Devin Sullivan - Senior Vice President Jim Eberle - Chief Executive Officer, Director Jeff Hough - Chief Financial Officer, Senior Vice President, Treasurer, Secretary

Greetings, and welcome to the GSE Systems Inc. Reports Fiscal Year 2014 Fourth Quarter Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devin Sullivan. SVP of the Equity Group Inc. Thank you Devin. You may begin.

Thank you, and good morning, 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 maybe 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. Statements reflect 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 future performance and are subject to risks and uncertainties, and other important factors that could 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 in the Risk Factors section. GSE does not intend to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. With that said, I would now like to turn the call over to Jim Eberle, Chief Executive Officer of GSE Systems. Jim, please go ahead.

Thanks, Devin, and good morning. I would like to welcome everyone to GSE Systems fourth quarter and full year 2014 conference call. Also on today's call is our CFO, Jeff Hough; and Larry Gordon, our Senior Vice President, General Counsel. Earlier today, we issued a press release covering our financial results for the fourth quarter and full year 2014. Hopefully you have got a chance to review this news release, but if you have not, a copy can be found on our website at www.gses.com under the Investor Relations section. I would like to begin with the recap of some of the actions we took in 2014 to address lingering challenges in our nuclear fossil and process and markets. First, we restructured our Swedish operations. In 2014, our Swedish subsidiary generated 2.1 million in revenue, which was a 37.5% decrease in revenue from 2013. The decrease was due in part to fewer orders from Japanese customers in a wake of the Fukushima Daiichi 1 nuclear power plant disaster in 2011, as well as the completion of a large fossil simulation project in 2013. In addition, the overall European market remains weak. Accordingly, our Swedish operations incurred a net loss in 2014 of $1.6 million. Based upon anticipated orders for our Swedish subsidiary in 2015, we have down sized our Swedish operations incurring restructuring costs of $611,000 in 2014. We invested in new management and business development personnel for our process simulation business, which includes our portfolio of EnVision and Jpro products and services, and spent approximately $676,000 on product development in 2014. In 2014, 14% of the company's revenue approximately $5 million came from process industry customers. We will continue to invest in this high potential business in 2015, and we will be releasing a new suite of EnVision liquid natural gas computer-based training and simulation models. Finally, we made a significant acquisition and related investment. In the fourth quarter, we acquired Hyperspring and purchased a 50% interest in IntelliQlik. These transactions will further diversify our revenue base and provide GSE with two new growth platforms. Hyperspring Staff Augmentation business contributed $2.3 million to our fourth quarter 2014 revenue for services provided after the date of its acquisition on November 14, 2014. Hyperspring's historic gross margin approximates 10%. In 2015, we see a significant opportunity to expand Hyperspring U.S. and international nuclear customer base while diversifying into the fossil power and process industries. Additionally, Hyperspring's U.S. customer base are utilities that we were not traditionally customers of GSE, and vice-versa. In fact, we are currently pursuing opportunities arising from the synergy gain due to the acquisition. IntelliQlik is developing a next-generation cloud-based software platform for online learning and learning management for all energy sectors. We expect IntelliQlik's platforms to launch in late 2015, and believe we will fill a significant unmet needs to web-based learning and training in the energy sector. To assist our clients in creating world-class internal training and performance improvement programs. We are building and E to E, entry-to-expert performance solution. The solution includes a set of integrated scalable products and services that provide a structured training program for employee selection and on-boarding through