Q4 2020 GSE Systems Inc Earnings Call

Ladies and gentlemen, please standby arco because you get them militarily once again, ladies and gentlemen, please standby our comfort you can momentarily.

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Greetings and welcome.

GSE solutions fourth quarter and year end, 2020 financial results conference call and.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

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And now.

I'm, saying the conference over to your host Kelly all of the equity group. Thank you you may begin.

Thank you Devin and good afternoon, everyone. Thank you for joining us today.

Before we begin I would like to remind everyone that statements made during the course of this call maybe considered forward looking statements within the meaning of section 27 a of.

Let's trees Act of 19, and 33 as amended and section 21 E of the Securities Act of 19 and 34.

These statements reflect current expectations concerning future events and results.

Words, such as expect intend believe may will should could anticipate.

Late and similar expressions are words that are used to identify forward looking statements, but their absence does not mean a statement is not and forward. Looking these statements are not guarantees of future performance and are subject to risks and uncertainties and other important factors that could cause actual performance or achievements to be materially different from those projected.

For a full discussion of these risks uncertainties and factors you are encouraged to read Gse's documents on file with the Securities and Exchange Commission, including those set forth and periodic reports filed under the forward looking statements and risk factors section.

<unk> does not intend to update or revise any forward looking.

Statements, whether as a result of new instrument, 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 and addition to other GAAP measures provide meaningful supplemental information regarding the company's operational performance and.

Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies.

These measures should be considered centered in addition to and not as a substitute for or.

Our superior to any measure of performance prepared in accordance with GAAP and <unk>.

Reconciliation of non-GAAP measures to their most directly comparable GAAP measures in accordance with SEC regulation G can be found in the company's earnings release.

And that I'd now like to turn the call over to Mr. Kyle.

Loudermilk, Chief Executive Officer of GSE solutions Kyle. Please go ahead.

Thank you Kelly I'd like to welcome everyone to GSE fourth quarter and full year 2020 financial results Conference call. Joining me on today's call is Emmett Pepe, our Chief Financial Officer.

Earlier today, we issued a press release covering our fourth.

Quarter and full year financial results.

You've had a chance to review this news release, but if not a copy can be found on our website at www Dot GSE dot com under the news section.

We finished 2020 on a very encouraging note with fourth quarter adjusted EBITDA improving to positive $1 one.

Compared to three straight quarters of negative adjusted EBITDA to start the year amid the onset of the global COVID-19 pandemic.

This is really good news demonstrating that GSE you can achieve positive adjusted EBITDA, even amidst COVID-19, and significant business impact to our topline revenues and the quarter.

I am proud of our team's resilience and.

Ability to work through the industry wide project delays and work stoppages caused by the pandemic this year.

Our ability to end the year on a positive note is also a direct result of a multi year effort to intentionally ally and GSE to a broad set of essential services for the industry.

Our priority.

During the pandemic has been the health and wellbeing of our employees and customers.

And so I'm proud of our efforts to keep our offices open as essential services to enable employees to work from home through effective use of technology.

Pivot to remote work when possible and to keep engaged with coworkers and customers via effective.

And the use of technology and critical on site visits.

Given the growing de Carbonization movement, which I will touch on later, we are very bullish about our long term prospects.

Also have reason to be optimistic about our outlook for 2021.

Fortunately, we started to see a meaningful upswing and bidding activity at the end of the year.

Which has continued into the first quarter of 2021.

In December.

And ITC group <unk> Master service agreements with a major U S utility for a combined budgeted value of $35 million over two years.

We anticipate that work under these agreements, which is not yet reflected and our.

New order quarter and backlog will start to ramp as we approach the end of Q2 and continue to build and the second half of the year.

We have provided staff augmentation services to this long standing customer for many years and these significant agreements expand our mandate to include qualified engineering services.

We will be <unk>.

Supply and a client with highly skilled and field professionals engineers and maintenance and operation support personnel among others to deliver services on both nuclear and non nuclear related projects.

