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GSE Systems Announces Second Quarter 2018 Financial Results

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GSE Systems, Inc. (GSE or the Company) (NASDAQ:GVP), a leading
provider of professional and technical engineering, staffing services
and simulation software to clients in the power and process industries,
today announced financial results for the second quarter (Q2) ended June
30, 2018.

Q2 2018 vs. Q2 2017 OVERVIEW

  • Revenue increased 44% to $24.7 million from $17.1 million.
  • Gross profit rose 26% to $6.3 million from $5.0 million.
  • Net income increased 19% to $1.0 million, or $0.05 per diluted share,
    compared to $0.8 million, or $0.04 per diluted share.
  • Adjusted net income1 grew 86% to $2.5 million, or $0.13 per
    diluted share, from $1.4 million, or $0.07 per diluted share.
  • Adjusted EBITDA1 rose 34% to $2.4 million from $1.8 million.
  • New orders increased 98% to $16.0 million from $8.1 million.

At June 30, 2018

  • Cash and cash equivalents of $10.5 million, including $0.5 million of
    restricted cash.
  • Total debt of $9.5 million.
  • Working capital of $11.4 million and current ratio of 1.6x.
  • Backlog of $68.1 million.

1 Refer to the non-GAAP reconciliation tables at the end of
this press release for a definition of "adjusted EBITDA" and "adjusted
net income".

Kyle J. Loudermilk, GSE's President and Chief Executive Officer, said,
"On a year-over-year basis, GSE's second quarter 2018 revenue increased
44% to $24.7 million, adjusted EBITDA grew 34% to $2.4 million and
adjusted net income rose 86% to $2.5 million, all of which are the
highest quarterly levels in the Company's history. Our acquisitions of
Absolute Consulting and True North Consulting helped drive this
quarter's strong performance, demonstrating the significant potential of
our strategy to scale GSE and create value through rolling up a
fractured vendor ecosystem in the nuclear power industry. With
approximately $25 million of available liquidity, consisting of $10
million of cash and $15 million under our delayed draw term loan, we are
ready to evaluate and pursue a robust pipeline of additional potential
value-creating strategic acquisitions."

Q2 2018 RESULTS

Q2 2018 revenue increased $7.6 million to $24.7 million, from $17.1
million in Q2 2017, primarily driven by the acquisition of Absolute
Consulting, LLC ("Absolute") in September 2017, and to a lesser extent
by the acquisition of True North Consulting ("True North") on May 11,
2018.

  Three months ended   Six months ended
June 30, June 30,
Revenue 2018   2017 2018   2017
(unaudited) (unaudited) (unaudited) (unaudited)
Performance $

10,864

$ 11,686 $ 20,765 $ 21,356
NITC   13,834   5,439   26,828   12,111
Total Revenue $ 24,698 $ 17,125 $ 47,593 $ 33,467

Performance Improvement Solutions ("Performance") revenue totaled $10.9
million and $11.7 million for Q2 2018 and Q2 2017, respectively. The
Company recorded total Performance orders of $8.6 million and $4.2
million for Q2 2018 and Q2 2017, respectively. The decrease in revenue
was primarily due to the following: a decline of $1.8 million in revenue
due to timing differences, as some of the 2017 major projects were
completed in late 2017 or early 2018; the fact that some major projects
from new orders will start in the second half of 2018; and a decline of
$0.3 million from foreign subsidiaries as a result of the winding down
of the international subsidiaries. The decrease was partially offset by
the acquisition of True North, which contributed $1.3 million of revenue
to the segment since the acquisition.

Nuclear Industry Training and Consulting ("NITC") revenue increased 154%
to $13.8 million for Q2 2018 from $5.4 million for Q2 2017. NITC orders
totaled $7.4 million and $3.9 million for Q2 2018 and Q2 2017,
respectively. The increase in revenue was largely due to the acquisition
of Absolute which contributed $7.5 million of revenues to the current
year, and an increase of $0.9 million from Hyperspring due to overall
increased staff augmentation needs from industry.

Q2 2018 gross profit increased to $6.3 million, or 26% of revenue, from
$5.0 million, or 29% of revenue, in Q2 2017.

