Acquisition

12 Months Ended

Dec. 31, 2011

3. Acquisition

EnVision Systems, Inc.

On January 4, 2011, (the “Closing Date”) the Company completed the acquisition of all outstanding common stock of EnVision Systems, Inc. (“EnVision”), acquiring 100% ownership in EnVision. EnVision is headquartered in Madison, NJ and has an Indian subsidiary based in Chennai, India. EnVision’s tutorials and simulation models serve the entry-level training market for the oil & gas, refining, and specialty chemicals industries. EnVision operates as a wholly-owned subsidiary of GSE and has been re-named GSE Envision, Inc. On the Closing Date, GSE paid $1.2 million in cash to the shareholders of EnVision. In addition, if EnVision attains certain revenue targets for the four year period ending December 31, 2014, the shareholders of EnVision could receive up to an additional $3.0 million payable over four years.

On the first anniversary of the Closing Date, the EnVision shareholders are entitled to receive $550,000. On the second, third and fourth anniversaries, EnVision shareholders are entitled to receive $500,000. These payments are contingent upon EnVision meeting or exceeding certain revenue targets during those periods, as defined in the purchase agreement. The EnVision shareholders are also entitled to the amount by which the aggregate payments received by the Company from Shell Global Solutions International, B.V. (“Shell”) after the Closing Date and prior to March 31, 2014 exceed $3.0 million, provided that the amount payable to the EnVision shareholders will not exceed $1.0 million. At December 31, 2011, the Company has accrued approximately $310,000 and $2.0 million of short term and long term contingent consideration, respectively, based on its estimate of the fair value of the potential contingent consideration payable to the EnVision shareholders.

EnVision’s shareholders are entitled to receive an amount equal to 30% of the cash collected prior to March 31, 2013 from the billed receivables which were included on the Closing Date balance sheet related to Shell. Seventy percent of the cash collected prior to March 31, 2013 relating to the recoverable costs and accrued profit not billed amounts which appeared on the Closing Date balance sheet will be paid to the EnVision shareholders. Payments to the EnVision shareholders for cash collections relating to the billed receivables and recoverable costs and accrued profit not billed amounts will occur in three yearly payments ending in 2013. EnVision shareholders could receive up to approximately $687,000 of the trade receivables and recoverable costs and accrued profit not billed amounts included on the Closing Date balance sheet, contingent on the collection of cash. In the second quarter of 2011, the Company made payments of $74,000 to EnVision’s shareholders related to billed receivables included on the Closing Date balance sheet.

At Closing, the EnVision shareholders were entitled to receive all the cash of the business except for $400,000. Additionally, the EnVision shareholders were credited for any prepaid expenses and assumed any existing liabilities from the Closing Date balance sheet. Based on the Closing Date balance sheet, a $109,000 payment was made to the EnVision shareholders in the second quarter of 2011.

Of the $4.0 million gross purchase price, the Company accrued approximately $2.0 million of contingent consideration based on its estimate of the fair value of the potential contingent consideration payable to the EnVision shareholders for the four year period ending December 31, 2014. The Company will estimate the fair value of the recorded amount of contingent consideration on a quarterly basis and any subsequent adjustments based on actual payments or revised estimates are recognized in the selling, general, and administrative expenses of the consolidated statement of operations during the period of adjustment. The contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting.

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The estimated fair value of the purchase price recorded by the Company consisted of the following (in thousands):

Cash paid at closing	$	1,200
Present value of estimated future payments		1,998
Payable to EnVision Shareholders - contracts receivable		687
Working capital retained by EnVision Shareholders - cash		109
Total estimated purchase price	$	3,994

The Company’s purchase price allocation for the net assets acquired was as follows (in thousands):

January 4, 2011
(unaudited)

Cash		$	553
Contract receivables			1,124
Prepaid expenses and other current assets			62
Property, plant and equipment, net			22
Receivable from EnVision shareholders			321
Intangible assets			1,509
Goodwill			1,854
	Total assets acquired		5,445