continuous skills improvements for experienced employees. Hyperspring acquisition and IntelliQlik training platform has increased a breadth of solutions we have within our E to E program. As a result of our progress, we believe that GSE finished 2014 in a much stronger position compared to the start of the year. Now onto some perspectives on the fourth quarter, as you can see, we dramatically improved our financial performance from the prior three quarters, Excluding one-time non-cash expenses; we are essentially breakeven for the quarter. In the fourth quarter, U.S. fossil fuel power utilities continued to delay capital expenditures and some are shutting down this coal-fired plants or converting them to gas-fired platforms - include sort of de-filteratization systems. Overall domestic fossil fuels simulation revenue decreased slightly to $5.6 million in 2014 from $5.7 million in 2013. However, our revenue generated from domestic fossil fuel simulation program increased year-over-year by $1.4 million to $2.6 million in the fourth quarter of 2014, primarily reflecting a large contract from the U.S. utility for new review of the opportunities [ph] before power plants. Overall, our combination of fossil pipeline and backlog is at near historic highs. In the nuclear power space, we continue to see most operators on the sidelines they are changing energy industry landscape with the managed structure of the Chinese. We believe in industry data supports the position that nuclear power remain a part of the energy mix as we feel the climate change and search for low carbon free source of energy production. On their increasing, deal with the country's critical air pollution problem, Chinese have articulated ongoing commitments to nuclear energy. Also, in our post-Fukushima era, we anticipate our first in evident award in Japan this year. We have been positioning GSE for expanded in China. In that regard, our wholly-owned Chinese subsidiary recently received ISO-9001-2008 certification for simulation engineering, design and consultation services for the energy industries. This certification confirms our commitment to building and delivering high quality staff and plant performance simulations. Besides China, we are seeing targeting growth opportunities and other rapidly growing, emerging with increasing power demand across the middle east and all of Asia. With respect to backlog and new business. we ended the year with $48.4 million impact 6%, up 6% from the backlog of $45.7 million at the end of the third quarter 2014. Year end 2014 backlog include $6.7 million of Hyperspring backlog. We expect approximately two-thirds of or year-end backlog to convert to revenue in 2015. Excluding Hyperspring, we booked $7.5 million of new business orders across all of our sectors in multiple geographies in the fourth quarter 2014. In comparison, we booked new orders totaling $17.6 million in the third quarter 2014, $9.6 million in the second quarter of 2014 and $6.3 million in the first quarter of 2014, so far in the first quarter 2015; we have booked in excess of 7.5 million. New contracts in the fourth quarter of 2014 included $3 million for simulator upgrades and services and the nuclear power market, $1.5 million for new full scope simulators and other projects and fossil power market, $1 million for various tutorials and simulators for customers in the oil and gas industry and $2 million for miscellaneous engineering services, training and 3D visualization projects. We continue to see a substantial market for Immersive 3D gaming technology for training purposes, and for our engineering segments technology to design scenarios that operators to identify and correct problems before constructions of new plans mitigating risk, saving time and money. In 2015, we will continue to invest in software development with the goal of developing new and enhanced products for our clients and driving new business. Finally, our balance sheet remains strong even after quarter our fourth quarter acquisition Hyperspring and investment in IntelliQlik, as of December 31, 2014, we had $13.6 million in unrestricted cash, working capital of $11.5 million and no long-term debt, providing us with flexibility to invest selectively in additional growth opportunities as they arise. I will now turn the conversation over to Jeff Hough to review our results for the fourth [ph]