(in thousands)   Three months ended June 30,   Six months ended June 30,
Gross profit 2018   %   2017   % 2018   %   2017   %
(unaudited) (unaudited) (unaudited) (unaudited)
Performance $

4,429

  40.8% $ 4,389   37.6% $ 7,680   37.0% $ 7,433   34.8%
NITC   1,911   13.8%   628   11.5%   3,558   13.3%   1,706   14.1%
Gross Profit $ 6,340   25.7% $ 5,017   29.3% $ 11,238   23.6% $ 9,139   27.3%

Performance gross profit for Q2 2018 was $4.4 million, or 40.8% gross
margin, compared to $4.4 million, or 37.6% gross margin, in Q2 2017. The
year-over-year increase in gross margin for Performance was primarily
driven by cost savings realized in Q2 2018 for a major project, which
resulted in a revenue recognition of $0.7 million related to performance
obligations satisfied in previous periods.

NITC gross profit for Q2 2018 was $1.9 million, or 13.8% gross margin,
compared to approximately $0.6 million, or 11.5% gross margin, in Q2
2017. The lower gross profit percentage in Q2 2017 was primarily due to
lower margin projects from a major customer in 2017.

Selling, general and administrative ("SG&A") expenses in Q2 2018 totaled
$4.8 million, or 19.4% of revenue, compared to $3.8 million, or 22.0% of
revenue, in Q2 2017. The year-over-year increase in SG&A expenses was
primarily driven by the acquisition of Absolute, which contributed $0.4
million to Q2 2018 SG&A expenses, as well as transaction costs of $0.5
million related to the True North acquisition and higher labor costs of
$0.1 million due to higher headcount.

On December 27, 2017, the Board of GSE Systems, Inc. approved an
international restructuring plan to streamline and optimize the
Company's global operations. As previously announced, the Company
expected restructuring charges to total $2.0 million, excluding any tax
impacts and cumulative translation adjustments. The Company recorded
restructuring charges of $0.2 million in Q2 2018, primarily consisting
of lease termination costs, employee severance costs and other charges.
As of June 30, 2018, the Company had recorded accumulated restructuring
charges of $1.8 million, and expects to record the remaining
restructuring charges of approximately $0.2 million by the end of 2018.
These restructuring charges exclude cumulative translation adjustment
losses of approximately $1.6 million, assuming currency rates at June
30, 2018, which will be recorded as a charge against net income upon
liquidation of the respective foreign subsidiaries. The Company also
expects to recognize tax benefits related to the liquidation of these
subsidiaries that may offset the majority of the currency translation
adjustment losses.

Depreciation expenses totaled $0.2 million in Q2 2018, compared to $0.1
million in Q2 2017. The year over year increase was primarily due to the
acquisition of Absolute and the depreciation of additional leasehold
improvements as the Company relocated most of its corporate functions to
a new location in Columbia, Maryland in March 2018.

Amortization of definite-lived intangible assets increased to $0.3
million in Q2 2018, compared to $34,000 in Q2 2017. The increase in
amortization of definite-lived intangible assets in 2018 was primarily
due to acquisitions of Absolute and True North. In Q2 2018, Absolute and
True North's amortization expenses totaled $0.2 million and $0.1
million, respectively.

Operating income was approximately $0.7 million and $0.8 in Q2 2018 and
Q2 2017, respectively. The change was primarily driven by the items
discussed above.

Net income for Q2 2018 totaled approximately $1.0 million, or $0.05 per
basic and diluted share, compared to $0.8 million, or $0.04 per basic
and diluted share, in Q2 2017. The change was primarily driven by the
changes in operating income, (loss) gain on derivative instruments, net,
and (benefit) provision for income taxes.

Adjusted net income1, which excludes from net income the
impact of gain/loss from the change in fair value of contingent
consideration, restructuring charges, stock-based compensation expense,
impact of the change in fair value of derivative instruments,
acquisition expenses, amortization of intangible assets related to
acquisitions, and bankruptcy related expense, was approximately $2.5
million, or $0.13 per diluted share, compared to approximately $1.4
million, or $0.07 per diluted share, in Q2 2017.

Earnings before interest, taxes, depreciation and amortization
("EBITDA") for Q2 2018 was $1.2 million compared to $1.3 million in Q2
2017.

