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spk00: Good afternoon and welcome to the GSE Systems, Inc. Third Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants will be in a listen only mode. Should you need assistance during today's call, please signal for 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 your telephone keypad. If you would like to withdraw your question, please press star then two. And please note that today's event is being recorded. At this time, I would like to turn the conference over to Adam Lowensteiner, VP of Lithum Partners. Please go ahead, sir.
spk02: Thank you, Chris, and good afternoon, everyone, and thank you all for joining us today to review the financial results for GSE Systems for the third quarter ended September 30, 2022. With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE Systems, and Emmett Pepe, Chief Financial Officer of GSE Systems. Before we begin, I would like to remind everyone that the 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 for 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 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. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with SEC Regulation G can be found on the company's earnings release. With that said, I'd like to now turn the call over to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE Solutions. Kyle, please proceed.
spk04: Thank you, Adam. I'd like to welcome everyone to GSE's third 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.gses.com under the news section. To lay out the agenda for today's call, I will start with a brief update on the industry, discuss GSE's business in the quarter across all the lines of business, and provide a summary of our focus on sales and revenue generation. Emmett will review the financial results and will conclude with the Q&A session. First, a brief update on the industry. While keeping my remarks brief, I do want to note some key positive developments in the nuclear industry since our last call. The first piece of recent news that I'd like to highlight is the recent acquisition of Westinghouse Electric by Brookfield Renewable Partners, one of the world's largest clean energy investors, and Kimiko, a major supplier of uranium. The $7.9 billion deal reveals that these two major players believe that the nuclear energy sector has a long and growing future. Nuclear energy is becoming increasingly important in a world that prioritizes electrification, decarbonization, and energy security. This deal also demonstrates that investment activity in the sector is clearly picking up. In the U.S. nuclear fleet, we are seeing more existing facilities file for operational extensions. Most recently, Vistacorp submitted an application to the NRC to renew its license for the Comanche Peak Nuclear Power Plant in Texas through 2053 or for an additional 20 years beyond its initial license. More plants in the U.S. will follow. GSE is well-positioned to benefit from this industry activity, as illustrated by our announcement in early October of our expanded service offering specifically designed for nuclear power plant life extension services. Small module reactors, or SMRs, continue to make significant strides towards commercialization. Very recently, the NRC has indicated that it will certify NuScale SMR reactor for use in the United States. As many of you already are aware, NuScale is a long-term partner of GSE, as we have been working with them for over 10 years in helping them with their development of SMRs. We are very excited for this relationship and the potential it offers in the future. Overseas, subsequent to last quarter's conference call, South Korea announced their intention to increase production of nuclear energy to nearly one-third of its energy mix, up from a current 24% by 2030. On the heels of this news, GSE announced a new contract to implement a digital twin design simulation system for a longtime customer in South Korea. South Korea has been an important market for GSE, and this new contract highlights GSE's prominence in the region with unique services and technology. Shortly after our last quarterly conference call, Japan officially announced its intentions to restart its nuclear reactors, which is a piece of great news for the industry and GSE. GSE has conducted business in Japan for decades, and I'll be traveling there soon to meet with GSE customers and partners as Japan begins the long-term restart of its nuclear assets. In summary, the macro outlook for the nuclear energy industry continues to remain strong. Global awareness of the importance of nuclear power for energy security, environmental equity, and grid reliability is driving further action to sustain existing nuclear power fleets, produce more power from those assets, and accelerate the path towards adoption of next-generation nuclear power technology. We feel that the industry is entering a major cycle of long-term investment for growth, likely to be sustained for decades to come, barring any major disruptions. Now for some perspective on GSE's business in Q3. Overall, the third quarter produced improved results compared to the prior quarter. We were able to improve our order flow, and I do want to highlight that during the third quarter, gross orders were at $12.2 million and offset by roughly $2 million in order reversals for unused backlog and completed projects. While we usually don't focus on reporting a gross order figure, I wanted to share the figure as it demonstrates the extent of our order flow. This is much improved from the second quarter as we are starting to see customers increase their engagement in project activity. Emmett will get into specific numbers during his remarks later in the call. Performance Engineering Division had a solid quarter. We continue to win new business, and we are especially pleased with the strong license revenue of $2 million in the quarter. This is the result of our deliberate strategy of packaging and licensing our simulation technology and the resulting industry adoption of these solutions for significant value add. This is great to see. Our license revenue business is now a material and growing part of our business, delivering sticky, high-margin revenues. The solid performance of the Performance Engineering Division, including the strong license revenue in the quarter, helped improve our gross margins both year-over-year and sequentially. In our workforce solutions business, we continue to bring in new orders, and we have highlighted via a recent press release the 3 million combined orders from a client in the southern United States for both workforce solutions and performance solution services. This demonstrates that our cross-selling of our solutions