Thanks Jim, and thanks to each of you for joining us today. I would like to point out that as a result of our acquisition of Hyperspring, we are now reporting selected financial results for two business segments, Staff Augmentation, which provides personnel to fulfill staff positions on a short-term basis to energy industry customers and Performance Improvement Solutions, which provides simulation, engineering and training solutions and services to the nuclear fossil fuel power industry to the chemical and petrochemical industries. Hyperspring's results are included in the Staff Augmentation segment. I also want to remind everyone that Hyperspring's results are included in our fourth quarter results only from the date of its acquisition, November 14, 2014 onward. First quarter 2015 will represent the first full quarter of contribution from Hyperspring. Total revenue for the fourth quarter 2014 increased by 6.9% to $13.1 million from $12.3 million in the fourth quarter of 2013, driven by $2.3 million of incremental Staff Augmentation revenue from Hyperspring, which more than offset a $1.4 million decline in Performance Improvement Solutions revenue. The decline in the Performance Improvement Solutions revenue was attributed to $2.5 million decrease in revenue from the $36.6 million Slovakia simulator project, which ended in April 2014. However, revenue generated from domestic fossil fuel simulation projects increased by 1.4 million in the fourth quarter 2014 as compared to the fourth quarter 2013, mainly due to a large contract received from U.S. utility for new high-fidelity operator training simulators at power plants. Gross profit in the fourth quarter 2014 increased to $4.1 million from $3.6 million in the fourth quarter 2013. Our Staff Augmentation gross profit was $0.2 million or 9.8% of the revenue in the fourth quarter 2014. Performance Improvement Solutions gross profit was $3.9 million or 35.3% of revenue in the fourth quarter of 2014. As a percentage of revenue, consolidated gross profit improved to 30.9% from 29.5% in last year's fourth quarter, primarily reflecting a decrease in the revenue from the Slovakia contract, which generated lower than average gross margin. Our selling, general and administrative expenses in the fourth quarter 2014 was $4.7 million, up from $3.9 million in the fourth quarter 2013. Our SG&A was higher in the fourth quarter 2014, mainly due to three items, $466,000 of increased software product development expenses, $382,000 of severance costs related to our U.S. operations and $157,000 of Hyperspring acquisitions expenses. Our operating loss for the fourth quarter 2014 was $912,000 compared to an operating loss of $492,000 in the fourth quarter of 2013. Gain on derivatives were $31,000 in the fourth quarter 2014 compared to a gain of $486,000 in the fourth quarter 2013. Our provision for income tax was $4,000 in the fourth quarter 2014, compared to $169,000 in the fourth quarter of 2013. The net loss for the fourth quarter 2014 was $837,000 or $0.05 per basic and diluted share compared to a net loss of $162,000 or $0.01 per basic and diluted share in the fourth quarter 2013. The net loss in the fourth quarter 2014 include $0.5 million of pre-tax charges relating to restructuring expenses and Hyperspring acquisition costs. EBITDA loss, earnings before interest and taxes depreciation and amortization for the fourth quarter 2014 was 656,000, compared to EBITDA of 175,000 in the fourth quarter 2013. GSE's cash position at December 31, 2014 was $13.6 million excluding $4.2 million of restricted cash as compared to cash and equivalents $16 million excluding $4.2 million of restricted cash at September 30, 2014. The decline in GSE's cash position at December 31, 2014, primarily reflects the $3 million payment made by the company to purchase Hyperspring in the fourth quarter 2014. On November 14, 2014 GSE completed the acquisition Hyperspring for an aggregate of $3 million at closing subject to adjustment based on a subsequent determination of the actual working capital of Hyperspring at close. If Hyperspring is successful in renewing their TVA contract for substantially the same scope as currently being provided and add an agreed upon profit margin on or before May 15, 2015, GSE will pay the sellers an additional $1.2 million. In such case, GSE may be required to pay the sellers up to an additional $7.2 million in cash if Hyperspring contain certain EBITDA targets for the three-year period ending November 13, 2017. However, if Hyperspring is not successful in renewing their TVA contract, GSE may still be required to pay the sellers up to an additional $8.4 million in cash if Hyperspring attain certain EBITDA targets for the three-year period ending November 13, 2017. At the end of fourth quarter, we had no long-term debt and working capital $11 5 million. I will now turn the conversation back to Jim.

