousands)

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 the Company’s results because it excludes certain items that are not directly related to the Company’s 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:

                Three Months ended Six Months ended June 30, June 30,   2016         2015     2016         2015     Net income (loss) $ 111 $ (1,495 ) $ 249 $ (1,967 ) Interest income, net (13 ) (21 ) (40 ) (48 ) Provision for income taxes 108 73 196 161 Depreciation and amortization   175     259     348     511   EBITDA 381 (1,184 ) 753 (1,343 )

Loss from the change in fair value of contingent

consideration

223 513 154 433 Restructuring charges 277 48 402 145 Stock-based compensation expense 242

137

489

271

Consulting support for revenue recognition analysis   -     -     78     -   Adjusted EBITDA $ 1,123   $ (499 ) $ 1,876   $

(494

)  

Adjusted Net Income and Adjusted EPS Reconciliation (in thousands, except per share amounts)

Adjusted Net Income and adjusted earnings (loss) per share (“adjusted EPS”) are not measures of financial performance under generally accepted accounting principles (“GAAP”). Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, are useful to investors to evaluate the Company’s results because they exclude certain items that are not directly related to the Company’s core operating performance 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:

        Three Months ended Six Months ended June 30, June 30, 2016     2015 2016     2015   Net income (loss) $ 111 $ (1,495) $ 249 $ (1,967)

Loss from the change in fair value of contingent

consideration

223 513 154 433 Restructuring charges 277 48 402 145 Stock-based compensation expense 242

137

489

271

Consulting support for revenue recognition analysis   -   -   78   - Adjusted net income $ 853 $

(797)

$ 1,372 $

(1,118)

  Earnings (loss) per share - diluted $ 0.01 $ (0.08) $ 0.01 $ (0.11)   Adjusted earnings (loss) per share - diluted $ 0.05 $ (0.05) $ 0.08 $ (0.06)   Weighted average shares outstanding - Diluted 18,262,413 17,887,859 18,194,039 17,887,859  

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GSE Systems, Inc.Chris Sorrells, 410-970-7802Chief Operating OfficerorThe Equity Group Inc.Devin Sullivan, 212-836-9608Senior Vice Presidentdsullivan@equityny.comorKalle Ahl, CFA, 212-836-9614Senior Associatekahl@equityny.com