(Mark One)
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x
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2014
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or
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o
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Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the transition period from ____ to ____
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Commission File Number 001-14785
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GSE Systems, Inc.
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(Exact name of registrant as specified in its charter)
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Delaware
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52-1868008
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(State of incorporation)
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(I.R.S. Employer Identification Number)
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1332 Londontown Blvd., Suite 200, Sykesville MD
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21784
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code: (410) 970-7800
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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PAGE
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PART I.
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FINANCIAL INFORMATION
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3
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Item 1.
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Financial Statements:
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3
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4
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5
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6
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7
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8
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Item 2.
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19
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Item 3.
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30
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Item 4.
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31
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PART II.
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OTHER INFORMATION
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32
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Item 1.
|
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32
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Item 1A.
|
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32
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Item 2.
|
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32
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Item 3.
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32
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Item 4.
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32
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Item 5.
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33
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Item 6.
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33
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34
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Unaudited
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|||||||
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June 30, 2014
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December 31, 2013
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||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$
|
18,103
|
$
|
15,643
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||||
Restricted cash
|
11
|
45
|
||||||
Contract receivables, net
|
14,419
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24,557
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||||||
Prepaid expenses and other current assets
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3,646
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3,699
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||||||
Total current assets
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36,179
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43,944
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||||||
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||||||||
Equipment, software and leasehold improvements
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7,154
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7,090
|
||||||
Accumulated depreciation
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(5,366
|
)
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(5,175
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)
|
||||
Equipment, software and leasehold improvements, net
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1,788
|
1,915
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||||||
|
||||||||
Software development costs, net
|
1,274
|
1,020
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||||||
Intangible assets, net
|
647
|
709
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||||||
Long-term restricted cash
|
1,021
|
1,021
|
||||||
Other assets
|
177
|
218
|
||||||
Total assets
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$
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41,086
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$
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48,827
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||||
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||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
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$
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1,309
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$
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3,554
|
||||
Accrued expenses
|
2,061
|
1,903
|
||||||
Accrued compensation and payroll taxes
|
2,571
|
2,497
|
||||||
Billings in excess of revenue earned
|
5,905
|
6,545
|
||||||
Accrued warranty
|
1,640
|
1,851
|
||||||
Other current liabilities
|
907
|
1,603
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||||||
Total current liabilities
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14,393
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17,953
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||||||
|
||||||||
Other liabilities
|
78
|
487
|
||||||
Total liabilities
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14,471
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18,440
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||||||
|
||||||||
Stockholders' equity:
|
||||||||
Preferred stock $.01 par value, 2,000,000 shares authorized, shares issued and outstanding none in 2014 and 2013
|
-
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-
|
||||||
Common stock $.01 par value, 30,000,000 shares authorized, shares issued 19,486,770 in 2014 and 2013
|
195
|
195
|
||||||
Additional paid-in capital
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72,544
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72,205
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||||||
Accumulated deficit
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(42,410
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)
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(38,400
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)
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||||
Accumulated other comprehensive loss
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(715
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)
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(614
|
)
|
||||
Treasury stock at cost, 1,598,911 shares in 2014 and 2013
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(2,999
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)
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(2,999
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)
|
||||
Total stockholders' equity
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26,615
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30,387
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||||||
Total liabilities and stockholders' equity
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$
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41,086
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$
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48,827
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Three Months ended
June 30,
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Six Months ended
June 30,
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||||||||||||||
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2014
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2013
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2014
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2013
|
||||||||||||
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||||||||||||||||
Contract revenue
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$
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8,276
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$
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11,034
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$
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17,000
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$
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23,417
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||||||||
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||||||||||||||||
Cost of revenue
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5,629
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8,219
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12,129
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17,521
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||||||||||||
Write-down of capitalized software development costs