The <unk> team continued its momentum and January winning three additional contracts with a combined value of $8 7 million.

To provide specialized training and staffing support services for large energy companies and all.

All of these wins, we beat out tough competition, reflecting our elite nuclear expertise personalized approach to customer service and proven track record and providing the best people available to industry.

And performance solutions.

<unk>, we continued to successfully grow our cloud based SaaS revenue stream and the fourth quarter.

In particular, we were very pleased that a large U S oil company commenced and multiyear subscription to our envision on demand software simulation and training platform.

Envisions computer based tutorials with high fidelity simulation models allow the customer.

Estimate to conduct critical training anytime anywhere in the areas of process fundamentals as well as sulfuric alkylation, Amy and treating fluid catalytic cracking and sulfur recovery.

We have made significant significant progress and our efforts to grow our software revenues, which is great news.

This has increased 34% to $3 $9 million and 2020 compared to $2 9 million and the prior year.

Not overstate the importance of this progress we intentionally put in place a strategy to expand our license revenue and do so such that the revenue would grow as a recurring annuity.

The SaaS business model provides us with.

Recurring and predictable revenue scalability and for our investors potential hidden value considering the market valuation multiples for similar platforms.

<unk> has increased our clients' interest and flexible decentralized simulation and workforce development solutions that are underpinned by robust technology and deep.

Deep subject matter expertise.

Our SaaS customers require only a web browser and internet connectivity for the end user enabling the client corporation to eliminate the burdensome and costly management of on premises technology.

So long as a subscription as active our clients benefit from our essential high value solutions.

This business model ensures a very sticky recurring and growing revenue stream for GSE.

Further emphasizing this demand from industry, just yesterday, we announced that another longtime customer a major Canadian energy company has contracted with GSE to upgrade their on premises training platform to our new envision software.

Our as a service.

Ascription solution.

The conversion of perpetual licenses to subscription licenses is a win win for the customer and GSE from the aforementioned reasons. We are very excited about this progress and are investing and our solutions roadmap for further growth and 2021.

New orders for Q.

For 2020 totaled $7 9 million, consisting of $4 4 million for performance improvement and $3 $5 million per <unk>.

Our total backlog at the end of Q4 stood at $40 4 million consisting of $33 million for performance improvement and $10 $1 million per at ITC and.

While these figures are below pre pandemic levels, we see signs that our backlog has leveled out and we expect to see improvement throughout 2021 is a recent and ITC contract wins begin to appear and our new orders and backlog numbers and as we win new business and both segments.

We have seen.

<unk> seen.

And bidding activity pick up already in 2021 if.

If we are successful converting bits to wins, we would expect a significant rebound and both our <unk> and performance improvement segments and the latter part of the year.

At the end of 2020, our team undertook a deep dive to evaluate our growth strategy for 2021 and beyond the result of.

<unk> is a compelling solutions roadmap that we have highlighted and our most recent investor deck, we're very excited to execute our organic growth roadmap and the new year.

The organic growth strategy and solutions roadmap is comprised of three key elements build integrate and expand.

Build entails building.

Upon what is extra historically worked for GSE through continuing to deliver our essential services to industry <unk>.

Integrate intel's integrating our solutions as one company and as we go to market.

We are aligned and streamline ourselves to ensure that we are one company delivering comprehensive and integrated solutions to the market. We are focused on effectively.

Cross selling and up selling to existing customers and traditional end markets, such as nuclear and potential expanding into adjacent markets.

<unk>, we've gone through a detailed process and defining the new collaborative service and technology products that will provide significant value and to industry and a unique and compelling manner.

And you're seeing promising traction for new solutions, such as thermal performance monitoring data validation and reconciliation and other new solutions that Intel are essential services and unique licensed <unk> technology.

Solutions lead us to the broader de carbonization market as our customers and roofing swiftly to decarbonize their power.

Generation.

We're well positioned for this and we expect to have some exciting news on this front as the year unfolds.

