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spk01: Good day and welcome to the GSE Systems Incorporated second quarter of fiscal year 2022 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your questions, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Adam Lowensteiner, VP of LISM Partners. Please go ahead.
spk04: Thank you, Betsy. Good afternoon, everyone, and thank you all for joining us today to review the financial results for GSE Systems for the second quarter ended June 30th, 2022. With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE Systems, and Emmett Pepe, CFO of GSE Systems. 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're encouraged to read GSA's documents and file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward-looking statements and risk factors section. GSC 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, 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 company's operational performance. 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. The reconciliation of non-GAAP measures So the most directly comparable gap measures in accordance with SEC Regulation G can be found in the company's earnings release. With that said, I'd like to now turn the call over to Mr. Kyle Lauterman, President and CEO of GSE Solutions. Kyle, please proceed.
spk05: Thank you, Adam. I'd like to welcome everyone to GSE's second quarter fiscal 2022 financial results conference call. Earlier today, we issued a press release detailing our financial results. Hopefully, you've had a chance to review this news release, but if not, a copy can be found on our website at www.gscs.com under the news section. To lay out the agenda for today's call, I plan on opening my remarks with a fairly lengthy update discussion on the industry, lots going on that's very exciting, and then drill down into our commentary on the quarter's highlights and the status of each of our divisions, including our performance engineering segment, workforce solutions, and our SaaS-based software solutions. Emmet will then give a recap of the financial results and will then open the call to any questions at the end. The macro overview of the energy industry, especially nuclear, continues to be top of mind for policy leaders across the globe. The confluence of the desire to decarbonize the electrical grid in the United States and other Western nations, the acute energy shortages in Western Europe that were unimaginable only a year ago, and an existential need for energy security in regions adjacent to zones of international conflict have all heightened awareness of the essential importance of nuclear power. As a result, nuclear power is being thought of in as favorable a light as at any point in the industry since the nuclear renaissance. Recent developments favor the mid- and long-term outlook for the nuclear power industry. In the United States, there is financial recognition from the federal government that investment is required to extend the lifetime of the existing fleet of nuclear reactors and investment required to produce more power from existing infrastructure. The infrastructure law of late 2021 for the first time allocated funds to recognize the value of the carbon-free baseload produced by the nuclear fleet. Since the law passed, the U.S. Department of Energy, DOE, has held hearings to determine how best to deploy $6 billion in allocated funds. As a result, the Civil Nuclear Credit Program has now been established whereby owners or operators of commercial U.S. reactors can apply for certification to bid on credits to support their continued operations. An application must demonstrate the reactor is projected to close for economic reasons, and that closure will lead to rise in air pollutants and carbon emissions as a result. While it has taken some time to get this program in place, ATLAS monies can now begin to flow to the existing fleet to preserve the asset base. This is good news. In other good news, the industry is excited to learn that Vogel III has been approved for loading nuclear fuel in preparation for being connected to the grid over the ensuing months. This is a huge and exciting milestone for industry, and Southern Nuclear in particular. Vogel IV will come roughly a year later, which is also exciting. Additionally, small modular reactors, or SMRs, continue to make significant strides towards commercialization. Very recently, the Nuclear Regulatory Commission has indicated that it will certify NuScale's SMR reactor for use in the United States. This is a milestone achievement for industry and is the first newly certified commercial reactor in quite some time. NuScale hopes to have the first reactors built at Idaho National Laboratories by the end of the decade. Between now and then, there is a lot of engineering, simulation, and additional work that will be required to facilitate the construction and operation of the plants. Romania and other Eastern European countries have indicated keen interest in procurement of NuScale SMRs. As a long-term partner of NuScale, we are very excited for this progress. Further progress is being made by other advanced reactor technology providers. TerraPower, in partnership with GE Itachi, is actively testing the Kemmerer site in Wyoming to advance the preparation for construction of a sodium fast reactor on the site of a former coal-fired power plant. If all goes as planned, Early construction activities will begin by the end of 2022. Other states are following suit, with the Maryland General Assembly earlier this year passing sweeping emissions reduction targets in the Climate Solutions Now Act, setting incremental goals for reducing greenhouse gas emissions with the ultimate goal of achieving net zero emissions across the state's economy by 2045. As a result, the Maryland Energy Administration is teamed with X Energy and other SMR technology firms to evaluate coal to nuclear replacement opportunities in the state. In other SMR news, Holtec International has applied for a federal loan to advance their plans to build an SMR, possibly targeting the site to be at their existing plant at Oyster Creek in New Jersey. The exciting news here is how they are pitching this new plant, and it is their belief that whichever state hosts this new SMR, it will become a leader in an emerging industry and offer tens of thousands of new high-paying jobs in manufacturing, reactor support services, and nuclear plant operations. Holtec also announced it signed an MOU with Entergy Corporation to evaluate the feasibility of deploying one or more of Holtec's SMRs on one of its existing fossil sites. This, too, is a major trend to follow as more fossil