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-
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2,174
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-
|
2,174
|
||||||||||||
Gross profit
|
2,647
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641
|
4,871
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3,722
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||||||||||||
|
||||||||||||||||
Operating expenses:
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||||||||||||||||
Selling, general and administrative
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4,452
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3,946
|
8,596
|
8,111
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||||||||||||
Goodwill impairment loss
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-
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4,462
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-
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4,462
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||||||||||||
Depreciation
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134
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146
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273
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299
|
||||||||||||
Amortization of definite-lived intangible assets
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36
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52
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72
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104
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||||||||||||
Total operating expenses
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4,622
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8,606
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8,941
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12,976
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||||||||||||
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||||||||||||||||
Operating loss
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(1,975
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)
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(7,965
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)
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(4,070
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)
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(9,254
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)
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||||||||
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||||||||||||||||
Interest income, net
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28
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24
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59
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63
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||||||||||||
Gain (loss) on derivative instruments, net
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5
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(410
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)
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109
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(143
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)
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||||||||||
Other income (expense), net
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3
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94
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(7
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)
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(11
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)
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||||||||||
Loss before income taxes
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(1,939
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)
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(8,257
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)
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(3,909
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)
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(9,345
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)
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||||||||
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||||||||||||||||
Provision (benefit) for income taxes
|
47
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(58
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)
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101
|
9
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|||||||||||
Net loss
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$
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(1,986
|
)
|
$
|
(8,199
|
)
|
$
|
(4,010
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)
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$
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(9,354
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)
|
||||
|
||||||||||||||||
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||||||||||||||||
Basic loss per common share
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$
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(0.11
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)
|
$
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(0.45
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)
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$
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(0.22
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)
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$
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(0.51
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)
|
||||
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||||||||||||||||
Diluted loss per common share
|
$
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(0.11
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)
|
$
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(0.45
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)
|
$
|
(0.22
|
)
|
$
|
(0.51
|
)
|
|
Three Months ended
June 30,
|
Six Months ended
June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
|
||||||||||||||||
|
||||||||||||||||
Net loss
|
$
|
(1,986
|
)
|
$
|
(8,199
|
)
|
$
|
(4,010
|
)
|
$
|
(9,354
|
)
|
||||
|
||||||||||||||||
Foreign currency translation adjustment, net of tax
|
(106
|
)
|
(158
|
)
|
(101
|
)
|
(160
|
)
|
||||||||
|
||||||||||||||||
Comprehensive loss
|
$
|
(2,092
|
)
|
$
|
(8,357
|
)
|
$
|
(4,111
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)
|
$
|
(9,514
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)
|
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
Accumulated
Other Comprehensive
|
Treasury
Stock
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Shares
|
Amount
|
Total
|
||||||||||||||||||||||||
Balance, December 31, 2013
|
19,487
|
$
|
195
|
$
|
72,205
|
$
|
(38,400
|
)
|
$
|
(614
|
)
|
(1,599
|
)
|
$
|
(2,999
|
)
|
$
|
30,387
|
||||||||||||||
|
||||||||||||||||||||||||||||||||
Stock-based compensation expense
|
-
|
-
|
339
|
-
|
-
|
-
|
-
|
339
|
||||||||||||||||||||||||
Foreign currency translation adjustment, net of tax
|
-
|
-
|
-
|
(101
|
)
|
-
|
-
|
(101
|
)
|
|||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
(4,010
|
)
|
-
|
-
|
-
|
(4,010
|
)
|
||||||||||||||||||||||
Balance, June 30, 2014
|
19,487
|
$
|
195
|
$
|
72,544
|
$
|
(42,410
|
)
|
$
|
(715
|
)
|
(1,599
|
)
|
$
|
(2,999
|
)
|
$
|
26,615
|
|
Six Months ended
June 30,
|
|||||||
|
2014
|
2013
|
||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$
|
(4,010
|
)
|
$
|
(9,354
|
)
|
||
Adjustments to reconcile net loss to net cash provided by operating activities:
|
||||||||
Goodwill impairment loss
|
-
|
4,462
|
||||||
Write-down of capitalized software development costs
|
-
|
2,174
|
||||||
Depreciation
|
273
|
299
|
||||||
Amortization of definite-lived intangible assets
|
72
|
104
|
||||||
Capitalized software amortization
|
95
|
478
|
||||||
Amortization of deferred financing costs
|
-
|
6
|
||||||
Change in fair value of contingent consideration
|
47
|
173
|
||||||
Stock-based compensation expense
|
339
|
438
|
||||||
Equity loss on investments
|
38
|
96
|
||||||
(Gain) loss on derivative instruments
|
(109
|
)
|
143
|
|||||
Changes in assets and liabilities:
|
||||||||
Contract receivables
|
9,985
|
2,786
|
||||||
Prepaid expenses and other assets
|
268
|
215
|
||||||
Accounts payable, accrued compensation and accrued expenses
|
(2,006
|
)
|
(562
|
)
|
||||
Billings in excess of revenue earned
|
(650
|
)
|
716
|
|||||
Accrued warranty reserves
|
(211
|
)
|
(329
|
)
|
||||
Other liabilities
|
(627
|
)
|
(86
|
)
|
||||
Net cash provided by operating activities
|
3,504
|
1,759
|
||||||
|
||||||||
Cash flows from investing activities:
|
||||||||
Capital expenditures
|
(141
|
)
|
(142
|
)
|
||||
Capitalized software development costs
|
(349
|
)
|
(995
|
)
|
||||
Restrictions of cash as collateral under letters of credit
|
-
|
(228
|
)
|
|||||
Releases of cash as collateral under letters of credit
|
34
|
-
|
||||||
Net cash used in investing activities
|
(456
|
)
|
(1,365
|
)
|
||||
|
||||||||
Cash flows from financing activities:
|
||||||||
Proceeds from issuance of common stock
|
-
|
44
|
||||||
Payments of the liability-classified contingent consideration arrangements
|
(500
|
)
|
(1,188
|
)
|
||||
Treasury stock purchases
|
-
|
(368
|
)
|
|||||
Net cash used in financing activities
|
(500
|
)
|
(1,512
|
)
|
||||
|
||||||||
Effect of exchange rate changes on cash
|
(88
|
)
|
(177
|
)
|
||||
Net increase (decrease) in cash and cash equivalents
|
2,460
|
(1,295
|
)
|
|||||
Cash and cash equivalents at beginning of year
|
15,643
|
22,386
|
||||||
Cash and cash equivalents at end of period
|
$
|
18,103
|
$
|
21,091
|
1. | Basis of Presentation and Revenue Recognition |
|
|
Three Months ended
June 30,
|
|
Six Months ended
June 30,
|
||||
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Slovenské elektrárne, a.s.