Adjusted EBITDA1, which excludes from EBITDA the impact of
gain/loss from the change in fair value of contingent consideration,
restructuring charges, stock-based compensation expense, impact of the
change in fair value of derivative instruments, acquisition expenses,
and bankruptcy related expense, totaled approximately $2.4 million and
$1.8 million for Q2 2018 and Q2 2017, respectively.

BACKLOG AND CASH POSITION

Backlog at June 30, 2018 was $68.1 million, compared to $71.4 million at
December 31, 2017. Backlog at June 30, 2018, included $43.6 million of
Performance backlog, $4.6 million of which was attributable to True
North, and $24.5 million of NITC backlog.

GSE's cash position at June 30, 2018, was $10.5 million, including $0.5
million of restricted cash, as compared to $20.1 million, including $1.0
million of restricted cash, at December 31, 2017. The change in cash
position was primarily driven by the timing difference of cash
collection and payments in different periods.

CONFERENCE CALL

Management will host a conference call today at 4:30 pm Eastern Time to
discuss Q2 2018 results as well as other matters.

Interested parties may participate in the call by dialing:

  • (877) 407-9753 (Domestic)
  • (201) 493-6739 (International)

The conference call will also be accessible via the following link:

http://www.investorcalendar.com/event/34215

For those who cannot listen to the live broadcast, an online webcast
replay will be available at www.gses.com
or through November 14, 2018 at the following link: http://www.investorcalendar.com/event/34215

ABOUT GSE SYSTEMS, INC.

GSE Systems, Inc. is a leading provider of professional and technical
engineering, staffing services, and simulation software to clients in
the power and process industries. GSE's products and services are
tailored to help customers achieve performance excellence in design,
training, compliance, and operations. The Company has over four decades
of experience, more than 1,100 installations, and hundreds of customers
in over 50 countries spanning the globe. GSE Systems is headquartered in
Sykesville (Baltimore), Maryland, with offices in Columbia, Maryland;
Navarre, Florida; Montrose, Colorado; and Beijing, China. Information
about GSE Systems is available at www.gses.com.

FORWARD LOOKING STATEMENTS

We make statements in this press release that are considered
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. These statements reflect our current expectations
concerning future events and results. We use words such as "expect,"
"intend," "believe," "may," "will," "should," "could," "anticipates,"
and similar expressions to identify forward-looking statements, but
their absence does not mean a statement is not forward-looking. These
statements are not guarantees of our future performance and are subject
to risks, uncertainties, and other important factors that could cause
our actual performance or achievements to be materially different from
those we project. For a full discussion of these risks, uncertainties,
and factors, we encourage you to read our documents on file with the
Securities and Exchange Commission, including those set forth in our
periodic reports under the forward-looking statements and risk factors
sections. We do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.

GSE SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

   
Three months ended Six months ended
June 30, June 30,
2018   2017 2018   2017
 
Revenue

$

24,698

$ 17,125 $ 47,593 $ 33,467
Cost of revenue   18,358   12,108   36,355   24,328
Gross profit 6,340 5,017 11,238 9,139
 
Operating expenses:
Selling, general and administrative 4,793 3,774 9,320 7,366
Research and development 189 348 518 750
Restructuring charges 190 - 1,107 45
Depreciation 176 99 279 175
Amortization of definite-lived intangible assets   312   34   462   98
Total operating expenses 5,660 4,255 11,686 8,434
 
Operating income (loss) 680 762 (448) 705
 
Interest (expense) income, net (61) 18 (39) 45
(Loss) gain on derivative instruments, net (91) 315 (247) 155
Other income (expense), net   4   (34)   29   (37)
Income (loss) before income taxes 532 1,061 (705) 868

(Benefit) provision for income taxes

  (449)   234   (190)   307
Net income (loss) $ 981 $ 827 $ (515) $ 561
 
Basic earnings (loss) per common share $ 0.05 $ 0.04 $ (0.03) $ 0.03
 
Diluted earnings (loss) per common share $ 0.05 $ 0.04 $ (0.03) $ 0.03
 
Weighted average shares outstanding - Basic 19,651,441 19,196,133 19,580,046 19,154,297
     
Weighted average shares outstanding - Diluted 20,029,123 19,561,245 19,580,046 19,471,794

GSE SYSTEMS, INC AND SUBSIDIARIES

Selected Balance Sheet Data (in thousands)

   