fuel sites are being shuttered. They are prime real estate for an SMR as they already have lots of infrastructure on site and land is already approved for a power plant. These are exciting advancements in the nuclear industry, and many in the industry are starting to envision the market opportunity for SMRs. While estimating market size is a bit premature, utilities are already planning for the future and building models for the future power demands and the capabilities of producing it in a clean, responsible manner via SMRs. A recent article in the Associated Press cited utilities that are members of the nuclear energy industry, NEI. are estimating that they could potentially add 90 gigawatts of nuclear power combined to the U.S. grid, with the bulk of that coming online by 2050, according to the association. That translates to about 300 new small modular reactors, estimates Maria Korsnick, President and Chief Executive Officer of NEI, stated. I share this data as it shows the seriousness that utilities are taking to deliver necessary power and the potential market opportunity that exists for GSE as a result to offer its simulation technologies, engineering services, and more, which will be required for each site and built in advance of the commissioning of any SMR in order to train future plant employees. All this points to the fact that the United States is in the very early stages of a robust program to extend the lifetime of the existing nuclear fleet infrastructure while preparing to build out a portfolio of inherently safe small modular reactors to help drive towards zero carbon goals while achieving greater energy reliability and security for the nation. Net-net, it continues to become more and more apparent that to effectively get to certain decarbonization levels, energy security and reliability goals, nations need to embrace nuclear, not dismiss it. The fact that nuclear can produce sustainable, consistent carbon-free energy is no surprise. It is no surprise, therefore, that the industry is in the very early stages of a significant comeback. While not all countries will be on board, many nations recognize that nuclear is here to stay and is a linchpin to solving the decarbonization puzzle. These trends bode well for the industry as a whole. While there are still a lot of politics involved in keeping existing sites up and running as well as getting new ones commissioned sooner, the overall need for nuclear isn't going away. In fact, even as countries are trying to avoid fossil fuels, LNG is also in high demand given its clean burning capabilities versus other fuels like oil and coal. While GFC is aligned mostly with the nuclear industry, many of our customers are involved in fossil fuels specifically LNG, and we are leveraging our services where we can to help drive the progress of LNG expansion. That said, the nuclear industry is currently at an interesting crossroads of sorts. For many reasons that I just mentioned, the near term is focused on preserving current facilities to bridge the industry into the future, which includes the major push to introduce newer facilities like SMRs. Given this crossroads, Heavy investment in current facilities are going to be needed in order to bridge the gap, extend the lifetime of the existing fleet until SMRs are commissioned to pick up the slack. The good news is that GSE is involved across the spectrum, but at times, customers are reluctant to invest in their nuclear facilities, which can be costly, especially in the absence of a robust and clear energy policy from the government. At times, the absence of a robust energy policy is a challenge to our customers when it comes to planning for capital investment. leading to periodic pauses in maintenance and upgrade work, which I'll discuss later in my remarks. That said, government officials, especially in the United States, are recognizing the high value proposition its nuclear fleet delivers, clean and consistent energy. For instance, the Diablo Cadmium nuclear power plant in Avila Beach, California, which provides the state with 10% of its electricity, is slated to be closed in 2025. But recently, Governor Gavin Newsom has now proposed extending the plant lifetime to help bridge the gap to California's dream of being net zero carbon. Senator Dianne Feinstein, who originally supported closing the plant, has changed her mind and expressed so in a recent essay in the Sacramento Bee that states Diablo must keep operating, at least for the time being, in order to meet clean energy goals while addressing power demands stemming from climate changes. A new study last year by Stanford University and the Massachusetts Institute of Technology found that keeping Diablo Canyon open for 10 more years could reduce the California power industry's carbon emissions by more than 10% from 2017 levels and reduce the reliance on natural gas. It could also save $2.6 billion in electricity costs and help prevent drownouts, something that California is all too familiar with. A recent article in the Wall Street Journal cited this study and highlighted this change of heart among politicians. finding a bipartisan understanding that to obtain net zero goals, nuclear has to be a significant part of that solution, both in the near term by keeping existing plants up and running, and in the long term to develop newer facilities like SMRs, which have a smaller footprint, are inherently safe, use newer technologies, can be built quicker and carry a lower price tag than traditional plants. As I mentioned earlier in the call, the Biden administration has placed a nice down payment within the bipartisan infrastructure bill that was passed last November, the $6 billion in funds to assist the current nuclear fleet and investment for newer technologies. More assistance is on the way, as included in the proposed Inflation Reduction Act by Senators Manchin and Sumer, potentially to be signed into law as early as tomorrow. And the nuclear industry would receive roughly $30 billion in tax credits, which would incentivize many nuclear power plant operators to keep their facilities going for many years to come, produce more power from those facilities, and bridge the technology gap until SMRs are commercialized. Proving out that nuclear is a viable long-term energy source isn't just limited to the United States. In Europe, the EU Parliament in early July backed EU rules labeling investments in gas and nuclear power plants as climate-friendly. This was a huge landmark win for the energy industry, especially nuclear, as some in the world have considered it a green solution given waste disposal concerns. These new roles in the EU now