|
|
0.6%
|
|
22.4%
|
|
4.5%
|
|
22.9%
|
2. | Recently Adopted Accounting Pronouncements |
3. | Basic and Diluted Loss Per Common Share |
(in thousands, except for share amounts)
|
Three Months ended
|
Six Months ended
|
||||||||||||||
|
June 30,
|
June 30,
|
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Numerator:
|
||||||||||||||||
Net loss
|
$
|
(1,986
|
)
|
$
|
(8,199
|
)
|
$
|
(4,010
|
)
|
$
|
(9,354
|
)
|
||||
|
||||||||||||||||
Denominator:
|
||||||||||||||||
Weighted-average shares outstanding for basic earnings per share
|
17,887,859
|
18,299,108
|
17,887,859
|
18,320,653
|
||||||||||||
|
||||||||||||||||
Effect of dilutive securities:
|
||||||||||||||||
Employee stock options
|
-
|
-
|
-
|
-
|
||||||||||||
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
|
17,887,859
|
18,299,108
|
17,887,859
|
18,320,653
|
||||||||||||
|
||||||||||||||||
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
|
2,736,703
|
2,916,427
|
2,727,435
|
2,918,692
|
4. | Contract Receivables |
(in thousands)
|
June 30,
|
December 31,
|
||||||
|
2014
|
2013
|
||||||
|
||||||||
Billed receivables
|
$
|
8,472
|
$
|
19,040
|
||||
Recoverable costs and accrued profit not billed
|
5,972
|
5,519
|
||||||
Allowance for doubtful accounts
|
(25
|
)
|
(2
|
)
|
||||
Total contract receivables, net
|
$
|
14,419
|
$
|
24,557
|
|
June 30, 2014
|
|
December 31, 2013
|
China Nuclear Power Engineering Company
|
13.0%
|
|
4.9%
|
Slovenské elektrárne, a.s.
|
2.1%
|
|
35.9%
|
5. | Software Development Costs |
6. | Goodwill and Intangible Assets |
7. | Fair Value of Financial Instruments |
|
Quoted Prices
in Active
Markets for Identical Assets
|
Significant
Other
Observable Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||
(in thousands)
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
|
||||||||||||||||
Money market fund
|
$
|
12,261
|
$
|
-
|
$
|
-
|
$
|
12,261
|
||||||||
Foreign exchange contracts
|
-
|
3
|
-
|
3
|
||||||||||||
|
||||||||||||||||
Total assets
|
$
|
12,261
|
$
|
3
|
$
|
-
|
$
|
12,264
|
||||||||
|
||||||||||||||||
Foreign exchange contracts
|
$
|
-
|
$
|
(48
|
)
|
$
|
-
|
$
|
(48
|
)
|
||||||
|
||||||||||||||||
Total liabilities
|
$
|
-
|
$
|
(48
|
)
|
$
|
-
|
$
|
(48
|
)
|
|
Quoted Prices
in Active
Markets for Identical Assets
|
Significant
Other
Observable Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||
(in thousands)
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
|
||||||||||||||||
Money market fund
|
$
|
10,553
|
$
|
-
|
$
|
-
|
$
|
10,553
|
||||||||
Foreign exchange contracts
|
-
|
142
|
-
|
142
|
||||||||||||
|
||||||||||||||||
Total assets
|
$
|
10,553
|
$
|
142
|
$
|
-
|
$
|
10,695
|
||||||||
|
||||||||||||||||
Foreign exchange contracts
|
$
|
-
|
$
|
(655
|
)
|
$
|
-
|
$
|
(655
|
)
|
||||||
|
||||||||||||||||
Total liabilities
|
$
|
-
|
$
|
(655
|
)
|
$
|
-
|
$
|
(655
|
)
|
8. | Derivative Instruments |
|
June 30,
|
December 31,
|
||||||
(in thousands)
|
2014
|
2013
|
||||||
|
||||||||
Asset derivatives
|
||||||||
Prepaid expenses and other current assets
|
$
|
3
|
$
|
140
|
||||
Other assets
|
-
|
2
|
||||||
|
3
|
142
|
||||||
Liability derivatives
|
||||||||
Other current liabilities
|
(37
|
)
|
(637
|
)
|
||||
Other liabilities
|
(11
|
)
|
(18
|
)
|
||||
|
(48
|
)
|
(655
|
)
|
||||
|
||||||||
Net fair value
|
$
|
(45
|
)
|
$
|
(513
|
)
|
|
Three Months ended
June 30,
|
Six Months ended
June 30,
|
||||||||||||||
(in thousands)
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
|
||||||||||||||||
Foreign exchange contracts- change in fair value