June 30, 2018

December 31, 2017
(unaudited) (audited)
Cash and cash equivalents $ 9,959 $ 19,111
Restricted cash - current 523 960
Current assets 31,752 36,863
Total assets 59,778 56,182
 
Current liabilities $ 20,389 $ 25,252
Long-term liabilities 8,992 1,258
Stockholders' equity 30,397 29,672

EBITDA and Adjusted EBITDA Reconciliation (in thousands)

EBITDA and Adjusted EBITDA are not measures of financial performance
under generally accepted accounting principles (GAAP). Management
believes EBITDA and Adjusted EBITDA, in addition to operating profit,
net income and other GAAP measures, are useful to investors to evaluate
the Company's results because each measure excludes certain items that
are not directly related to the Company's core operating performance
that may, or could, have a disproportionate positive or negative impact
on our results for any particular period. Investors should recognize
that EBITDA and Adjusted EBITDA might not be comparable to
similarly-titled measures of other companies. Our management uses EBITDA
and Adjusted EBITDA and other non-GAAP measures to evaluate the
performance of our business and make certain operating decisions (e.g.,
budgeting, planning, employee compensation and resource allocation).
This measure 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 EBITDA and Adjusted
EBITDA to the most directly comparable GAAP measure in accordance with
SEC Regulation G is as follows:

  Three months ended   Six months ended
June 30, June 30,
2018   2017 2018   2017

Net income (loss)

$ 981 $ 827 $ (515) $ 561
Interest (expense) income, net 61 (18) 39 (45)

(Benefit) provision for income taxes

(449) 234 (190) 307
Depreciation and amortization   573   250   944   507
EBITDA 1,166 1,293 278 1,330
Change in fair value of contingent consideration - 43 - 297
Restructuring charges 190 - 1,107 45
Stock-based compensation expense 401 650 1,028 1,246
Impact of the change in fair value of derivative instruments 91 (315) 247 (155)
Acquisition-related expense 491 - 491 -
Bankruptcy related expense   65   122   65   122
Adjusted EBITDA $ 2,404 $ 1,793 $ 3,216 $ 2,885

Adjusted Net Income and Adjusted EPS Reconciliation (in
thousands, except per share amounts)

Adjusted Net Income and adjusted earnings per share (adjusted EPS) are
not measures of financial performance under GAAP. Management believes
adjusted net income and adjusted EPS, in addition to other GAAP
measures, provide meaningful supplemental information regarding our
operational performance. Our management uses Adjusted Net Income and
other non-GAAP measures to evaluate the performance of our business and
make certain operating decisions (e.g., budgeting, planning, employee
compensation and resource allocation). This information facilitates
management's internal comparisons to our historical operating results as
well as to the operating results of our competitors. Since management
finds this measure to be useful, we believe that our investors can
benefit by evaluating both non-GAAP and GAAP results. 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 adjusted net income and adjusted EPS
to GAAP net income, the most directly comparable GAAP financial measure,
in accordance with SEC Regulation G is as follows:

  Three months ended   Six months ended
June 30, June 30,
2018   2017 2018   2017

Net income (loss)

$ 981 $ 827 $ (515) $ 561
Change in fair value of contingent consideration - 43 - 297
Restructuring charges 190 - 1,107 45
Stock-based compensation expense 401 650 1,028 1,246
Impact of the change in fair value of derivative instruments 91 (315) 247 (155)
Acquisition-related expense 491 - 491 -
Amortization of intangible assets related to acquisitions 312 34 462 98
Bankruptcy related expense   65   122   65   122
Adjusted net income $ 2,531 $ 1,361 $ 2,885 $ 2,214
 
Diluted income (loss) per common share $ 0.05 $ 0.04 $ (0.03) $ 0.03
 
Adjusted earnings per common share - Diluted $ 0.13 $ 0.07 $ 0.14 $ 0.11
 
Weighted average shares outstanding - Diluted(1) 20,029,123 19,561,245 19,920,034 19,471,794
(1)   During the six months ended June 30, 2018, the Company reported a
GAAP net loss and positive adjusted net income. Accordingly, there
were 339,988 dilutive shares from options and RSUs included in the
adjusted earnings per common share calculation for the six months
ended June 30, 2018, that were considered anti-dilutive in
determining the GAAP diluted loss per common share.

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