And focusing on organic growth, we can effectively target investment and the business, while continuing to manage our balance sheet.

Our cash and equivalents totaled $6 7 million on December 31, providing a.

Power Gen and financial flexibility to manage the business.

This is a solid foundation for us as we proceed through 2021.

As 2020 demonstrate stratum.

We are fortunate to have a unique and durable business that provides essential services to a diverse diversified group of blue chip clients and an industry with very high barriers.

Sufficiency.

Our existing client relationships are becoming even stickier as we provide them with an increasing number of new solutions.

Looking ahead, we expect to benefit from several important industry drivers, including the de carbonization of the power industry. The.

And the deployment of small modular reactors known as <unk>.

And the widening skills gap and aging nuclear power work force.

The new administration stance on clean energy, including proposed increases and public spending for carbon free energy sources, including nuclear as a targeted area of investment per the recently announced American jobs planned is a very clear.

Here industry tailwind.

In February the U S made and official returned to the Paris climate agreement, which is designed to limit greenhouse gas emissions and address global warming.

To reach a carbon free power sector by 2035, and a net zero economy by 2050 U S nuclear energy must play a major role and.

And GSE as a key enabler to this industry.

Another key driver within the industry as the development and deployment of <unk> technology, which has gained significant traction of late for example in September 2020.

The U S nuclear regulatory Commission approved the first and some are designed by new scale, which is an existing GSE.

GSE customer, we're supporting new scale with simulation technology and engineering services solutions.

Scale estimates that its first SLR based and Utah.

Could be operational by 2027.

These reactors have key advantages and that they are smaller factory built modular cheaper easier.

Easier to build and generally perceived a safer than traditional reactors, while having greater reliability and wind and solar energy.

And other recent <unk> news just last month, Montana Senate Committee voted to pass a feasibility study for replacing coal fired power generation and to call strip power plant with Us and March.

And while U S representative Mike Simpson called for breaching for Snake River dams.

And to restore salmon ecosystems as well as replace energy for those dams with sources, such as us and marks.

In October 2020, the USDA awarded a 160 million.

To build working models of small scale advanced nuclear reactor designs and and December announced another $30 million of initial funding under its new advanced reactor demonstration program.

Further investment and advanced nuclear has highlighted and the American jobs plan.

Finally, the U S energy industry is expected to lose a large.

A large percentage of this work force as baby boomers retire.

This should present greater opportunities for our business over the next several years as utilities will look to vendor expertise to fill the gap.

We are well positioned to identify and provide solutions that offer highly qualified professionals for both short and long term assignments whether due to.

And aging power workforce or due to other short term spikes in demand for specialist skills.

In closing with these very clear industry tailwind in our favor and given our very unique position as a heavily tech enabled provider of essential services to the de carbonization of.

Of the power sector and.

And nuclear power industry, we remain very confident and our opportunity to create substantial long term value for customers and shareholders alike.

And the near term, we intend to continue to drive organic growth as described streamline our operations containing costs and manage our balance sheet and and.

Maximize cash flow.

We're optimistic that 2021 will be a much stronger year for our industry as project activity rebounds, and for our company as we execute on our very exciting growth strategy.

I'll now turn over.

Over the call to Emmett Pepe, our CFO, who will review the fourth quarter financial results and then please go ahead.

Thank you Kyle.

Total revenue in Q4, 2020 was $12 7 million compared to $17 3 million and Q4 2019.

<unk>, a $1 6 million decrease and our performance improvement segment revenue and a $3 million decrease and our NII T C.

Segment revenue.

The decrease and performance improvement revenue was driven primarily by COVID-19.

Related headwinds our inability to commence certain projects remotely the decline and ITC revenue was primarily due to COVID-19 related project delays and stoppages.

And lower staff augmentation needs from customer.

During the quarter.

On a sequential basis, our Q4, 2020 total revenue remained essentially flat compared to Q3 2020 total revenue and we believe we are well positioned to build on this revenue base as we progress through 2021, given recent contract wins and the recent increase in.