|
$
|
11
|
$
|
(548
|
)
|
$
|
254
|
$
|
1
|
|||||||
Remeasurement of related contract receivables,
billings in excess of revenue earned, and
subcontractor accruals
|
(6
|
)
|
138
|
(145
|
)
|
(144
|
)
|
|||||||||
|
||||||||||||||||
Gain (loss) on derivative instruments, net
|
$
|
5
|
$
|
(410
|
)
|
$
|
109
|
$
|
(143
|
)
|
9. | Stock-Based Compensation |
10. | Long-Term Debt |
|
|
As of
|
|
Covenant
|
June 30, 2014
|
|
|
|
Minimum tangible capital base
|
Must Exceed $26.0 million
|
$24.7 million
|
Quick ratio
|
Must Exceed 2.00 : 1.00
|
2.51 : 1.00
|
Tangible capital base ratio
|
Not to Exceed .75 : 1.00
|
.59 : 1.00
|
11. | Product Warranty |
(in thousands)
|
||||
|
||||
Balance at December 31, 2013
|
$
|
1,851
|
||
Warranty provision
|
418
|
|||
Warranty claims
|
(623
|
)
|
||
Currency adjustment
|
(6
|
)
|
||
Balance at June 30, 2014
|
$
|
1,640
|
12. | Contingent Consideration |
13. | Income Taxes |
14. | Preferred Stock Rights |
15. | Share Repurchase Plan |
·
|
GSE Power Systems, Inc., a Delaware corporation;
|
·
|
GSE Power Systems, AB, a Swedish corporation;
|
·
|
GSE Engineering Systems (Beijing) Co. Ltd., a Chinese limited liability company;
|
·
|
GSE Systems, Ltd., a Scottish limited liability company;
|
·
|
GSE EnVision, LLC, a New Jersey limited-liability company; and
|
·
|
EnVision Systems (India) Pvt. Ltd., an Indian limited liability company.
|
·
|
Even following a temporary slowdown to revamp safety regulations following the Fukushima Daiichi accidents in Japan, China remains to be an ambitious country in the field of nuclear power energy. According to reports from China Daily, China has approved construction of 8.6 gigawatts ("GW") of new nuclear generation this year, following the approval of 2.1 GW last year. With 20 nuclear reactors and another 28 reactors under construction, China plans to build nuclear power plants as a key part of curbing demand on fossil fuels. By 2020, China plans to increase its nuclear capacity three fold to at least 58 GW according to the World Nuclear Association. As reported by Businessweek.com, Chinese engineers have adapted the Westinghouse Electric Company's AP1000 reactor technology into a larger design, called the CAP1400, which increases the power the reactor can produce from 1,000 megawatts to 1,400 megawatts. Most recently, Westinghouse announced that it is in advanced talks to build 8 additional AP1000 reactors in China for an estimated $24 billion. GSE's business in China remains strong and is working to strengthen its relationships with the Chinese nuclear utilities and is developing plans to grow its Chinese subsidiary. At June 30, 2014, we have backlog from Chinese end customers of $9.8 million.
|
·
|
South Korea, who ranks fifth globally in nuclear power generation, has largely developed its own nuclear power industry, building and operating its reactors through state-run utility Korea Electric Power Corp. In January 2014, South Korea approved a $7 billion project to build two nuclear plants. According to the World Nuclear Association, nuclear energy remains a strategic priority for South Korea and capacity is planned to increase by 59% to 32.9 GW in 2022. Additionally, South Korea is seeking to export its nuclear technology with a goal of exporting 80 nuclear reactors by 2030. The Company has hired an agent in Korea and is working to strengthen its relationships with the Korean nuclear utilities. At June 30, 2014, we have backlog from South Korean customers of $1.4 million.