Accounts payable, accrued expenses and other liabilities			429
Billings in excess of revenue earned			46
Deferred tax liability			976
	Total liabilities assumed		1,451

	Net assets acquired	$	3,994

The Company recorded intangible assets as a result of the acquisition. Contractual customer relationships acquired totaled $438,000 and are being amortized in proportion to the projected revenue streams of the related contracts over three years. Non-contractual customer relationships acquired totaled $433,000 and are being amortized in proportion to the projected revenue streams of the related relationships over eight years. The Company acquired intangible assets of $471,000 related to developed technology which are being amortized using the straight line method over an eight year period. The Company also acquired $152,000 of in-process research and development intangible assets which are being amortized over eight years in proportion to the projected revenue streams of the related in-process research and development. Additionally, $15,000 related to domain names and other marketing related intangibles were obtained and are being amortized using the straight line method over an estimated useful life of three years. The intangible assets and accrued contingent consideration for EnVision were recorded at estimated fair value.

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EnVision’s results of operations are included in the consolidated financial statements for the period beginning January 4, 2011.

Pro forma results. Our consolidated financial statements include the operating results of EnVision as of the date of acquisition. For the twelve months ended December 31, 2011 and 2010, the unaudited pro forma financial information below assumes that our material business acquisition of EnVision occurred on January 1, 2010.

(in thousands except per share data)	(unaudited)
	Twelve Months ended
	December 31,
Pro forma financial information including the acquisition of EnVision		2011		2010
Revenue	$	51,126	$	50,410
Operating income (loss)		2,590		(708)
Net income (loss)		3,163		(1,711)
Earnings (loss) per common share — basic	$	0.17	$	(0.09)
Earnings (loss) per common share — basic	$	0.17	$	(0.09)

TAS Holdings Ltd.

Effective April 26, 2010, GSE Systems Inc., through its wholly owned subsidiary GSE Systems, Ltd. (“GSE UK”), completed the acquisition of TAS Holdings Ltd. (“TAS”), a provider of engineering consulting, specializing in electrical system design, instrumentation and controls engineering and automation engineering. GSE UK acquired 100% of the outstanding common stock of TAS. The purchase price for the common stock of TAS was equal to (i) the consolidated net asset value of TAS as of April 26, 2010, approximately $600,000, and (ii) four times the adjusted consolidated pre-tax income of TAS for the year ended September 30, 2009, approximately $1.7 million (the “Adjusted Profit Consideration”), for a total of approximately $2.3 million in cash, GSE Systems, Inc. common stock and contingent consideration.

Approximately $500,000 of the consolidated net asset value was paid on the closing date and the remaining $100,000 of the consolidated net asset value was paid during the third quarter 2010. On the closing date, the TAS Shareholders were entitled to receive approximately $683,000 (40% of the Adjusted Profit Consideration) payable in GSE common stock. Based upon the formula agreed to by the parties, the TAS Shareholders received 122,617 shares of GSE common stock.

During 2011, the Company paid the TAS Shareholders $167,000 based on the results of TAS for the nine month period ending December 31, 2010. The Company has accrued approximately $70,000 at December 31, 2011 to satisfy all remaining obligations under the purchase agreement. The Company recorded a $677,000 reduction in the fair value of the contingent consideration related to the TAS purchase agreement during 2011. This adjustment is recognized in the selling, general, and administrative expenses of the consolidated statement of operations.

On April 26, 2010, the Company recorded intangible assets as a result of the acquisition, totaling $735,000. These intangible assets included contractual and non-contractual customer relationships, customer backlog, trademarks, domain names, and other marketing related intangibles. These assets are being amortized over an estimated useful life of one to ten years. In 2011, the Company accelerated the amortization related to one of their contractual customer relationships due to the completion of TAS's contract with the customer. The Company recognized approximately $116,000 of additional amortization as a result of this acceleration during 2011.

TAS’ results of operations are included in the consolidated financial statements for the period beginning April 26, 2010.

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