to the industry is gaining traction. For workforce solutions, we continue to retool and focus investment on revenue generating positions as this business emerges from industry slowdowns related to the pandemic and the ongoing economic uncertainty. Now I'd like to discuss our focus on sales and revenue generation. As the company and the industry we serve emerge from the pandemic and deal with the current economic uncertainty, our focus is on getting the sales and revenue generating dimensions of our business built out and as productive as possible. Sales consists of individuals that engage with our customers and prospects to build a pipeline of opportunities and convert those opportunities into orders that will convert to revenue as work is performed and or as solutions are delivered. Revenue-generating positions are billable engineers and other professionals who convert orders to revenue through their work. Finding, attracting, and retaining top talent is an acute challenge in this industry and in this economy, and GSE is not immune to this challenge. We are focused on what is in our control. To address this need, we have brought on new recruiters whose sole job is to find the people with the right skills to specifically fill a sales position and fill revenue-generating positions such as billable engineers. This is a constant and ongoing process. We review candidates and have been effective in filling open roles created by new business, as well as those openings that are a result of turnover. Finding good people is never easy, but we are addressing this challenge. I will note that having found a great sales addition earlier in the year to focus on licensed revenue products is starting to yield nice results as this quarter demonstrates. We also have a strong pipeline of new opportunities as a result of this investment. What is also in our control is ensuring we are focused on meeting with customers in person to develop new business. Our most recent Board of Directors addition has been instrumental in opening new doors for us to meet with key executives in the nuclear industry who are responsible for the budgets and decisions that matter to us. Myself and other top executives are hitting the road, meeting with these leaders, promoting GSC's solution, listing for areas of opportunity where we can deliver value for the customer, and generate business as a result. We currently just have a few business development staff for engineering, but what is clear is that finding a full-time sales leader who's credentialed and well-connected at client executive levels is a critical need for us and a top priority. We have a retained search underway for this position in engineering sales. This will take time to fill, and it won't be easy. As I mentioned, we are on the road engaging with key individuals to promote GSE to build the business. Consistent feedback is that at this level of customer, the GSE story is new to them, and they're glad to learn that we do so much more than the legacy simulation business for their respective companies. There is opportunity, and we're going after it. For workforce development, we have been busy since early in the year to cycle in key salespeople. We have four sales business development people now in place for workforce development with three having been introduced since the start of the year. These salespeople win contracts that enable us to fill open recs for customers. To support these salespeople, we have seven recruiters, six which were hired during this year, in place to submit the CVs of our staffing field professionals to customers for selection to fill the open recs. Thus, having a salesperson paired with a recruiter are both essential parts of the revenue generation for workforce development. We have excellent bids in place with significant customers and are working to win more contracts and fill the roles associated with those contracts once awarded. To summarize, we've made good progress in the third quarter. Strong license revenue accompanied by improved orders and bookings are the result of getting out in front of customers and being aggressive to win business that is available, while setting the stage to capture more business as industry spend recovers. We are focused on targeting investment in revenue-generating positions and activities for the business. The team is highly motivated, taking ownership of what we control, and we are moving forward. The many exciting developments in the nuclear industry right now continue to make me feel very confident about GSE's future. I'll now turn the call over to Emmett Pepe, GSE's CFO. He'll review the third 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 in a few areas and provide added color where I can. Revenue during the third quarter of 22 was 11.9 million, a decrease of 19% compared to the 14.7 million in the third quarter of 2021, and 6.6% lower when compared to the 12.7 million in the second quarter of 2022. Revenue from the company's performance engineering were improved during the third quarter, rising nearly 9.2% over last year and 1.2% sequentially from the second 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. As Kyle mentioned, we have invested in expanding workforce solutions business development team to drive new order flow and improve this division's results over time. We are excited about the potential opportunities that this group has identified and are pursuing. Our engineering performance division also known as Performance Improvement Solutions, was certainly a highlight of the quarter. Engineering performance revenues were approximately 8.1 million in the third quarter of 2022. This compared to 7.4 million in the third quarter of 2021 and compared to 8 million in the second quarter of 2022. Orders for this division were higher in the third quarter to 7.2 million when compared to the second quarter of 2022, which was 3.8 million. but lower when compared to the third quarter of 2021, when it was 11.2 million. Kyle mentioned briefly, we had approximately 2 million of backlog reversals in this segment for primarily time and material contracts with remaining value that was not converted into revenue. Excluding these items, our engineering performance division delivered 9.2 million of orders in the quarter, which we are pleased with. The sequential revenue improvement was primarily from the companies Systems and Simulation Division, previously known as our Legacy Performance Simulation, which has been executing on backlog projects. Our Programs and Performance Division, previously known as True North Consulting, showed solid growth from the prior quarter and was up slightly from a year ago. We are excited about the opportunity pipeline moving forward in this division. The