|
·
|
Germany was the first major industrial power to announce that it would phase out nuclear power following the events in Fukushima, Japan. Pre-Fukushima, Germany obtained about one quarter of its electricity from nuclear energy, using 17 reactors, per the World Nuclear Association. Following the Fukushima disaster, all of the country's nuclear power reactors which began operation in 1980 or earlier were shut down. The remaining nine reactors will be closed by the end of 2022. Germany's politicians are striving to switchover to renewable energy and want renewable power to contribute 35% of the country's electricity consumption in 2020 and 80% by 2050 as part of its clean energy drive. At June 30, 2014, we have backlog from German customers of $1.5 million. We anticipate some future orders from our German customers.
|
·
|
Despite Russia moving forward with plans to expand the role of nuclear energy with an expected 50% increase in output by 2020, Russia has been a difficult landscape to navigate. The Company had done extensive upgrade work for the Leningrad Nuclear Power Plant prior to the consolidation of Russian nuclear power plants under Rosenergoatom in 2001 and received some additional work thereafter, but has received no additional work since 2008. Currently, Russia remains to be an unproven market for business opportunity.
|
·
|
In the U.S., prior to the Fukushima disaster, much of the nuclear power industry was anticipating a nuclear "renaissance." GSE received contracts in 2010 from Westinghouse Electric Company LLC to provide operator training simulators for the first nuclear reactors to be built in the U.S. in over 30 years at the Vogtle and VC Summer nuclear power plants. The U.S. Nuclear Regulatory Commission was reviewing 13 combined construction and operating license ("CCOL") applications from 12 companies and consortia for 22 nuclear power reactors. In February 2012, the NRC voted to issue the first three new rules to deal with safety issues based on eight changes identified by the NRC's Fukushima task force, with implementation expected by the end of 2016. The three orders require safety enhancements of operating reactors, construction permit holders, and combined license holders. These orders require nuclear power plants to implement safety enhancements related to (1) mitigation strategies to respond to extreme natural events resulting in the loss of power at plants, (2) ensuring reliable hardened containment vents, and (3) enhancing spent fuel pool instrumentation. In addition, the NRC requested each reactor reevaluate the seismic and flooding hazards at their site using present-day methods and information. Of the 13 combined construction and operating license applications under review by the NRC at the time of the Fukushima disaster, 2 licenses have been issued (for the Vogtle and VC Summer plants), 2 have been suspended and 9 are still under review. No new CCOL's have been filed with the NRC since the Fukushima disaster and the nuclear "renaissance" has not materialized.
|
·
|
GSE is selling its RELAP5-HD advanced thermohydraulic model for plants in Europe, Asia and the U.S. GSE has successfully sold its first two domestic upgrade programs using RELAP5-HD, and believes the success of these projects will help convince domestic customers of the value of this advanced model. To date, GSE has sold 23 RELAP5-HD projects around the world.
|
·
|
As evidenced by the new safety rules that the NRC has recently issued, the Chinese State Council's Safety Plan, and the creation in Japan of the Nuclear Regulatory Authority, there will be additional governmental regulations requiring plant modifications and new testing scenarios that will result in the need for higher fidelity simulation. According to Platts.com, U.S. nuclear plant operators estimate they will spend $3.6 billion in post-Fukushima upgrades. GSE has developed PSA-HD™ and DesignEPTM, which are engineering-grade nuclear simulation solutions for both full-scope simulator and desktop simulator applications. PSA-HD allows operating personnel to train for and develop responses to severe accident scenarios based on the operations of their specific facility. DesignEP provides a desktop solution that allows engineers, safety analysis specialists, emergency planners and plant operating personnel all to experiment with new designs and procedures to address severe accident conditions. Both solutions utilize MAAP as the calculation engine, with GSE's real-time executive and graphical interface to provide a dynamic, real-time solution for severe accident analysis. MAAP is an Electric Power Research Institute (EPRI) software program that performs severe accident analysis for nuclear power plants including assessments of core damage and radiological transport. A valid license to MAAP from EPRI is required to use MAAP with PSA-HD and DesignEP. PSA-HD's real-time code can be integrated with a nuclear plant's existing full-scope training simulator and is applicable to all current nuclear plant designs. GSE's solutions can be used to validate the utility's severe accident management guidelines (SAMGs), demonstrate the safety of current plant designs to regulators and stakeholders, and identify potential issues with existing plant design that may require modification. The solutions include high-fidelity models of the plant's reactor core, containment structures and spent fuel pool. The models simulate severe accident conditions which mirror those that occurred at the Fukushima facility, such as the release of radioactive materials due to overheating of the core, exposure of the fuel rods in the spent fuel pool, and hydrogen build up in the containment building.