let new investment decisions on new facilities be created and move forward, knowing that such investments will be considered as green projects. While these roles were highly debated and lobbied, it is also a great win for the industry around the world, as the EU is a leader in seeking decarbonization, but it's also recognizing that these goals can't be achieved without including nuclear. Now that this decision has been made, it will be a smoother facilitation of new nuclear projects. In the United Kingdom, They have pivoted to embrace nuclear for its consistent and clean energy output. Recently, the UK approved development consent to the Sizewell C nuclear power plant in Suffolk, which will be built next to the existing Sizewell B plant. Once Sizewell C is up and running, it will be able to power approximately 6 million homes. The decision was welcomed by Tom Gryotrek, CEO of UK's Nuclear Industry Association, who stated, quote, this is a huge step forward for Britain's energy security and net zero ambitions. Sizewell Sea will provide reliable low-carbon power for more than 80 years, cutting gas use, creating thousands of high-quality skilled jobs, and long-term investment and opportunity up and down the country. Sizewell Sea will be one of the UK's largest ever green energy projects, and this decision significantly strengthens the pipeline of new nuclear power capacity in Britain." Moving to Asia, nuclear is also embraced and seeing a major resurgence given tighter energy supplies. The Prime Minister of Japan recently requested his government to restart as many as nine nuclear reactors by this winter to help avoid a possible shortage of power. Ten of Japan's 33 operable nuclear reactors have been restarted under post-Fukushima safety rules, though some are offline for maintenance. A further seven units have been cleared by the nation's nuclear regulator to resume operations, but haven't yet restarted due to the required upgrades or lack of local support politically. South Korea's government recently announced it will restart construction of two nuclear reactors and extend the life of those already in operation. As South Korea has one of the world's most fossil fuel-reliant economies, its energy ministry has stated that it would like nuclear to be at least 30% of its country's power generation by 2030. And with a new president in office, South Korea's nuclear industry is slated for a strong resurgence. All of this commentary makes abundantly clear there's tremendous and broad positive momentum for the nuclear power industry. Energy security, zero carbon grid, and scalable sustainable growth of zero carbon is top of mind across the world. And as a provider of specialized services and technology to industry, GSE is extraordinarily well positioned to capitalize on these trends. Now, let's dive into some of the key events GSE experienced in the second quarter. Overall, the second quarter produced solid results, whereby we were working through the flurry of orders received in the back half of 2021. Carrying us in the quarter was Performance Engineering Division, while we were working to improve our Workforce Solutions Division. I'll get to each division in a moment, but for now I want to express that we were pleased with the quarterly results given the industry's early summer pause in placing new orders. We did receive some nice orders in the quarter, but they were lower than the first quarter levels, and this is due to a few reasons, including continued academic slowdown in the sector, customers staying focused on producing energy in peak months, while postponing new awards of major maintenance and related projects. The cyclical behavior of a busy end of year for new project awards, followed by a lull in new orders and subsequent quarters, is not new. In fact, we've seen this over the last 24 months, and that business can come in fits and starts, with any delays resulting in a spurt of business like we experienced in the back half of 2021. Also, you know the business is there, and that one sizable order could easily recover prior backlog levels. A major positive and imminent industry dynamic that makes us feel confident about our future in the near term is the new Southern received from the NRC's Greenlight to start loading fuel and commence operations of its Volvo 3 reactor based in Burke County, Georgia. While this project has been long overdue and over budget, it's a major milestone for the industry, and it's the only one out of two nuclear reactor facilities to be constructed and come online in the United States in the past two decades. This is a big deal, and we at GSC are pleased to be diligently working with Southern to get to this point in time. In the coming weeks, the site will be busy with many highly skilled employees to load fuel and conduct startup testing and operations, designed to demonstrate that the plant is ready to operate at 100% and begin to supply electricity to the grid. Focal 3 is expected to enter service in the first quarter of 2023, and Southern is in the midst of completing construction in Unit 4 and expected to have that reactor up and running in the fourth quarter of 2023. As I mentioned earlier, in addition to GSE's involvement in this project, It is monumental news for the good for the nuclear power industry in this country. Before heading a bit more granular, the second quarter continues to show sluggishness through the industry as a whole, but we believe the spending patterns are acting similarly to what we experienced in 2021, and a pause is coming after a very busy second half to the 2021 year. We believe customers took a pause after that surge of spending and are currently very focused on power production, which comes as no surprise given recent energy prices and high demand for energy during a very hot summer. We also note that customers are highly focused on successfully completing the projects that were awarded in late 2021. Clients continue to execute in these projects with us, which has kept our engineers very busy and explains our solid revenue for the quarter. We do believe that order flow should improve as we enter the back half of 2022, as our customers look to further enhance their facilities, ensuring they're getting most out of their facilities and producing more power. The production of peak power and getting reimbursed for that power is something more that we are keenly focused on with our customers, which is why we have enhanced our thermal system monitoring enterprise platform solution. GSE's TSM enterprise software is a web-based thermal system monitoring platform for power generation plants that helps customers improve plant