Devin Sullivan - VP, Equity Group Jim Eberle - CEO Jeff Hough - CFO

Mark Schappo - Benchmark

Good afternoon and welcome to the GSE Systems Report First Quarter 2013 Financial Results. At this time all participants are on a listen-only mode. A brief question-and-answer session will follow up formal presentation. (Operator Instruction). As a reminder this conference is been recorded. It is now my pleasure to introduce your host Mr. Devin Sullivan, Senior Vice President of the Equity Group. Thank you Mr. Sullivan, you may begin.

Thank you Manny, and good afternoon everyone. Thank you for joining us today. Before we begin, I would like to remind everyone that statements made during the course of this call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934. These statements reflect our current expectations concerning future events and results. Words such as expect, intend, believe, may, will, should, could, anticipate, and similar expressions are words that are used 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 and uncertainties, and other important factors that could cause our actual performance or achievements to be materially different from those projected. For a full discussion of these risks, uncertainties, and factors, you are encouraged to read GSE's documents on file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward-looking statements and risk factor section. GSE does not intent to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I’d now like to turn the call over to Mr. Jim Eberle, Chief Executive Officer of GSE Systems. Please go ahead Jim.

Thank you, Devin. Good afternoon. I’d like to welcome everyone to GSE Systems 2013 first quarter conference call. Also on today’s call is our CFO, Jeff Hough and Larry Gordon our Senior Vice President and General Counsel. Earlier this afternoon, we issued a Press Release covering our quarterly financial results, a copy of which can be found on our website at www.gses.com under the Investor Relations section. Our results for the first quarter were disappointing. Lower revenues combined with continue investment in our people and infrastructure costs produced a loss for the quarter. We expect to begin the benefits of these investments in 2014 and beyond. We believe that much of the top line sluggishness is been driven by delays and the awarding of contracts, mainly contracts which we expected to be awarded in Q1 and that being pushed to the second half of 2013. I want to stress that these delays in awarding of contracts, not cancelations. Because we expect these projects close of this year we will incur certain overhead expenses and likely suffer from the effects of under utilization until these projects ramp up. I’m pleased with our proposal activity. We are seeing interest in our suite solutions from various geographies including Asia, Europe, The Middle East, Africa, North and South America and n markets including fossil, nuclear, oil and gas and petrochemical. We also have several what I refer to is game changing contract opportunities in the areas of large simulation based training centers. We had a number of exciting developments occur during the quarter. We announced that we will supply our active 3Di visualization technology to a state of the art training facility being constructed by EF Energy in a 900 year old medieval monastery in southwest England. We upgraded our JADE modeling toolset in our ISIS database system making our software more attractive, intuitive and robust. In April, our experts spoke at or chaired three significant conferences. Our Senior Vice President of Workforce Solutions Phillip Polefrone presented blended engaging training from new nuclear workers at the second annual summit of the Regional Center for Nuclear Education and Training at Indian River State College in Fort Pierce, Florida. Our 3D visualization technology expert Mike Lerg hosted a panel discussion titled virtual roles for the energy industry at the 2013 Defense Gametech users conference to address our virtual worlds are been used to improve training and operational effectiveness across the energy industry and our Vice President and Head of our GSE Envision product line Santosh Joshi was the honorary chairman and moderator for Day 2 of the 7th Annual China Petrochemical Focus Conference in Shanghai, which focused on technology and operational excellence. In May, two of our simulation technology experts gave a joint demonstration titled delayed coker and FCC simulations and CDTs at the annual coking and CatCracking safety seminar in Galveston, Texas. Our continued diversification strategy is especially relevant and in the time of increasing interest in developing domestic oil and natural gas reserves. Statistics shows that U.S. Universities are producing only about 20% of the engineering graduates; they did 20 years ago. The petroleum needs the training to recruit better and faster on system in a more complex than ever before. They also need to make sure that they retain this recourse over the long time, new innovations and simulation based training which is offered by GSE while our industry trained us to accomplish these goals in less time with lower cost. This included products from GSE Envision, which provide interactive multimedia tutorials and simulation models primarily to the petrochemical and oil and gas refining industries. GSE Envision has completed more than 800 installations in 35 countries. In this quarter, we continue working on several advancements related to the GSE Envision suite of products which includes gas oil separation process and an upstream treatment unit adding to our robust library. Our M&A activities is continue in earnest and we are reviewing a number of possible acquisition opportunities in the U.S. and aboard. I will now turn the call over to Jeff for review of Q1 results. Jeff?