Bidding activity Kyle mentioned earlier.

Gross profit and Q4, 2020 totaled $3 8 million compared to $5 million and Q4 2019.

Performance improvement gross profit declined by approximately 289000 year over year to $3 2 million.

And ITC gross profit.

<unk> decreased by approximately 944000 and year over year to 634000.

Our overall gross profit margin increased year over year. Despite the challenges caused by COVID-19 pandemic, we were able to adapt our cost structure quickly to counteract the revenue declines caused by.

The industry wide project delays and stoppages.

Credit is given to the entire organization for B and agile and 2020, while we face.

Storage level of uncertainty.

SG&A expenses totaled $3 2 million and Q4, 2020 versus the comparable figure of $3 9 million and Q4 'twenty.

2019.

The decrease in SG&A expenses was primarily driven by lower business development costs.

We are currently and the process.

Back office systems overhaul to fully integrate all of our subsidiaries onto one platform. This is an exciting project and will allow the corporate function to better support the businesses.

To execute the organic growth strategy that Carl outlined as.

And as these systems begin to come online in 2020. One we anticipate that there will be synergies to capture that will further reduce our cost structure.

Operating loss equaled approximately $1 2 million and Q.

For 2020 compared to an.

Operating loss of approximately $1 6 million and Q4 2019.

Non-GAAP adjusted EBITDA as defined in our earnings release totaled approximately $1 1 billion and Q4 2020.

Compared to an adjusted EBITDA of $1 2 million and Q4 2019.

Q.

And as 2020 results are a significant step toward a normalization post COVID-19 and we're very pleased that we nearly reached breakeven for the full year 2020, after three consecutive quarters and negative adjusted EBITDA.

Also wanted to highlight the turnaround and DP engineering, which produced a positive EBITDA in Q4 2020.

Fourth we have right sized.

The DP engineering business. We are excited to continue to grow on that base using the outlet and the call details surrounding our organic growth strategy.

The engineering provides another central service to the nuclear power industry that further deepens our service offerings.

We have been prudently managing our balance sheet during.

The other 20, we paid out $18 5 million of our long term debt and at quarter and our net debt totaled $6 4 million consisting of $13 1 million of debt $6 seven.

$7 million of cash the total debt includes approximately $10 million that we received earlier this year under the Paycheck protection program.

And 'twenty, we have used these funds for payroll related costs rents utilities and other permitted uses.

As of December 31, 2020, we were in full compliance with all requirements in order to apply for forgiveness under the P. P. P loans, we apply for forgiveness of this loan and the first quarter of 'twenty, one and our application has been approved by the bank and is currently.

Waiting for approval by the SBA.

We anticipate a response and the second quarter of 2021.

Exclusive of the $10 million Paycheck protection program loan, which we continue to believe will be forgiven, our net cash balance would be $3 7 million.

We believe we have sufficient cash and working capital available to support.

Our ongoing business.

And Q1 2021, it's been a very busy quarter for call me with Investor presentations and conferences, we look forward to continue and these efforts throughout 'twenty, one and further publicize the positive work GSE is doing especially considering the renewed push surrounding decarbonization.

On a final note today, we filed.

And I'll be 25 notification of late filing as the company requires additional time and order to be able to file a complete and thorough annual report that said, we expect to file well within the extension windows.

I'll now turn the conversation back to Kyle.

Support and thanks, very much Emmett operator, please open the floor for questions.

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As there are no further questions at this time I would like to turn the call back over to management for any closing remarks.

Okay, well I'd just like to thank everybody for joining us we appreciate your time and interest and GSE.

Really.

Very pleased with the quarter and very excited about what's ahead of us and 2021.

Do you have any questions. Please reach out to our.

The IR firm the equity group and <unk>.

And we'd be happy to schedule a follow up call.

Thanks again, everyone is safe and we look forward to speaking with you all soon ticker.

And with that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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