efficiency, save operational resources and money, and increase reliability. The enhanced TSM enterprise platform offers both software technology and expert services that address three areas critical to the overall plant health and performance, including analysis and monitoring of plant parameters for thermal performance optimization, real-time monitoring of critical plant components, and real-time analysis of selected plant components and subsystems using GSE's dynamic simulation library. TSM Enterprise includes a convenient user interface and calculation modules that can be used together to simplify tracking thermal performance in nuclear, fossil, and integrated gas combined cycle plant applications. The modular approach allows plants to select the tools they need, targeting unique operational parameters to meet specialized performance goals. Modules and associated services can be purchased as needed and added to customers' TSM package at any time as needs change. We're finding that the TSM Enterprise Solutions continues to gain momentum amongst our clients as they are highly focused to squeeze every source of additional power out of their fixed assets, which over a span of a year can add up to millions of dollars in incremental revenues. The real beauty of our platform is that we are starting to leverage it and offer it to other applications, including fossil fuel facilities, as well as carbon capture analysis and boiler optimizations. Given the positive feedback and successes we had with TSM, we continue to make more improvements across our solution portfolio, in order to make greater impact for customers. We announced this last week that we added another module of the TSM platform with the latest module helping organizations further reduce operational costs associated with engineering programs and compliance requirements. Specifically, the new module automates complex tasks and applies expert roles to analyze plant data from multiple sources to provide recommendations to the program owners. Those recommendations can help customers identify issues needing further investigation and optimize inspection scope, evaluating risks and costs. These tools help clients address complex challenges related to the reduction of operating costs, and by doing more with technology, this alleviates the challenges posed by the decline in workforce and the availability of expert resources to decipher the complex set of rules and regulations involved. TSM is part of our broader software business that we built purposely over the past few years, which has evolved by design into a material high-value line of business. The solid software revenue in Q2 is a direct result of our years-long effort to build out this business, and we see that it is now looking and feeling like a real software business, including the typical timing associated with it. Our goal is for the software revenue to continue the steady growth we have seen over each of the prior three years. This is exciting progress, and I'd like to thank our team. While we wait for customers to fully return to pre-pandemic spending, I'd like to highlight that at GFC, we worked hard in building out a highly diversified business model, and we're very pleased that it has worked well during these inconsistent times. That said, while the new orders awarded in the second quarter were lower than we would have liked, customers remained focused on project delivery, highly engaged with us, and our revenue remained solid as a result. We believe the acceleration we experienced in the second half of 2021 could repeat itself this year and beyond. The good news is that we know the business opportunity is there in the market with a broad and active sales pipeline. In addition, with the financing we put in place in the first quarter of this year, GSE is in a very strong position to competitively bid for new business and make the necessary investments to improve organic growth through sales and product development efforts. Now that we have significantly improved our capital structure, we can better manage the ups and downs in customer spending and affords us the opportunity and necessary capital to be prepared for future orders. Now let's review each operating segment. Our engineering performance division was certainly the highlight of the quarter as revenues climbed to $8 million up from $6.4 million in the first quarter and $6.9 in the second quarter of 2021. Key contributions in the quarter were from GSE performance to True North, while DP engineering was in line from prior periods. Orders for this division were lower in the second quarter at $3.8 million when compared to the first quarter of 2022, which was $6.4 million, and the second quarter of 2021, which was $5.8 million. Orders placed with GSC Performance were off just a bit from the prior period, but DP Engineering and True North both experienced lower order flow during the second quarter. What is interesting to note is that while new order flow ebbed from the end of the prior year, as mentioned, customers remained focused on project execution, keenly so, which explains our very solid revenue performance. This is not a dissimilar pattern to what we saw in 2021, which means the customer project award and execution cyclicality is continuing. It is not clear if this trend will continue moving forward, but clearly indicates a shift in behavior from pre to post-pandemic. As I mentioned earlier, software license revenue continued to be a strong point of our business. In Q2, we had solid license revenue of $1.2 million, including a number of deals up to a very sizable order for software as a service solution from a leading global energy company. Our licensed revenue growth is now a key component of our business as a result of significant growth over the past several years. While the performance solutions of ISM is still in the midst of recovering from the pandemic, which does still have effects in our industry, despite most of the reopening and normalization of the broader economy, as we stated, we are seeing customers put more work out to bid and inquire specifically of our unique solutions. We're also finally meeting up with customers in person, working with them on opportunities where GSE can provide unique value add. Meeting with customers in person has been lacking up to this point as a result of the pandemic and the pandemic-induced behaviors that continue and should help the company renew key contacts within industry. Because of this, we have reasons to be confident that the industry is emerging from the pandemic-related slowdown in spend and do expect additional business within this division over the longer term. Our