Kalle Ahl - The Equity Group Kyle Loudermilk - President and CEO Chris Sorrells - COO Emmett Pepe - CFO

Greetings and welcome to the GSE Systems, Inc. First Quarter 2017 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. It is now my pleasure to introduce your host, Mr. Kalle Ahl of The Equity Group. Thank you Ahl, you may begin.

Thank you Tim, 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 result of new information, future events, or otherwise. On this call, management may refer to EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, which are not measures of financial performance under generally accepted accounting principles or GAAP. Management believes that these non-GAAP figures in addition to other GAAP measures provide meaningful supplemental information regarding the Companies operational performance. Management uses these non-GAAP measures to evaluate the performance of GSE’s business and to make certain operating decisions such as budgeting planning, employee compensation, and resource allocation. This information facilitates management’s internal comparisons to GSE’s historical operating results as well as for the operating results of its competitors. Since management finds these measures useful GSE believes that investors may benefit by evaluating both non-GAAP and GAAP results. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. 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 measures to their most directly comparable GAAP measures in accordance with Regulation G of the SEC can be found in the Company’s earnings release. I’d now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Kyle, please go ahead.

Thanks Kelly and good afternoon. I’d like to welcome everyone to GSE Systems first quarter 2017 earnings conference call. Also on today's call are Chris Sorrells, our Chief Operating Officer and Emmett Pepe, our Chief Financial Officer. Earlier today we issued a press release covering our first quarter 2017 financial results. Hopefully you've had 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 News section. During the first quarter of 2017, we delivered 26% year-over-year revenue growth and adjusted EBITDA of $0.8 million. GSE’s quarterly revenue reached 16.3 million, our highest total in over a decade. Our top line growth led to our seventh consecutive quarter with positive adjusted EBITDA, a huge accomplishment for our team as we retool and refocus GSE. We’re thrilled with the traction our sales team continue to gain in our key markets this quarter with new orders topping 19.8 million, this is the second highest quarterly order total in over seven years. We are pleased with the performance of our nuclear industry training and consulting segment which won orders totaling of 14.9 million, a quarterly record. The increase in orders in this segment reflects GSE’s unique capabilities to service the requirements of the nuclear power industry and confirms that our value added services are of critical importance to the industry. In addition to our success booking orders, we achieved the highest quarterly revenue and gross profit in the history of the segment. The increase in gross profit demonstrates that we can operate this business effectively while growing it. We hope to significantly expand our nuclear industry training and consulting segment over the next 12 to 18 months. Given our new business success, GSE’s backlog remained at a near record level of 79.6 million, up from 73.2 million at the end of 2016. Total backlog consisted of 67 million of performance improvement solutions backlog 12.6 million of nuclear industry training and consulting backlog. We anticipate another year of profitable growth in 2017. In addition to our organic initiatives, we are evaluating select inorganic opportunities that would serve as terrific catalyst for enhanced growth. With approximately 23 million of cash and zero debt on the balance sheet, we're well positioned to create value for our shareholders through our corporate development activities. Chris Sorrells will provide an update on M&A efforts a little later in this call. We continue to deliver on our significant projects in our performance improvement solutions segment, in particular, we're making great progress on the delivery of three full scope simulators for a large Southern utility customer. We’re working very well with the customer, utilizing our project management expertise to keep the project moving on time, while meeting the highest quality standards and applying our unique know how to drive what we anticipate will be incrementally higher margins for the project. We're very excited to see this moving along as it is. The Westinghouse bankruptcy announced on March 29 is having a ripple effect throughout the nuclear industry ecosystem. Having been partnered with Westinghouse for many years, we have a great track record of delivering technology and services to Westinghouse and their customers. This has been a mutually beneficial relationship with significant revenue for GSE over the years. We believe that Westinghouse’s bankruptcy and reorganization will be non-disruptive to our business. And while we remain confident in our ability to be paid for ongoing projects, we are actively managing everything that is in our control to mitigate any negative impact. Finally, we are excited to have Jack Fuller as a candidate for election as an Independent Director of GSE's board. In July 2011, Mr. Fuller retired as Chairman of the Board of GE Hitachi Nuclear Energy, a global alliance that is headquartered in Wilmington, North Carolina. Mr. Fuller has over 15 years in the nuclear industry serving in senior leadership positions covering new power plant development, nuclear services, fuels, enrichment, and related nuclear technologies. He previously served as President and CEO of the GE Hitachi Alliance, CEO of the Global Nuclear Fuels and as the CFO for the nuclear business of GE Electric Company. In this 38 plus year career, Mr. Fuller held senior leadership assignments in general management, business development, strategic planning, finance, product development and plant operations. We anticipate Mr. Fuller election at our upcoming shareholders in June and this addition further enhances the GSE team as we move forward. In summary, we believe the long-term industry dynamics remain in our favor and we are focused on growing revenue in 2017 by executing operationally on our backlog, driving organic sales, and effectuating our corporate development strategy. I'll now turn the call over to Chris Sorrells, our COO. Chris, please go ahead.