|
(in thousands)
|
Three Months ended June 30,
|
Six Months ended June 30,
|
||||||||||||||||||||||||||||||
|
2014
|
%
|
2013
|
%
|
2014
|
%
|
2013
|
%
|
||||||||||||||||||||||||
Contract revenue
|
$
|
8,276
|
100.0
|
%
|
$
|
11,034
|
100.0
|
%
|
$
|
17,000
|
100.0
|
%
|
$
|
23,417
|
100.0
|
%
|
||||||||||||||||
Cost of revenue
|
5,629
|
68.0
|
%
|
8,219
|
74.5
|
%
|
12,129
|
71.3
|
%
|
17,521
|
74.8
|
%
|
||||||||||||||||||||
Write-down of capitalized software development costs
|
-
|
0.0
|
%
|
2,174
|
19.7
|
%
|
-
|
0.0
|
%
|
2,174
|
9.3
|
%
|
||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Gross profit
|
2,647
|
32.0
|
%
|
641
|
5.8
|
%
|
4,871
|
28.7
|
%
|
3,722
|
15.9
|
%
|
||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||
Selling, general and administrative
|
4,452
|
53.8
|
%
|
3,946
|
35.8
|
%
|
8,596
|
50.6
|
%
|
8,111
|
34.6
|
%
|
||||||||||||||||||||
Goodwill impairment loss
|
-
|
0.0
|
%
|
4,462
|
40.4
|
%
|
-
|
0.0
|
%
|
4,462
|
19.1
|
%
|
||||||||||||||||||||
Depreciation
|
134
|
1.6
|
%
|
146
|
1.3
|
%
|
273
|
1.6
|
%
|
299
|
1.3
|
%
|
||||||||||||||||||||
Amortization of definite-lived intangible assets
|
36
|
0.5
|
%
|
52
|
0.5
|
%
|
72
|
0.4
|
%
|
104
|
0.4
|
%
|
||||||||||||||||||||
Total operating expenses
|
4,622
|
55.9
|
%
|
8,606
|
78.0
|
%
|
8,941
|
52.6
|
%
|
12,976
|
55.4
|
%
|
||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Operating loss
|
(1,975
|
)
|
(23.9
|
)%
|
(7,965
|
)
|
(72.2
|
)%
|
(4,070
|
)
|
(23.9
|
)%
|
(9,254
|
)
|
(39.5
|
)%
|
||||||||||||||||
|
||||||||||||||||||||||||||||||||
Interest income, net
|
28
|
0.4
|
%
|
24
|
0.2
|
%
|
59
|
0.3
|
%
|
63
|
0.3
|
%
|
||||||||||||||||||||
Gain (loss) on derivative instruments, net
|
5
|
0.1
|
%
|
(410
|
)
|
(3.7
|
)%
|
109
|
0.6
|
%
|
(143
|
)
|
(0.6
|
)%
|
||||||||||||||||||
Other income (expense), net
|
3
|
0.0
|
%
|
94
|
0.9
|
%
|
(7
|
)
|
(0.1
|
)%
|
(11
|
)
|
(0.1
|
)%
|
||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Loss before income taxes
|
(1,939
|
)
|
(23.4
|
)%
|
(8,257
|
)
|
(74.8
|
)%
|
(3,909
|
)
|
(23.0
|
)%
|
(9,345
|
)
|
(39.9
|
)%
|
||||||||||||||||
|
||||||||||||||||||||||||||||||||
Provision (benefit) for income taxes
|
47
|
0.6
|
%
|
(58
|
)
|
(0.5
|
)%
|
101
|
0.6
|
%
|
9
|
0.0
|
%
|
|||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net loss
|
$
|
(1,986
|
)
|
(24.0
|
)%
|
$
|
(8,199
|
)
|
(74.3
|
)%
|
$
|
(4,010
|
)
|
(23.6
|
)%
|
$
|
(9,354
|
)
|
(39.9
|
)%
|
·
|
Business development and marketing costs increased slightly to $1.2 million from $1.1 million for the three months ended June 30, 2014 and 2013, respectively, but decreased to $2.2 million from $2.4 million for the six months ended June 30, 2014 and 2013, respectively. Bidding and proposal costs, which are the costs of operations personnel assisting with the preparation of contract proposals, decreased slightly year over year. Bidding and proposal costs were $392,000 and $533,000 for the three months ended June 30, 2014 and 2013, respectively, and $769,000 and $970,000 for the six months ended June 30, 2014 and 2013, respectively.