pipeline of opportunities overall for this segment has clearly improved as nuclear budgets and the focus on energy security and dependence increases and for good reason. As a result, our focus is working diligently with our customers and potential customers to convert these bids into orders and subsequently revenues similar to what we experienced in the back half of 2021. While we continue to drive revenue through the execution of projects, we have seen the nature of project awards change as a result of the pandemic. Whereas prior to the pandemic, our project mix would include typically very large-scale nuclear simulations projects that would burn off over 18 to 24 months. We do see that mix shifting to more shorter duration projects with tighter scope of six to 12 months. This means that our backlog will change to reflect this. Projects that appear as awards, which are smaller in nature, that prior to the pandemic would have been larger, they are now allocated the backlog, and they'll, as a result, burn off quicker. They'll also be replaced quicker by the next similarly sized project, and we're seeing that. The result is a tighter backlog than prior to the pandemic, but one that will turn over more quickly. I do want to note this for folks who study our backlog to ensure that we understand the changing nature of the business post-pandemic. Software solutions. Moving on to our cloud-based SaaS solutions, I mentioned that in the past, while this is technically categorized under our engineering performance division, it is a very exciting and unique component to our business, and one which I believe warrants its own conversation. Revenue from our software solutions was $1.2 million in the second quarter, up compared to $0.4 million in the first quarter, compared to $0.8 million in the same quarter a year ago. Our software business developed into a nice business for GSE with lots of predictable high-margin revenue. Given the conversions from licensed to SaaS over the past few years, many of revenues from software ramped up at the end of the year. GSE recognizes this revenue on a ratable basis for SaaS software quarterly over the lifetime of the contract. We made a significant push to convert our perpetual license to term license with our customers, as well as capture new customers delivering the SaaS solution via the cloud. We've been very successful in converting several of our clients to the SaaS-based license agreement and are in discussions with several more clients and prospects about onboarding them with these new solutions. We've already made investments in bringing on more people into our sales efforts, specifically in this area, so we fully expect this investment to deliver further enhanced results in the second half of the year. Gratifying to have seen what was a small line of business when my team and I joined GOC develop over the past few years into an important and growing software business as part of GOC. This is a deliberate result of our strategy. We continue to be excited about these high-value, high-margin software solutions, which have demonstrated the potential for continued above-average growth rates while bringing strong predictability to the software license business. Last year, it represented nearly 10% of total revenue for our company we are focused on growing this line of business. It has proven to be an excellent follow-on to the company's legacy business of power plant simulators. In addition to the recurring revenue of our software solutions, it provides very high gross margins, typically 80 to 90%. We're happy with the growth in this area and look forward to continuing the transformation to make this segment a much larger part of our business. Workforce solutions, now discussing workforce solutions, Sales were $4.8 million in the second quarter, down from $5.9 million in the first and $6.7 in the second quarter a year ago. While revenues were lower, the performance of the division has improved from Q1 to Q2 of last year, as it delivered basically a break-even quarter at the operating income level. Orders were also lower in the quarter at $3.1 million, which was lower from $4.7 in Q1 and $5 million the same quarter a year ago. We're obviously disappointed, but not surprised in taking the necessary action during the first quarter to make key changes to improve it for the future. We continue to make smart investments in the business by adding new salespeople, recruiting professionals for the division, as well as in order to improve organic growth. Getting a bit more specific, the division did receive two key orders from our customers that were quite sizable, one with a major utility company and the other with a construction services company. To summarize, I'm extremely proud of our team and the results produced in the second quarter. While we have additional work to do, we are implementing our strategy and executing on everything that's in our control. We've made the necessary investments to be able to win more orders when the industry is prepared to place them. In the meantime, our diversified business mix that we purposely built over the past few years has proven resilient and keeping us in the game. We believe it is a position the company would probably benefit from the macro trends that bode very well for our future. We are an essential part of the power industry ecosystem, particularly nuclear, and our clients rely on us to keep their assets up and running while creating a highly efficient, safe environment. The strong reputation we have in the industry and the relationships we maintain with our customers and the value-added engineering, workforce, and software technology we offer to industry should position us well to beat out the competition as more business flows into the vendor ecosystem for nuclear and broader zero-carbon power generation. As the industry continues to develop a resilient grid that will advance the goal of decarbonization, GSE is at the forefront of providing such solutions and ready to partner with our industry to achieve these goals. The industry news items that I've prepared and shared previously are a few of the many exciting developments in the nuclear industry right now that make me feel very confident about our future. Our unique solutions are at the forefront of making nuclear power generation Technologies and plants operate and run safely and efficiently and produce more power from those assets over time. We're in a very exciting place with the right technology, the right people at the right time. I'll now turn the call over to Emmett Pepe, GSE CFO, who will review the second quarter financial results. Emmett, please proceed.