Thanks Kyle. Before I provide an update on our M&A efforts, I want to address a few recent industry developments and trends. Let me start with some additional color on the Westinghouse bankruptcy. Westinghouse, the US nuclear dealer unit of Japan's Toshiba Corp filed for bankruptcy protection at the end of March. This action is called into question the future of two separate billion dollar nuclear projects under construction by Southern Company and SCANA in the US. The bankruptcy largely had been expected by industry observers and the parties so far are working to keep these critical projects moving forward. Several years ago, GSE was selected by Westinghouse to deliver up to six simulators including two simulators for the two nuclear projects under construction in the US as well as two simulators for China projects. GSE designed, built, shipped and was paid in full by Westinghouse for the two simulators for the US projects as well as two simulators for projects in China. Our current work with Westinghouse is solely focused on maintaining and upgrading the simulators as changes are made to the plants under construction. As Kyle highlighted and I want to reemphasize, we're doing all that we can that is in our control to collect on payments due and manage our work such that we mitigate any further impact. While we are focused on Westinghouse, the impact if something were to go other than expected would be minimal. Westinghouse accounts for less than 5% of our total AR and less than 2% of our backlog. As of this call, Southern Company and SCANA reached interim agreements with Westinghouse to continue construction on the two nuclear plants as Westinghouse works through bankruptcy proceedings. This is good news. Most importantly, I will note that GSE’s overall backlog and sales pipeline remains very strong. We are excited at the fact we continue to see favorable legislative trends unfolding within the industry. Positive momentum continues for recognizing the importance of power generation from nuclear power plants through subsidies. Two states, New York and Illinois now recognize the value of zero carbon emissions from nuclear power. Having adopted subsidies to maintain their fleets and meet clean energy goals. Following suit, legislation has been introduced in Connecticut, a bill will soon be introduced in Ohio and a program is under consideration in New Jersey as those states look to sustain the clean power resulting from their nuclear fleets. Several states are pursuing zero admission credits where plants would receive payments for each unit of carbon free power they produce. Connecticut's proposal was different and would secure power purchase agreements from the v station the state's own nuclear plant. Advocates highlight that the plants provide significant and stable around the clock power generation known as base load without producing carbon dioxide. In addition to the zero emissions benefits of nuclear power, there is near universal recognition that nuclear base load is critical to maintaining a stable grid. Each of the states considering nuclear subsidies have adopted strong renewable portfolio standards with the goal of reducing emissions. The standards require that an increasing portion of electricity come from low carbon sources. When a large nuclear reactor goes offline, regions can see a quantifiable increase in emissions. That occurred in New England after the closure of Vermont Yankee, wind power from natural gas plants filled most of the 640 megawatt gap. So we expect positive momentum to continue in 2017 for the states creating a favorable tailwind for GSE, which we are already observing. On the staffing side of our business, the industry's aging workforce is another favorable tailwind for us. We are seeing growing anecdotal evidence of the industry's aging workforce. For example, in the first quarter 2017, we bid on a master services agreement for a three to five year staff augmentation project for a major utility. The contract award is pending, but services cover engineering, training, maintenance, project, program support et cetera. The utility would typically engage between 600 and 1000 contractors on the program in any point in time. Our independent research revealed that the internal natural attrition rates are astoundingly high in the nuclear industry. They could lose up to 50% of their employees to retirement during this contract term, which is forcing them to turn to contractors or persuade the retirees to come back to work. This is yet another example of why we view the staffing side of the industry as an attractive growth engine. Let me conclude with a brief update on our M&A efforts. We continue to make progress and expand our list of potential acquisition targets across the competitive landscape including software, training, consulting, technical engineering, and staffing companies. Most of which are focused on our core market, the nuclear power industry. We continue to have serious interest in the training and staffing sector focusing on business models that are similar or complementary to our nuclear industry training and consulting segment. We believe the aging workforce and critical industry need for a specialized professional services will be a major catalyst for this business model. Our internal list has risen from 140 companies last quarter to over 150 acquisition candidates with a combined revenue now exceeding 1.5 billion. We're betting this was carefully and have started diligence on a select few. We are active in the corporate development process looking for the right business cultural fit having accretive valuation. With that I'd like to turn it over to Emmett who will review the first quarter financial results.