|
·
|
The Company's general and administrative expenses ("G&A") increased to $2.1 million from $2.0 million for the three months ended June 30, 2014 and 2013, respectively, and remained flat at $4.2 million for the six months ended June 30, 2014 and 2013, respectively. Some components of G&A are as follows:
|
o
|
The Company incurred foreign currency translation gains of $56,000 for the three months ended June 30, 2014 compared to losses of $73,000 for the three months ended June 30, 2013. For the six months ended June 30, 2014 and 2013, the Company incurred foreign currency translation losses of $114,000 and $137,000, respectively.
|
o
|
The Company implemented a global Enterprise Resource Planning system during the third quarter 2012. Costs related to support and maintenance of this implementation totaled $59,000 and $144,000 for the three and six months ended June 30, 2014 as compared to $104,000 and $289,000 for both the three and six months ended June 30, 2013, respectively.
|
o
|
During the three and six months ended June 30, 2014, the Company incurred severance costs of $193,000 and $474,000, respectively, associated with the downsizing of our Swedish operations. In addition, we recorded a $137,000 charge in the second quarter of 2014 related to the renegotiation of our Swedish office lease to downsize the size of the office. The Company incurred $121,000, in severance costs in the first quarter of 2013.
|
·
|
Gross spending on software product development ("development") expenses for the three and six months ended June 30, 2014 totaled $1.0 million and $1.8 million, respectively, as compared to $765,000 and $1.5 million for the three and six months ended June 30, 2013, respectively. The Company capitalized $194,000 (19.2% of development expenses) and $349,000 (19.4% of development expenses) of product development expenses for the three and six months ended June 30, 2014, respectively, and $498,000 (65.1% of development expenses) and $995,000 (66.9% of development expenses) for the same periods in 2013, respectively. Net development spending increased from $267,000 for the three months ended June 30, 2013 to $816,000 for the three months ended June 30, 2014 and from $492,000 for the six months ended June 30, 2013 to $1.5 million for the six months ended June 30, 2014.
|
o
|
The Company's 3D visualization team, which develops 3D technology to add to our training programs, incurred $89,000 and $135,000 of costs related to this effort during the three and six months ended June 30, 2014, respectively, as compared to $13,000 and $69,000 for the same periods in 2013, respectively.
|
o
|
During the three months ended June 30, 2014, EnVision completed its new gas-oil separation process simulation training tool and tutorial and continued its development of a new upstream amine treatment unit training tool. Development expense related to the EnVision product line totaled $138,000 and $108,000 for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, EnVision incurred $222,000 and $241,000 of development expense, respectively.
|
o
|
Spending on other software product development totaled $783,000 and $1.4 million for the three and six months ended June 30, 2014, respectively. Spending on other software product development totaled $644,000 and $1.2 million for the three and six months ended June 30, 2013, respectively. The Company's development expenses were mainly related to ISIS™, our configuration management system, and maintenance of our JADE™ applications.
|
·
|
On May 22, 2013, the Company and Electrobalt Holding, a Russian Federation closed joint-stock company, created a 50/50 joint venture called General Simulation Engineering RUS Limited Liability Company ("GSE RUS"). For the three and six months ended June 30, 2014, the Company recognized losses of $10,000 and $38,000, respectively, relating to its pro rata share of operating results from GSE-RUS. No equity gains or losses on the GSE RUS investment were recorded in the first two quarters of 2013.
|
·
|
For the three and six months ended June 30, 2013, the Company recognized a gain of $18,000 and a loss of $96,000, respectively, relating to its pro rata share of operating results from GSE-UNIS Simulation Technology Co., Ltd. The Company and its joint venture partner, Beijing Unis Investment Co., Ltd., (UNIS) agreed in principal to terminate the GSE-UNIS joint venture as of July 31, 2013. As a result of UNIS agreeing in principal to purchase GSE's 49% ownership interest in the joint venture, the Company reclassified its $1.2 million investment to Other Current Assets.
|
·
|
As a 10% owner of the Emirates Simulation Academy ("ESA") in the UAE, the Company was required to provide a guarantee of 10% of ESA's credit facility. The Company provided the guarantee by depositing cash into an interest bearing, restricted account with the Union National Bank ("UNB"). In 2009, the Company wrote off the entire balance in this account. In the second quarter of 2013, the Company was notified by UNB that the ESA line of credit had been paid off by utilizing the guarantees from the three owners. The balance remaining in our account after the settlement of the guarantee, $82,000, was transferred to us and the UNB account was closed.