spk03: Thank you, Kyle. With the numbers highlighted in detail in the press release, let me focus my comments on a few areas and provide added color where I can. Revenue during the second quarter of 2022 was $12.7 million, a decrease of 5.7% compared to the $13.5 million in the second quarter of 2021, but 3.8% higher when compared to the $12.3 million in the first quarter of 2022. As Kyle indicated in his remarks, revenues from the company's performance engineering were strong during the quarter, rising nearly 16% over last year and 24.3% sequentially from the first quarter of 2022. These improvements were offset by lower revenues from the Workforce Solutions Division due to slower-than-expected conversion of new business development opportunities into revenue, which we are currently mitigating by closely managing the segment and providing the necessary support and resources. Engineering performance revenues were approximately $8 million in the second quarter of 2022 compared to 6.9 million in the second quarter of 2021, and compared to 6.4 million in the first quarter of 2022. The sequential and the year-over-year improvements were primarily from the company's legacy simulation division, which has been executing on backlog projects, our TrueNorth division, which showed solid growth in the prior quarter and was up slightly from a year ago. We're all excited about the opportunity pipeline moving forward for this division. Our DP engineering division was flat both from the prior quarter and prior year. We are actively pushing this business unit to expand its reach and customer base and are encouraged by the feedback we have received from customers. Workforce solutions revenue in the quarter was $4.8 million compared to $6.7 million in the second quarter of 2021 and compared to $5.9 million in the first quarter of 2022. The year-over-year and sequential declines was due to some reduction in field professional needs due to a major construction customer winding down a significant project, but also due to the turnover in our recruiters, which have hurt certain deployments at times. In response, we are working with new business development and recruiting hires to drive future growth. Gross profit in the second quarter of 2022 was $3.2 million, or approximately 25% of revenue. This is compared to gross profit of $2.7 million, or 19.9% of revenue in the second quarter of 2021. and 2.4 million or 19.8% of revenue in the first quarter of 2022. First Washington improved due to project mix with more revenue coming through the performance engineering division, which carries higher margins. While revenues were lower at Workforce Solutions, margins improved from the prior quarter due to the lowering of the payroll tax burden that is highest at the beginning of the year. Operating expenses, which excludes restructure and depreciation and amortization expense, in the second quarter of 2022 were 4.6 million compared to 3.7 million in the second quarter of 2021 and 4.6 million in the first quarter of 2022. The increase in Q2 was partially due to what many other companies are seeing in our industry and across the economy. We're seeing higher expenses, corporate insurance, inflationary pressures, part of which were already reflected in the Q1 results and other increases being other corporate expenditures that are one time in nature. Despite these pressures, we continue to closely monitor our operating expenses and continue to expect them to be in a similar range in the future. Net loss in the second quarter of 2022 was $1.4 million, or a loss of $0.07 per basic and diluted share, compared to net income of $3.2 million, or $0.16 per basic and diluted share in Q2 of 2021, and compared to a net loss of $3.4 million, or $0.16 per or basic and diluted share in Q1 of 2022. The net income in Q2 of 2021 included 4.6 million in other income from the recognition of ERC credits. Adjusted EBITDA was a loss of 700,000 in the second quarter of 2022 compared to a loss of 400,000 in Q2 of 21 and a loss of 1.7 million reported in the first quarter of 2022. The company's backlog remained healthy but ended the second quarter a bit lower as the company worked off previously announced orders and new order flow has paused. Backlog at the end of the second quarter was 34 million compared to 40.1 million at the end of the first quarter and 37.5 million at the end of the second quarter of 2021. The performance engineering segment backlog was 27.5 million and workforce solutions was $6.5 million at the end of the second quarter, and compared to the $31.9 million and $8.2 million, respectively, at the end of the first quarter. Backlog for performance engineering was $27.7 million at the end of the second quarter of 2021, and $9.8 million for workforce solutions at the same period. These backlog figures really highlight the company's performance. While the company has burned off some older orders and is reporting a lower backlog, The levels are similar to a year ago period and can change when new orders are awarded. Moving our discussion to the company's balance sheet, it remains strong as we exited the second quarter with 5.4 million in cash compared to 5.4 million at the end of the first quarter and compared to 3.6 million at the end of 21. These cash levels exclude restricted cash of 1.1 million to secure four letters of credit with various customers, and $500,000 to secure our corporate credit card program. We have received 1.6 million of ERC refunds from the IRS during the second quarter, which also has enhanced our capital structure, and anticipate the remaining additional 1.4 million ERC refunds still outstanding. I'm pleased with the actions of the second quarter to improve our capital structure and believe we have positioned ourselves sells for stability and renewed growth in the coming periods. And I'll turn the conversation back to Kyle.
spk05: Thank you, Emmett. To summarize, the second quarter financial results were solid, but we do still have some near-term challenges we're dealing with, as seen in the slowdown of orders received in the first half of 2022. We're staying very focused on doing what is in our control, and I can confidently admit that we have been executing those things under our control. With that said, operator, please open the floor for questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
spk07: At this time, we will pause momentarily to assemble our roster. As a reminder, if you would like to ask a question, please press star then 1.
spk00: The first question today comes from Ankur Sagar with Devy Capital. Please go ahead.
spk07: Hey, good afternoon, Kyle and Emmett. Hey, Ankur. Hello.
spk02: Okay, so Kyle, you know, you, I think, acknowledged in your prepared remarks as well that the new order flow has been pretty low, you know, with the Q1 and Q2. You know, with the Q4, you know, it was a positive sign. We thought that things are just turning up. And, you know, hopefully that number is going to probably go up, you know, in the coming quarters. You know, there is definitely momentum out there. I mean, from the government as well. I mean, you know, with that $6 billion in fund, I know there has been news that they're even accepting, you know, bids and RFPs on how to basically go ahead and use that. So... You know, just, you know, and the company's in a better, in a capital position. You know, tell me what is it going to take for this business to turn around? I mean, pre-pandemic, even, you know, in first two quarters of 2020, I mean, we were looking at new orders of 15 to 17 in a million at a bare minimum. And here we are. I mean, you know, it's quite low. And the backlog affects the revenue that you do in a quarter as well. So, you know, tell me in granular terms, what is it going to take? I mean, do you have less salespeople than you had earlier? I mean, you have more breadth of services that you offer with the acquisition. Yeah, yeah.