Thank you, Chris. I'll begin with the review of new business. Our performance improvement solutions segment bookings totaled 4.9 million in Q1 2017 compared to 34.8 million in the first quarter of 2016, with orders across multiple sectors and multiple geographies. The large variance from the prior year is due to the three large full scope simulated orders for a large southern utility customer in Q1 of 2016. New performance improvement solution contracts in the first quarter of 2017 included 2.4 million for simulator upgrades and services in the nuclear power market, 1.2 million for new full scope simulators and other projects in the fossil power market, 1.1 million for various tutorials and simulators for customers in the oil and gas industry and 0.2 million for miscellaneous engineering services and training projects. Nuclear industry training and consulting orders totaled 14.9 in the first quarter 2017 compared to 5.1 in Q1 2016. As Kyle mentioned previously, we have continued to provide key customers in the segment with valuable services that are of critical importance. Moving forward, we are positioned to continue this growth over the next 12 to 18 months. Now on to review our financial results for the first quarter. Total revenue for Q1 2017 increased 26% to 16.3 million from 13 million in Q1 2016. Performance improvement solutions revenue in the first quarter of 2017 rose 9% to 9.7 million from 8.8 million in Q1 2016. Nuclear training and consulting revenue grew 61% to 6.7 million in the first quarter of 2017 from 4.1 million in the first quarter of 2016 reflecting higher staffing demand from a major utility customer. Our top line growth is a direct result of our historical backlog and the improved performance of the nuclear training and consulting segment in the first quarter. Our talented sales team continues to book meaningful orders which will be able to execute on and continue this upward trend, which is evidenced by a near record backlog of 79.6 million. Gross profit in the first quarter of 2017 increased to 4.1 million or approximately 25% of revenue from 3.6 million or approximately 28% of revenue in Q1 of ‘16. Our gross profit percentages decreased slightly due to our three major full scope simulator projects with our major southern utility customer. These large projects have lower margins than what we typically have in this segment, but we're working hard to outperform our projected base case margins and could see some nice upside due to our unique technology and talented engineering staff. However, we expect our margins to revert back to the higher historical levels once these significant projects are completed. SG&A expenses in the first quarter of 2017 totaled 3.6 million or 22% of revenue compared with 2.8 million or 21.2% of revenue in the first quarter of ‘16. Multiple factors contributed to the significant rise in SG&A expenses. Our non-cash stock-based compensation expense grew by 349,000, which continues our commitment to provide incentives that align with the shareholders' interests. Additionally, due to growth in our nuclear training and consulting segment, we saw a $323,000 increase in our estimated earn-out payment for 2017. In Q4 of 2017 we would have completed our earn-out obligation so that line item will not impact SG&A going forward. Lastly, our expenses for professional services increased by 191,000 which reflect a significant investment on our continued improvement of our back office operations. Net loss for the first quarter of 2017 was approximately 266,000 or $0.01 per basic and diluted share compared to net income of approximately 138,000 or $0.01 per basic and diluted share in the first quarter of ‘16. We incurred 116,000 of unrealized losses on derivative instruments which will not result in a cash loss once the hedges reach maturity. These losses relate to the revaluation of unbilled receivables and outstanding hedging contracts. Non-GAAP adjusted net income as defined in our earnings release in the first quarter of 2017 was approximately 629,000 or $0.03 per basic and diluted share compared to approximately $519,000 or $0.03 per basic and diluted share in the first quarter 2016. Non-GAAP adjusted EBITDA as defined in our earnings release was approximately 815,000 in Q1 2017 compared to approximately 753,000 in the first quarter of 2016. In the first quarter of 2017 we generated 1.3 million in operating cash flow. Our cash position at March 31, 2017 totaled 22.8 million compared to 22.9 million at December 31, 2016. We continue to operate with no long-term debt and had working capital 14 million at the end of the first quarter. Our strong cash, our working capital positions as well as our generation of cash via operations will allow us to seek out organic and inorganic opportunities that can provide a significant shareholder value. I'll turn the conversation back to Kyle.

Thanks Emmett, operator please open the floor for questions.

[Operator Instructions] There are no questions at this time over the audio portion of the conference. I’d now like to turn the conference back over to management for closing remarks. : :

This is Kyle, thanks everyone for joining us. In closing, I'd like to say how pleased we are with our progress and reiterate our focus on continued improvement. In the coming months, I hope to get a chance to meet and speak with many of you. Thank you again for your time and interest in GSE.

This concludes today's conference. Thank you for your participation, you may disconnect your lines at this time. Have a wonderful rest of your day.