Design and Analysis Division, previously known as DP Engineering, was a bit lower both from the prior quarter and prior year. and we are actively working this business unit to expand its reach and customer base and are encouraged by the feedback we've received from customers. Now moving to our Workforce Solutions Division, also known to some as our NITC segment. Revenue in the quarter was 3.8 million compared to 7.3 million in the third quarter of 2021, and compared to 4.8 million in the second quarter of 2022. Borders were also lower in the quarter, albeit slightly, at 3 million, which was lower from the 3.1 million in Q2 and the 3.5 million from the same quarter of a year ago. The year-over-year and sequential declines are 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 recruiters in the highly competitive job market for these skills. The turnover constrained our capacity to place and deploy field professionals. As mentioned before, we have hired talented sales professionals and recruiters toward 2022 and are continuing to add to this team to build a balanced and productive group that can bring in new customers and recruit field professionals to fill roles. Gross profit in the third quarter of 2022 was $3.3 million, or 27.4% of revenue. This compared to gross profit of $3.2 million, or 21.7% of revenue, in the third quarter of 2021, and 3.2 million, or 25% of revenue, in the second quarter of 2022. The gross margin improved due to project mix, including increased software sales and more revenue coming through the performance engineering division, which carries higher margins. While revenues were lower at our workforce solutions, margins improved from the prior quarter due to the lowering of our payroll tax burden that is highest at the beginning of the year. As we have stated on prior calls, our software and support offerings are key focus because they're high margin and are predominantly recurring in nature. We're extremely pleased with the 147% growth in Q3 as compared to the prior year. Also, the year-to-date mix of our software business has grown to 9.6% of total revenue as compared to 5.8% in the prior year. Operating expenses, which excludes restructuring, depreciation, and amortization expenses, in the third quarter of 2022 were $4.5 million compared to $3.4 million in the third quarter of 2021 and $4.6 million in the second quarter of 2022. The increase in Q3 was partially due to what many other companies in our industry and across the economy we are seeing now. Higher expenses for corporate insurance and other inflationary pressures such as wage increases due to cost of living. In Q3, we also were impacted by on-exchange fluctuations, which resulted in remeasurement expense. As we enter 2023, we are taking a critical look at our expenses. As we have mentioned on previous calls, two significant facility leases are ending in the middle of next year, which will provide an opportunity to decrease our physical footprint and our fixed costs. We are also more generally assessing our vendor spend with an eye on improving our cash flow. Net loss in the third quarter of 2022 was $9 million or $0.42 per basic and diluted share compared to net income of $11.4 million or $0.55 per basic and diluted share in Q3 of 21 and compared to a net loss of $1.4 million or $0.07 per basic and diluted share in Q2 of 22. The net income in Q3 of 21 included $10.1 million in PPP loan forgiveness and $2.1 million in other income from the recognition of ERC credits. The net loss reported in the third quarter included a non-cash loss for an impairment of $7.5 million, which is incurred due to the business slowdown in the Workforce Solutions Division, which as a result caused us to lower the carrying value of the division. The write-down is comprised mostly of goodwill and some intangibles. Given the pandemic-related shift in staffing requirements and the long tail associated with that, the Workforce Solutions Division has not shown the stability and growth that we would have liked. Yet, it is still a critical piece of our business and has promising opportunity moving forward. Adjusted EBITDA was a loss of $690,000 in the third quarter of 2022 compared to $130,000 in Q3 of 2021 and a loss of $715,000 reported in the second quarter of 2022. The company's backlog remained healthy, but ended the third quarter a bit lower as the company worked off previously announced orders and new order flow has slowed compared to the year ago quarter. Backlog at the end of the third quarter was 32.3 million compared to 34 million at the end of the second quarter and 37.5 million at the end of the third quarter of 2021. Performance engineering segment backlog was $26.7 million, and workforce solutions division was $5.6 million at the end of the third quarter and compares to $27.5 million and $5.6 million respectively at the end of the second quarter. Backlog for the performance engineering division was $31.5 million at the end of the third quarter of 2021 and $6 million for workforce solutions at the same time 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, levels are similar to a year ago period and can change when new orders are awarded. Moving our discussions to the company's balance sheet, it remains strong as we exited the third quarter with $5.2 million in total cash compared to $3.6 million at the end of 2021. These cash levels include restricted cash of $1.6 million to secure four letters of credit with various customers totaling 1.1 million and 500,000 to secure our corporate credit program. We began making payments on our convertible debt that was secured in February this year. In Q3, we made two payments, one in cash and the other in company shares. We will assess which payment type to utilize on a monthly basis. The company has 1.4 million of ERC refunds outstanding at the end of the quarter. We did receive $400,000 in November, and we are expecting to receive the remaining ERC refunds from the IRS during the next three to six months of approximately $1 million, which would enhance the company's cash position in enabling us to make necessary investments for the future. While we are working in a challenging environment, I'm pleased with the actions in the third quarter to maintain a solid capital structure, and the results demonstrate that the company is stabilized and prepared for future growth. We have additional efficiencies we believe we can put into place and are currently examining our options. We also want to remind investors that in addition to the two leases that run off during 2023, we anticipate that there are further cost containment capabilities next year, giving savings on certain expense renewals being negotiated. I'll now turn the conversation back to Kyle.