spk05: I mean, look, Ankur, you know, our perspective is the one thing that needs to happen is industry needs to feel on stable ground and start spending money. And so, like you said, in early 2020, you know, right before the pandemic hit, orders were at that level, about that level you mentioned. The pandemic hit, we had to reverse some orders as certain work was canceled in Q2. And it really took us till the end of 2021 to see that uptick in orders and And that was largely because the industry is starting to spend money to catch up on a lot of things that were delayed. What we've seen is pre-pandemic behavior is not translating to post-pandemic behavior. There's this enhanced cyclicality in 2021 that seems to be repeating itself in 2022. And so we don't have fewer salespeople now. That is one that's you know, an essential part of our job is generating business. So we need to make sure we have feet on the ground and out and engaging with customers. And those that are affected can continue to do well. We have a really good incentive program and commissions program to keep them selling and hungry. And for those that don't produce, we find new salespeople and it's a constant process. You know, it's not like once and done. But with that said, you know, the nature of our orders that we're winning is also shifting. Since the industry is not on this, you know, yet stable ground to spend as they were pre-pandemic, the nature of the business they're giving out is smaller scope, tighter turn projects that I was mentioning in our earnings call. So when we see the pre-pandemic backlog being at a certain level, that included a large scale simulator, which could be 10 million of that, for instance, or certainly north of several million dollars. And that business is shifted dramatically to be smaller scale projects that come into the backlog. We execute on them and the next smaller scale project comes in. So we don't have this backlog sitting there carried over two years. You know, it'll burn off in six to 12 months. So while the backlog is tighter, it has what we're seeing and maintaining our revenue levels at where they are because that backlog is turning over quickly and it's burned off quickly relatively to pre pandemic. And it also comes in more quickly for certain projects, um, especially on the engineering, uh, performance engineering side. So we wanted, I wanted to really, you know, we did a lot of analysis and wanted to make sure we got that out there in this, uh, transcript to describe the shifting nature of the business pre pandemic post pandemic. So back to the initial question, what's it going to take to get back to, you know, a sustainable. 15 to 18 million dollar level per quarter one is we need the industry to start feeling more confident about itself we see a lot of good things that are happening such as what you mentioned the infrastructure act the six billion dollars took about nine nine to ten months to get in place this mechanism to put in bids bids are going to start i suspect it'll take three to six months to see the money start flowing um so that's one good component but in and of itself that's not going to solve the problem industry really needs to you know, have some more robust energy policy out from government in addition to, you know, the things that I mentioned, which are all very significant, which none of which existed pre-pandemic. So let's be clear. That's all good news. But we need, you know, Volvo 3 needs to come online, do really well. We have a lot of folks associated with that during the course of the project. we need industry to start spending some more money and we're very well positioned, you know, and we're getting out to see our customers now, which was really not feasible prior to now.
spk02: You know, it's, it's, you know, not like asking, I mean, you know, there's no specific guidance that you put out there, but at the same time, I think you acknowledge the fact too, that, you know, the company does need to get to that 15 to 17 million in the revenue on a quarterly basis to, you know, have a cash flow break, even if anything, or, you know, that, you know, so we have to get that, you know, achieve that number. You know, the ERC credits is not going to, you know, it's probably at the tail end. I mean, you've got the last payment that you're probably going to receive in the next two to six months. So just trying to, Do you think that the company can sustain by itself as a public company and generate that order flow? What changes specifically you have made in the business? Has there been some new hires recently? Or the company might be just better off being a sub-entity with a larger company that has more you know, power to basically win those kind of projects, maybe a tier one operator or something like that?
spk05: Yeah, I mean, first let me talk about, you know, are we bringing in new people? We're always bringing in new people. And, you know, we're facing a very similar environment to what other broader companies that are seeking high-talented technical people are facing, which is, you know, it's hard. It's hand-to-hand combat to fight and retain good talent. But we're getting those people. So as I mentioned in the call, hiring additional billable technical staff, constantly bringing in new salespeople to see and support them, and certain people will make it and do really well, certain people won't, and we continue that cycle. And likewise for our workforce solutions group, we've made heavy investments in bringing in Um, new recruiters, which are the folks that really fulfill, uh, the contracts that we have in place for the, uh, uh, workforce, uh, solution staff, augmentation groups as recruiters are critical roles. And we brought in a number of those. So those are, those are things that. Not any one is specific, but as an, uh, in their totality bunker, you know, we're working to get back to that, the levels we're having using mentioned and higher, um, to be sustainable. So far as whether we should be public, private, something else, we're a public company. We're for sale every day. And we've stated that we're here to do what's best for shareholders. And there are things that are in our control, such as stating we're a public company and we're for sale every day. It's an obvious fact. We are never going to get in the way of what's the best economic outcome for our investors, of which management and is significant shareholders in the business. So, you know, I can't go beyond that, obviously, in this call, you know, but I think that sets the tone.
spk02: I mean, so with the, you know, Q3, you know, a few weeks into it, what do you see in terms of the order activity? Are there any positive signs for where you see there is, you know, significant uptick in the amount of bids at least you have?
spk05: Well, we don't get future guidance. You know, what I can say is we are getting out to customers. I was just at the American Nuclear Society Utility Working Conference last week in Florida. That's the biggest conference of the year. And the mood is upbeat in the industry. You know, I think they're very eager for Volvo 3 to get online. They're very eager to see government policy solidify around nuclear. And, you know, that bodes well for us. But we don't get future guidance or guidance in the midst of a quarter.