|
·
|
The Company had other miscellaneous income of $13,000 and $31,000 for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, the Company had other miscellaneous expense of $6,000 and other miscellaneous income of $3,000, respectively.
|
·
|
A $10.0 million decrease in the Company's contract receivables, excluding any gains or losses on derivatives. The Company's trade receivables, net of the allowance for doubtful accounts, decreased from $19.0 million at December 31, 2013 to $8.4 million at June 30, 2014. At June 30, 2014, trade receivables outstanding for more than 90 days, net of the bad debt reserve, totaled approximately $2.5 million as compared to $0.6 million at December 31, 2013. The Company believes the entire 90-day balance at June 30, 2014 will be received. The Company's unbilled receivables increased by approximately $0.5 million to $6.0 million at June 30, 2014 as compared to December 31, 2013. The increase in the unbilled receivables is due to the timing of contracted billing milestones of the Company's current projects. In July 2014, the Company invoiced $1.2 million of the unbilled amounts; the balance is expected to be invoiced and collected within one year.
|
·
|
A $2.0 million decrease in accounts payable, accrued compensation and accrued expenses. The decrease was due to the timing of payments made by the Company to vendors and subcontractors.
|
·
|
A $2.8 million decrease in the Company's contract receivables. The Company's trade receivables, net of the allowance for doubtful accounts, decreased from $12.4 million at December 31, 2012 to $10.0 million at June 30, 2013. At June 30, 2013, trade receivables outstanding for more than 90 days, net of the bad debt reserve, totaled approximately $3.3 million versus $2.5 million at December 31, 2012. Included in the over 90 day balance at June 30, 2013 and December 31, 2012 was $2.3 million due from Shandong Nuclear Power Co. Ltd. which has since been collected. The Company's unbilled receivables decreased by approximately $500,000 to $10.8 million at June 30, 2013. The decrease in the unbilled receivables was due to the timing of contracted billing milestones of the Company's current projects.
|
·
|
A $716,000 increase in billings in excess of revenue earned. The increase was due to the timing of contracted billing milestones of the Company's projects.
|
|
|
As of
|
|
Covenant
|
June 30, 2014
|
|
|
|
Minimum tangible capital base
|
Must Exceed $26.0 million
|
$24.7 million
|
Quick ratio
|
Must Exceed 2.00 : 1.00
|
2.51 : 1.00
|
Tangible capital base ratio
|
Not to Exceed .75 : 1.00
|
.59 : 1.00
|
|
10.1
|
Extension of the $7,500,000 Revolving Credit Note, dated June 30, 2014, filed herewith.
|
|
|
|
|
31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002, filed herewith.
|
|
|
|
|
31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
|
32.1
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
|
101.INS*
|
XBRL Instance Document
|
|
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema
|
|
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase
|
·
|
The Bank has agreed to extend the Revolving Credit Expiration Date until March 31, 2015, as defined in the Master Loan and Security Agreement dated November 22, 2011 in Section 1.1 (a), by and among GSE Systems, Inc., GSE Power Systems, Inc., GSE EnVision, Inc. and Susquehanna Bank. The Bank will require that cash collateral in an amount equal to any outstanding Letter's of Credit, working capital advances or negative foreign exchange positions, be maintained in a segregated account at Susquehanna. We will have our counsel prepare a brief modification to the Financing Documents to reflect this change which we will send to you under separate cover. All other terms and conditions shall remain the same.
|
1.
|
I have reviewed this quarterly report on Form 10-Q of GSE Systems, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report are conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting;
|
Date: August 14, 2014
|
|
/s/ James A. Eberle
|
|
|
James A. Eberle
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
1.
|
I have reviewed this quarterly report on Form 10-Q of GSE Systems, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting;
|
Date: August 14, 2014
|
|
/s/ Jeffery G. Hough
|
|
|
Jeffery G. Hough
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: August 14, 2014
|
/s/ James A. Eberle
|
|
/s/ Jeffery G. Hough
|
|
|
James A. Eberle
|
|
Jeffery G. Hough
|
|
|
Chief Executive Officer
|
|
Senior Vice President and Chief
|
|
|
|
|
Financial Officer
|
|
Stock-Based Compensation (Details) (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2014
|
Jun. 30, 2013
|
Jun. 30, 2014
|
Jun. 30, 2013
|
|
Stock-Based Compensation [Abstract] | ||||
Pre-tax share based compensation expense | $ 161,000 | $ 214,000 | $ 339,000 | $ 438,000 |
Shares granted under stock options (in shares) | 0 | 0 | 60,000 | 64,500 |
Fair value of shares granted under stock option plan | $ 0 | $ 0 | $ 56,000 | $ 78,000 |
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