spk04: Thank you, Emmett. To summarize, the third quarter financial results demonstrated solid performance and we're delighted with the results of our software licensing business. While we are dealing with the immediate challenges of high inflation and economic uncertainty and the impact on the industries we serve, we are performing and executing on what is in our control. We're making sure we are positioned well for future opportunities, and the good news is that we're now engaging more with our customers in person to promote what GSE can do to add value to their efforts, ensuring we are in the ready position to capture business as industry spend increases. Three key catalysts still are at the forefront of driving growth for nuclear. The need for a stable grid, the drive towards energy security and independence, and the decarbonization of the power sector. It is these catalysts that give us confidence that the nuclear industry will be increasingly in demand for the foreseeable future. Given GSE's very unique situation, as a tech-enabled provider of essential services to this industry, we remain confident in our opportunity to create substantial long-term value. With that said, Adam, please proceed with questions and answer session.
spk01: Thank you.
spk00: We will now begin the question and answer session. As a reminder, if you do have a question, please press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. At this time, we are showing no questioners in the queue, and I'd like to turn the call over to Adam Lowensteiner.
spk02: Yeah, hey, Chris. I'd like to pose a couple questions to the management team. Kyle, the software business still remains a growth vertical, correct? I mean, how much more can investors glean from that business, and how should investors look at that business relative to the entire GSE?
spk04: Yeah, good question, Adam. If To begin to answer it, I would say when we first came into the company about seven years ago, our key to our thesis was to package our IP, license it, and deliver it in a contemporary SaaS-based licensing model. And what had gone from a fairly de minimis level is now representing about 10% of our revenue. It's highly sticky. It's recurring, very hard margin. So that effort is paying off, and it's it's creating a really nice annuity for the business that scales as we move forward. So rather than talk about futures, I'd look at that history of how licensed revenue has gone from the onset to where we are today, tracking to be about 10% of our business. And we certainly want to continue to grow the overall business, including the license revenue growth. And the license revenue growth really has been a very steady performer throughout the pandemic and economic uncertainty. So, you know, that investment is clearly paying off and we'll continue to focus in that area for sure.
spk02: My next question is, can you give us a little bit more color on the investments in revenue generation? What did you have in mind for these investments?
spk03: Hey, Adam, I'll take that. This is on it. Look, I think as Kyle mentioned and we've talked about, it's business development personnel and our workforce solution, the recruiters to fulfill and deploy these professionals, but it's investment in our sales, the full-time sales leader. We recently, during the year, middle of the year, had someone that's come in and focused on our software sales, which is also going to contribute to furthering that growth in the software line. I mean, the other aspect is investments in the business, whether it's R&D to continue to keep our software and products fresh. So it's a wide investment to generate revenue and service to customers. And we'll use whatever savings to both help us with the bottom line, but a lot of that will get reinvested in these efforts to generate revenue as well.
spk01: Thank you. Kyle, you want to conclude?
spk04: Yeah, look, I'd like to thank everyone for joining us. We appreciated your time here and interest in GSE. If you have questions, please reach out to Adam Lowensteiner from Lith and Partners, and we'd be happy to schedule a follow-up call. Thanks again, everyone, and have a great evening.
spk00: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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