spk02: Is backlog still a very good indicator for us, for an investor, to see what the upcoming quarters are? I mean, in terms of what revenue you generate in Q3, Q4, is backlog still a good indicator? I mean, you mentioned that pre-pandemic, post-pandemic, things have changed. I mean, you might be getting business right away that you can fulfill with a ready solution within the quarter. Yeah.
spk05: Yeah, I mean, look, that explains our solid revenue performance. The business we got in Q3, Q4 is giving a solid revenue this quarter. That's very different than the nature of the backlog buildup, say, you know, pre-pandemic. And that's why I wanted to go through for those that really want to do the diligence and model, wanted to talk about qualitatively what is happening in our backlog. Big projects burn over, you know, two plus years. That shifted into a six to 12 month for certain components of our business, which would comprise the majority of our backlog in the past. The rest is often burning off within a quarter, certainly around workforce solutions. Certainly the tighter scope engineering projects that exist three to six months is typical for True North BP. We're now seeing that with workforce solutions. So if you model that, knowing that the cycle of backlog is changing, you can see why what's happening in Q2 is occurring, which is smaller backlog, but revenue is still solid. Why is that? Well, here's why. And so make no mistake about it, we want to see that backlog grow, but the nature of what we're dealing with is different.
spk02: One last one, Kyle. I think there was a press release for the recent proxy I don't think the chairman of the board got enough votes to be elected. But, you know, I guess, you know, you put out a press release. The board still went ahead and did not accept the resignation, saying that it appears to be some kind of material weakness. And I want to point to that. You know, I don't think that's entirely in line with how shareholders feel. It is very much visible, and it's a fact. It doesn't even appear. It's actually a fact that when your nomination came last time for election three years ago and compares to what it is now, you yourself had 10 times against votes. So it was 400,000 against votes last proxy three years ago, and it's close to about 5 million this year. So, you know, there is definitely dissatisfaction among the shareholders. I could tell you about me and probably some other shareholders that I speak with. And to some extent, I mean, being a shareholder yourself, you can say to some extent it's justified that the business has not, you know, done fairly well. And I know you talk about being a public company. I mean, you're for sale, but it has to come through the board where the board has to evaluate what is the best alternative to take at this point, whether to continue the business like this, which is fair, or to basically put the company for sale. And it has to happen through the board. Nobody's going to come up and take a 10% stake in the company and say, we want to buy you out. That doesn't happen with public companies. So Um, you know, I, I, it's, uh, it would be great, um, you know, if you could address that, uh, as to, you know, I don't know what's, um, you know, what's the board's thinking in, in, in terms of that, uh, to, and how to basically, you know, uh, get the business in the right stature and basically, you know, look for shareholders and trust who are the real owners of the business.
spk05: Yeah, I, uh, I'm trying to figure out what exactly to answer here that I can answer in a public forum. I mean, look, we take note of the proxy, you know, the board took the action they did and published around, you know, not accepting the chairperson's resignation and stated the reasons as to why. That said, you know, I understand why shareholders are frustrated, myself being a major top five shareholder myself. But we're here working to make sure the business gets back on track. And, you know, that's our focus right now.
spk02: And with that said, you know... You do acknowledge the fact that, I mean, you know, that you have, you know, 10 times against votes for yourself, you know, from the last election. I mean, that is a fact. I mean, it doesn't appear. It's there.
spk05: Yeah. Yeah, Corey, I'm trying to answer your question, but you're cutting me off. So with that said, I acknowledge that. Like, you know, it's important. I'm out with shareholders. I talk with them, yourself included, understand the perspectives. And, you know, the best thing I can do is say we're focusing on turning the business around and making sure that all options are available to the company and for shareholders about, you know, our direction moving forward. So I can't tell you what we're talking about at the board level. That'd be inappropriate, you know, But I will say all options are open for us, and we're not shutting off any angles. But in the meantime, what we've got to do is make sure this business gets back to the revenue levels we've discussed and create further optionality. So with that said, you know, Operator, let's move on to the next questions, if any. I know Adam has a couple to discuss as well. Once again, to ask a question. And, Operator, thank you for the questions. I appreciate that.
spk07: Once again, to ask a question, please press star then 1.
spk01: There appear to be no further questions at this time, so this concludes our question and answer session. I would like to turn the conference back over to Kyle Loudermilk for any closing remarks.
spk05: Okay, well, I'd like to thank everyone for joining us. You know, I appreciate the Q&A, and we appreciate everyone's time and interest in GSE, and we remain excited about what's ahead of us. I do want to let folks know we will be presenting at the H.G. Wainwright Investor Conference in New York City, September 12th to 14th, and we'll also be participating in the Litham Partners 2022 Fall Investor Conference, which will be virtual September 28th to 29th. And we look forward to seeing and speaking with many of you at those events. Hope to see you there. So if you have any further questions, please reach out to Adam Lohnsteiner from LITHM Partners, and we'd be happy to schedule a follow-up call. Again, thanks everybody, and I hope you have a great evening.
spk00: The conference has now concluded. Thank you for attending today's presentation.
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