Kyle Loudermilk - President and Chief Executive Officer Emmett Pepe - Chief Financial Officer Chris Sorrells - Chief Operating Officer Kalle Ahl - The Equity Group, IR

Greetings and welcome to GSE Systems, Inc. Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Kalle Ahl from The Equity Group. Thank you. Kalle, you now have the floor.

Thank you, Chris 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 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 cause 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 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. On this call, management may refer to EBITDA and adjusted EBITDA, adjusted net income and adjusted EPS, which are not measures of financial performance under generally accepted accounting principles or GAAP. Management believes EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS in addition to operating profit, net income and 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 results for any particular period. Investors should recognize that EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS might not be comparable to similarly titled measures of other companies. This 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 EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS to the most directly comparable GAAP measures in accordance with SEC Regulation G can be found in the company’s earnings release and on its Web site. I’d now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Please go ahead, Kyle.

Thanks, Kalle, and good afternoon. I’d like to welcome everyone to GSE Systems’ second quarter 2016 earnings conference call. Also on today's call are Chris Sorrells, who has assumed the Chief Operating Officer position on a permanent basis, and Emmett Pepe, our new CFO. Earlier today, we issued a press release covering our second quarter 2016 financial results. Hopefully, you had a chance to review this news release but if you have not, a copy can be found on our Web site at www.gses.com under the Investor Relations section. I am excited that Chris as agreed to join us on a permanent roll. He has been instrumental in helping to execute the turnaround at GSE over the past year. Chris is a valued member of our senior leadership team and will continue in this role of helping us drive corporate best practices for our operation, continue to advance our corporate growth strategy including organic and M&A activities, liaise with investors, [management team] [ph] as well and continue to monetize GSE. Today we reported our fourth consecutive quarter of positive EBITDA. Our operating performance significantly improved over the prior year, primarily due to our efforts to reduce cost and focus on project profitability. Emmett will provide a recap of our second quarter financial results later in the call. Our quarter end backlog stood at $71.1 million, near GSE's all time high compared to $47.9 million at the end of 2015, driven by the large contract for full scope simulators we won in March 2016. This major contract involved designing, engineering and delivering three full scope simulator systems to one of our long-standing nuclear power clients. If you recall, this is one of the larger contracts to come up for bid in the North American market in recent years. Our work has commenced according to plans and we expect revenues to significantly ramp starting in the third and fourth quarters. We are acting as prime on this contract which makes GSE responsible for ordering and assembling hardware. This will result in lower gross margin than our typical margin for our process improvement segment but offers us a tremendous opportunity to express our highly differentiated technology and technical engineering capabilities while creatively exploring opportunities to improve margins. So far the project is advancing as planned and our team is working diligently to deliver an outstanding solution to the customer and delight them in the process. We will continue to pursue a number of new business development initiatives to strengthen our backlog further. Globally, we are seeing the greatest activity in the United States followed by our international division focused on the U.K., China, Korea as well as Japan as the country restarts their nuclear reactors. On that note, The Institute of Energy Economics, Japan, or IEEJ, recently estimated that seven nuclear power reactors are likely to recommence operations by the end of March 2017 and a total of 19 reactors are expected to restart in Japan by March 2018. While judicial rulings and local concerns will influence the ultimate pace of restarts, the general trend appears to be heading in a favorable direction for our industry. Positive industry developments are unfolding domestically here in the United States as well, driven by the ongoing push for carbon-free energy. For example, earlier this month, New York Public Service Commission established subsidies totaling $500 million per year to keep upstate New York nuclear power plants operating. This effort is part of the state's broader clean energy policy which mandates that half of New York state's electricity comes from carbon-free sources such as nuclear energy by 2030. The subsidies will commence starting in 2017. It's possible other states will follow this precedent, not dissimilar to the trend we witnessed with the growth of the renewable portfolio standard which provides generous subsidies to the wind and solar industries. Also this summer, the U.S. Department of Energy released a report with favorable implications for the longer-term health of the nuclear industry. In particular, the DoE released draft plans to double Americas nuclear power capacity, in part through the development of advanced reactors that do not rely on water cooling. The DoE's report, draft vision and strategy for the development and deployment of advanced reactors calls for two advanced reactor concepts to be licensed with construction contemplated in the early 2030s. The DoE's vision for a greater mix of energy from advanced reactors, harmonizes well with the U.S.' goal of reducing carbon emissions by roughly one-third by 2030. We will continue to build out our team for the significant near and long-term growth opportunities we see ahead of us. In July, we announced the appointment of Emmett Pepe as our new CFO. Emmett brings to GSE 30 years of experience in finance management, most recently at MicroStrategy, where we served as the Senior Vice President, Finance and Worldwide Controller. Emmett has hit the ground running and we are already benefitting from his global software industry experience and expertise in financial reporting, internal controls and process improvements. Last week we also announced the appointment of Jim Stanker to our board of directors and audit committee. Jim brings to GSE's board more than 30 years of strategic audit experience and financial leadership with multinational corporations in the technology, manufacturing and commercial product industry. Most recently, he completed a 16 year career at Grant Thornton. With Jim's addition our board has increased to seven directors including five independent members. Please join me in welcoming both Emmett and Jim to our team. In summary, over the past 12 months, we have significantly improved GSE's cost structure, streamlined our operations and filled critical leadership positions to revitalize growth. Backlog has increased materially since the start of the year and following a string of more than three years of quarterly losses, we have reported four consecutive quarters of positive adjusted EBITDA. I now would like to turn the call over to Chris Sorrells, our permanent COO, who will provide some additional color on our accomplishments over the past year and an update on our strategy and initiatives to revitalize GSE's growth. Chris, please go ahead.