Thanks, Jeff. I will now ask the operator to open the floor for questions.

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of [indiscernible]. Please go ahead with your question.

Hey, Jim, it is [indiscernible].

Hi, Ron. How are you?

Good. Congrats on the good quarter.

Thank you.

A quick question, we are almost going to the first question. Are you guys going to give us any insight as to how it is going?

As you know, Ron, we do not give guidance, but what I can tell you I see no material degradation from what you saw in the fourth quarter, so I see a continuing trend.

Great. I know it will be tough to answer, but just bonus payment to Hyperspring guys, would you say it is contract or…

They are ahead of initial plans on integration, so right now I would not say that they are on track for the full amount, so it is a sliding scale based on our EBITDA, performance and to kind of give frame up for the investors what kind of performance that they would need to achieve all of that earned out, if only order of $5 million of EBITDA per year or the three years. You talk about over three year period and $15 million of EBITDA contribution to achieve that full earn out now and then it is slide based on performances, but they are ahead of what our initial budget and plan was.

Great, and last piece of my question and then I will give it up. With the current asset mix and product mix, do you feel like the company could achieve profitability in the future or do we need to add more assets in order to get there?

As Jeff mentioned about 57% of our backlog is projected to move into revenue for the year 2015. I do believe that profitability for the year is possible. We do need to win more work to achieve that, so we do have an order forecast that we track very closely, it is set up by course we track it constantly to be honest, so there is a little bit of [rain] track in front of the train, but profitability for the year is possible and some of our budgeted expenses are based upon winning more work. Obviously, we will hire to fulfill additional work. If we do not win the work, we are not going to hire so we won't necessary incur the cost. I will point out that as I highlighted one of our areas of growth that we targeted is the process business, so you do have some spending upfront in order to grow our business in the form of management and business development personnel, but we also have a what I consider a solid strategy in that space, we have got a strong leader leading the charge and put together a strong team so far. We also had some positive results based on that team coming together and we do have some wins in their belt already so but we monitor it constantly, so we are going to try to balance cost with revenue.

Great. Can I sneak one last question in, because it is something that I thought of while we are going through this?

Of course.

Lower energy prices overall, negative, positive or neutral for your business in the next couple of years.

Ron, I would say the two-word answer is it depends. Overall, I would say it is probably neutral, but when there is disruption, there is always opportunity. If you look at our process industry, there is two sides, there is upstream and then downstream and it just kind of ships where who is making the money, so upstream which is not typically where our products and services were aligned is going to suffer, but downstream now is where the any profits going to be made and that is really one of our sweet spots currently. With them scaling back, you can make the argument they are not going to have the internal staff or some of their initial cuts usually are training and travels, so the internal training group which would lead to potential outsourcing and training, which would be write-down or [ph]. To me, these are I know the story we will be trying to tell and sell will be just that. How successful? I cannot, because it is fluid. Overall, oil and gas, as the price of oil goes down it is so different geographically where the energy is coming from and that is one of our stronger suites is that we are quite diversified across all forms of energy and we are very global. Over 50% of our business is done outside of the U.S., so I predicted largely it will be neutral to us with the possibility of an upside.

Great. Thank you.

Sure thing, Ron.

Thank you. [Operator Instructions] Our next question comes from the line of Kyle Krueger with Apollo Capital. Please go ahead with your question.

Yes. Could you talk about your opportunity in the security space, your customers' particularly utilities are increasingly focused on a variety of security threats, talking about operations and software and you are directly involved in some of those areas with your customers. What is your opportunity there?

It is a good question, Kyle. So far there has not been an area of business that we have pursued, however, I will tell you that we have had conversations in recent past relative to cyber security for our customers both, being in the power generation as well as process industry, so we do believe there is an opportunity there and we are working with a partner company to develop a tax strategy, so it is something that I expect we will make some progress on this year.

Can you kind of frame the magnitude of the opportunity and how you are looking at it? I mean, you can throw a lot of these customers. I mean, you have got a great gateway into providing an additional product set and features associated with security. I mean, it seems like you see a natural fit. I mean, how are you looking at the size of the market opportunity and I know you said later in the year, but how significant could it be potentially for GSE?

Well, I think that it could be quite significant, because as you say all of the customers have to grapple with this. There are some very specific regulated requirements for our nuclear customers and that is our area of strength and size so that would be a first logical entry point so and again you are looking at nuclear customers worldwide but additionally on the our process industry customers and that we believe that is a relatively untapped area. So, we will not regulated we know that it is something that our customer is concerned about, so I really cannot speak to size – put a dollar amount on it. It will be our ability to as I say put together the tax strategy with our partner who had core competencies in this area, where we do not natively have core competency, but putting the attack strategy together and then being able to scale with the opportunities that we see. I would say that is a good, one as I mentioned it is a good question. Two, I think it is going to be a good question to ask each quarter to see how we are progressing on that.

Have you disclosed the partner?

No.

Okay. Have you disclosed the partner?

No.

Is the partner, somebody who can be a potential acquisition candidate or if the marriage works on a preliminary basis, that kind of a thing or…

Yes. I mean, they certainly could. We are not at that stage right now, but they certainly it could be an acquisition candidate or even as I think we can even as the strategic partner we could go on her benefit, I am sorry. I answered your question.

Yes. Thanks. Thank you. I appreciate it.

Sure. Thanks, Kyle.

Thank you. Ladies and gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Okay. Just want to thank all of you again for your time and your continued interest in GSE systems. Have a good afternoon.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.