Thanks Jim and thanks to each of you for joining us today. Revenue for the first quarter was $12.4 million, a decrease of 7.5% from $13.4 million the first quarter of 2012. The decline in revenue was mainly due to the following factors. In the first quarter of 2013, we had reductions in revenue from both Japanese and German customers, two traditionally strong sources of revenue for the company. As an aftermath Fukushima earthquake and Tsunami which occurred over two years ago, the Japanese have shut down all of the two of their nuclear reactors and the Germans have announced plans to shut down all of the nuclear reactors by 2022. For the three months ended March 31, 2013, revenue decreased $1.4 million and $700,000 from nuclear simulation customers in Japan and Germany respectively, as compared to the same period in the prior year. Furthermore fossil fuel stimulation revenue decreased $800,000 in the first quarter of 2013, as compared to the prior year. In the U.S., we have seen a delay in capital spending by utilities due to uncertainty regarding environmental regulations that are due to go into effect in 2015 and the low price of natural gas and a likely heard of abundant sources through the fracking processes. The revenue decreases were partially offset by a $1.8 million increase in revenue recognized on the Company's $36 million order for new stimulator for a Slovak utility. We except that this project will wind down by the end of 2013. Gross profit for the quarter was $3.1 million or 24.9% of revenue as compared to $3.9 million or 29.3% of revenue in the first quarter of 2012. Our higher percentage is Slovakian revenues, 23% of total revenue in the first quarter of 2013 versus only 8% in the first quarter of 2012 and lower high margin core business revenues led to this decline. General and administrative expenses for the first quarter of 2013 were $4.2 million, an increase of 19.5% from 3.5 million in first quarter 2012. This increase is primarily due to about an $185,000 of maintenance or support costs related to the Company's new enterprise resource planning system that was implemented in the third quarter of 2012. We expect these costs to continue throughout 2013 although reducing in the last half of the year as the familiarity with the systems processes increases. We incurred approximately $200,000 of costs in the first quarter of 2013 associated with a new larger GSE UK office which was occupied in December 2012 and an increase in the allocation of GSE UK's management expenses to G&A in 2013 and due to foreign currency translation losses. We reported a net loss of $1.2 million or $0.06 per diluted share in Q1 2013 compared to a net income of $530,000 or $0.03 per diluted share in last year's first quarter. Our balance sheet remains very strong, our cash balance excluding $2.6 million of restricted cash and unrestricted certificates of the deposit was $18.7 million or $1.02 per share at March 31, 2013. During the first quarter 2013, the company made earned out payments totaling $979,000 to the former Envision shareholders. In addition, due to the timing of milestone payments made to the DCS vendor on the Company's Slovakian simulator project versus cash receipts from the customer; the Company's cash balance decreased by a net $980,000 in the first quarter 2013. At the end of the quarter, we had no long term debt and working capital of $28.2 million. I'll now turn it back over to Jim.

Before we turn things over for questions, I want to stress our management's continuing commitment to growing GSE and enhancing long term value for our shareholders. We believe that we are on the correct half that better days lie ahead. We appreciate your time today and would now be happy to take your question. Operator, please go ahead.

Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions). Our first question comes from the line of Mark Schappo of Benchmark. Please go ahead. Mark Schappo - Benchmark: So Jim starting on the expense levels, is this kind of the new normal going forward here?

I wouldn't exactly call it a new normal. I would say for this year there was about almost a $1 dollars in there that was an earn out payment. So that doesn't happen every quarter. We do have some potential future earn outs based on the performance of the acquired companies but I expect that by the end of 2013, that's when we would be able to go backwards on some of the expense levels we have as I've been mentioning for some time, investments that we made obviously in our IT infrastructure implementing Oracle. We're also implementing Project Management Tools, techniques for training. We implemented an enterprise wide customer relations management software. We're investing in internal training. So there's some catch up investments we need to make last year and this year and I would expect 2014 is one when we would really start to realize the benefits of those investments but also when we wouldn't have to make them at that level. Mark Schappo - Benchmark: And on the gross margin front, do you see that returning back to the low 30s range any time soon?

This year is going to be difficult because of that huge slug of Slovakian revenue that we have. As you may recall we booked a very large change order in the fourth quarter. We have about $11 million total revenue that we're going to generate from that project this year. Approximately $5 million of that is equipment. And with the orders being off, what we're facing this quarter as well as last quarters, orders that we had expected to be in and have not come off the table, they're still out there and we expect to win our fair share, we're missing on the other revenue streams, which would lift the gross margin percentage. So until we are able to book those orders and start executing them, that project is going to weigh on our gross margin line. However on the flip side that project completes this year and so right now we don't see any other large orders with large amounts of equipment in our backlog or in our orders forecast. Mark Schappo - Benchmark: Okay great, and then I was surprised to see the decline in your cost of simulation business, other than a focus of the company investing your plus year. Could you just maybe talk about that a little more?

Sure, it is the focus and we continue to focus internally on it through our public relations work as well as our people and their time. Quite honestly some of the jobs, there was a real lull in activity. We have seen bidding proposal activity pick up in that space. There is as you may have heard similar, Jeff was mentioning, I am sure you keep track of is one obviously if you look at the U.S., it’s very different, very regional situation when you are dealing with any of our segments. But in the U.S. we have no clear energy policy. Coal is essentially on a hold and a lot of the projects that they were switching; either switching from coal to natural gas or deciding to have natural gas, there just had been a lull in activity. We do see as I mentioned some of that activity picking up. In other parts of the world, I think what we see is pressure from the global economic condition, large capital jobs are certainly not accelerating. They tend to push off in these kind of times. You have recession in Europe. We have very modest growth here in the U.S., which weighs on China. So the three largest target continent markets for us, there is a softening in the economy. So energy demand is not up as predicted in a short term, but as I mentioned we believe it is inevitable on a long term basis. So core operating these, we believe remains sound. We are just in a soft patch. Mark Schappo - Benchmark: Okay great, then finally what was that nuclear – non-nuclear revenue mix for the quarter?

It was 63% nuclear revenue for the first quarter.

So it creeped up a little more and a lot of that you can attribute to a larger chunk of those Slovakian revenue in the first quarter.

(Operator Instructions). And gentlemen it appears that we have no further questions at this time. Any additional comments?

Yes, thanks to all of you again for your time, continued interest in GSE systems. I'd also like to thank all the hardworking women and men in GSE that work hard for us every day and we hope to see some of you at the second annual Marcum Micro Cap Conference in New York. We will be presenting on Thursday, May 30th at 10 a.m.

Thank you. Ladies and gentlemen, this does conclude today teleconference. You may disconnect your lines at this time. Thank you for your participation.