Thanks, Kyle. To begin, I would like to share some color on my decision to become GSE's permanent COO. I am removing interim from my title primarily because of the unique opportunity I see at GSE to create a leading supplier of advanced modeling software, training and model-based engineering solutions to the power and process industries. I believe this opportunity can generate an asymmetrical risk-reward scenario for both shareholders and employees, given the high barrier to entry markets that we serve, the highly skilled technical staff of our company and the quality of the leadership team we have assembled. I believe we can grow GSE via organic growth as well as M&A. The next two years are about testing our thesis and optimizing our core business. The new leadership team has had a busy and productive first year since joining last August. Highlights from an operational and organizational accomplishment include the following. We have reduced operating expenses by over $4 million on an annualized basis, within our first 60 days on the job, which has resulted in our fourth straight quarter of positive adjusted EBITDA. We have grown orders by 70% to $40.5 million in the six months ended June 30, 2016 as compared to $23.9 million in the first six months of June 30, 2015. We have reduced trade receivables outstanding from more than 90 days, net of the bad debt reserve to approximately $900,000, as compared to $2.1 million at June 30, 2015. We have hired a deep bench of experienced senior technology and finance leaders, we have rebuilt our R&D group and created a technology roadmap for our core products, we have created a culture of accountability via KPIs and personnel goals for our employees and leadership team. We have improved our utilization rates for billable employees, we have conducted a review for all key functions with the organization including sales, services and finance, that includes back office controls, insurance, benefits, banking and suppliers. We have enhanced our board of directors and we have commenced the implementation of an employee stock compensation plan to align shareholders with employees. Our stock has appreciated approximately 70% since last August. I believe this in part reflects our progress to date. While we have stabilized the business, we still have more to do. The next phase of our strategic plan centers on revitalizing GSE's growth. As I communicated on our last call, we are in the process of clearly defining and executing a three to five-year growth plan that is compelling to customers, employees and shareholders. We expect to have an investor presentation [reading] [ph] in September which will help us share more broadly the very exciting story that is underway at GSE. Philosophically, we will continue to be extremely careful on our capital allocation decisions and will only deploy our cash in a selected and disciplined manner. Regarding potential acquisitions, the main criteria that will guide us during the evaluation process include, earnings accretion, strong business fundamentals, strategic fit, potential for synergies, ease of integration. As mentioned on the last call, we have built a robust pipeline of potential acquisition targets both in software, training, consulting and staffing. To give you an idea, our internal M&A database includes information accumulated on more than 110 acquisition candidates, up from 75 in the first quarter. So there is reasonable depth to potential deal flow and now the task at hand around corporate development is to advance our growth thesis through M&A and do so at market based terms and conditions while being accretive. We are active in the process and are looking at potential deals. This is exciting but will take time to find the right business and [hopeful] [ph] fit at the right price. But rest assured, we are going to be diligent and thoughtful to conduct successful transactions and not just any old deal. Now I would like to welcome Emmett Pepe, our new CFO, who will review the second quarter financial results.

Thank you, Chris. I am thrilled to be part of GSE's team and see a significant growth and value creation opportunity in front of us. I will begin with a review of backlog and new business. As Kyle mentioned, we ended the quarter with near record backlog of $71.1 million, up 48% from backlog of $49.7 million at December 31, 2015. Our backlog at the end of Q2 2016 includes $64.7 million of performance improvement solutions backlog and $6.4 million of nuclear industry training and consulting backlog. In Q2 2016, our performance improvement solutions bookings totaled $5.8 million compared to $12.7 million in Q1 of 2015 with orders across multiple sectors and multiple geographies. As far as we can tell, there are no particular reasons for the year-over-year decline other than the timing of business. Our pipeline remains strong. With new performance improvement solutions contracts in the Q2 2016 included $3.2 million for simulator upgrades and services in the nuclear power market, $1.5 million for new full scope simulators and other projects in the fossil power market, and $600,000 for various tutorials and simulators for customers in the oil and gas industry, and $500,000 for miscellaneous engineering services and training projects. Nuclear industry training and consulting orders totaled $3.4 million in Q2 2016 compared to $6.1 million in Q2 2015. Now on to a review of our financial results for the second quarter. Total revenue for Q2 2016 was $12.4 million compared to $13.7 million in Q2 of 2015. Performance improvement solutions revenue increased 1% to $8.3 million in Q2 2016 from $8.2 million in Q1 2015. Nuclear industry training and consulting revenue was $4.1 million in Q2 2016 compared to $5.4 million in Q2 2015, reflecting our strategy to limit ourselves focused to projects that generate higher margins. Gross profit in Q2 2016 was $3.6 million or approximately 20% odd of revenue, up from $2.9 million or 21% of revenue in Q2 2015. Performance improvement solutions gross profit increased 27% to $2.9 million or 35% of revenue in Q2 2016 from $2.3 million or 28% of revenue in Q2 2015. The 700 basis point increase in gross margin mainly reflected a decrease in allocated overhead cost from $2.4 million in Q2 2015 to $1.7 million in Q2 2016. The decline in overhead costs mainly reflects a reduction in operations personnel in conjunction with the company's 2015 restructuring. Nuclear industry training and consulting gross profit increased 10% to approximately $649,000, or approximately 16% of revenue in Q2 2016, from $590,000 or 11% of revenue in Q2 2015. The gross margin improvement primarily reflects our strategy to focus on sales of higher margin projects. SG&A in Q2 2016 declined 27% to $2.9 million from $4 million in Q2 2015. SG&A was lower in Q2 2016 primarily due to the beneficial impact of our companywide cost reduction program, partially offset by the following items. $63,000 increase in audit, tax and legal costs, $246,000 increase in accrued employee bonuses tied to achievement of year-end 2016 audited financial metrics. Operating income for Q2 2016 was $227,000 compared to an operating loss of $1.4 million in Q2 2015. Pretax income for Q2 2016 was $219,000 compared to a pretax loss of $1.4 million in Q2 2015. Provision for income taxes was $108,000 in Q2 2016 and $73,000 in Q2 2015. Net income for Q2 2016 was $111,000 or $0.01 per basic and diluted share compared to a net loss of $1.5 million or loss of $0.08 per basic and diluted share in Q2 2015. Non-GAAP adjusted net income for Q2 2016 excluding the impact of restructuring charges, loss on derivative instruments and stock-based compensation expense, increased to $900,000 or $0.05 per basic and diluted share from $800,000 or a loss of $0.05 per basic and diluted share in Q2 of 2015. EBITDA, earnings before interest, tax, depreciation and amortization for Q2 2016 improved to $400,000 from an EBITDA loss of $1.2 million in Q2 of 2015. Excluding gains from the impact of restructuring charges, loss on derivative instruments and stock-based compensation expense, non-GAAP adjusted EBITDA in Q2 2016 increased to $1.1 million from non-GAAP adjusted EBITDA loss of $500,000 in Q2 2015. 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. At the end of the first quarter, we had no long term debt and working capital of $10.7 million. I will now turn the conversation back to Kyle.

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

[Operator Instructions] There are no further questions at this time. I will turn the call back over to Mr. Loudermilk for any closing remarks.

Well, thanks everyone for joining us. I hope I get a chance to meet and speak with many of you in the coming months. Thank you again for your time and interest in GSE.

Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.