Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On January 4, 2011 (the “Closing Date”), GSE Systems, Inc. (“GSE” or the “Company”), completed the acquisition of all outstanding common stock of EnVision Systems, Inc. (“EnVision”). At closing, 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 $3.05 million payable over four years.
The following unaudited pro forma condensed consolidated financial statements have been derived by the application of pro forma adjustments to our historical consolidated financial statements. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2010 is presented as if the acquisition had occurred on December 31, 2010. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2010 for GSE and EnVision, respectively, is presented as if the acquisition had occurred on January 1, 2010. The unaudited pro forma condensed consolidated financial statements do not purport to represent what our results of operations or financial position would have been as if the transaction had occurred on the dates indicated and are not intended to project our results of operations or financial position for any future period or date.
The unaudited pro forma adjustments are based on estimates, available information and certain assumptions that we believe are reasonable. The company has assumed that current value equals fair value for all assets and liabilities acquired in the acquisition of EnVision. The pro forma adjustments and primary assumptions are described in the accompanying notes. The unaudited pro forma condensed consolidated financial statements and the related notes should be read in conjunction with the historical consolidated financial statements and the related notes of EnVision included in Exhibit 99.1 of this Current Report on Form 8-K/A and the historical financial statements and accompanying notes of GSE included in our Form 10-K for the year ended December 31, 2010.
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GSE SYSTEMS, INC. AND SUBSIDIARIES | |||||||||||||||||
Unaudited Proforma Condensed Consolidated Balance Sheet | |||||||||||||||||
As of December 31, 2010 | |||||||||||||||||
(in thousands, except share data) | |||||||||||||||||
Assets | Historical GSE | Historical Envision | Pro Forma Adjustments | Pro Forma | |||||||||||||
Current assets: | |||||||||||||||||
Cash and cash equivalents | $ | 26,577 | $ | 553 | $ | (1,200 | ) | (a) | $ | 25,930 | |||||||
Restricted cash | 179 | — | — | 179 | |||||||||||||
Contract receivables, net | 17,201 | 1,195 | — | 18,396 | |||||||||||||
Prepaid expenses and other current assets | 1,992 | 69 | — | 2,061 | |||||||||||||
Total current assets | 45,949 | 1,817 | (1,200 | ) | 46,566 | ||||||||||||
Equipment and leasehold improvements | 4,727 | 189 | — | 4,916 | |||||||||||||
Accumulated depreciation | (3,667 | ) | (167 | ) | — | (3,834 | ) | ||||||||||
Property, plant, and equipment, net | 1,060 | 22 | — | 1,082 | |||||||||||||
Software development costs, net | 1,790 | — | — | 1,790 | |||||||||||||
Goodwill | 2,609 | — | 1,964 | (b) | 4,573 | ||||||||||||
Intangible assets, net | 637 | — | 1,529 | (c) | 2,166 | ||||||||||||
Long-term restricted Cash | 794 | — | — | 794 | |||||||||||||
Other assets | 775 | — | 321 | (k) | 1,096 | ||||||||||||
Total assets | $ | 53,614 | $ | 1,839 | $ | 2,293 | $ | 58,067 | |||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||
Current liabilities: | |||||||||||||||||
Accounts payable | $ | 4,945 | $ | — | $ | — | $ | 4,945 | |||||||||
Accrued expenses | 1,753 | 107 | — | 1,860 | |||||||||||||
Accrued compensation and payroll taxes | 2,053 | — | — | 2,053 | |||||||||||||
Billings in excess of revenue earned | 4,268 | 116 | — | 4,384 | |||||||||||||
Accrued warranty | 1,680 | — | — | 1,680 | |||||||||||||
Deferred tax liability – current | 35 | 92 | 105 | (d) | 232 | ||||||||||||
Other current liabilities | 1,175 | 18 | 733 | (e) | 1,926 | ||||||||||||
Total current liabilities | 15,909 | 333 | 838 | 17,080 | |||||||||||||
Other liabilities | 427 | 321 | 2,130 | (e) | 2,557 | ||||||||||||
Deferred tax liability – long term | 372 | 325 | 506 | (d) | 1,203 | ||||||||||||
Total liabilities | 16,708 | 979 | 3,474 | 21,161 | |||||||||||||
Commitments and contingencies | — | — | — | — | |||||||||||||
Stockholders’ equity: | |||||||||||||||||
Total shareholders’ equity | 36,906 | 860 | (860 | ) | (f) | 36,906 | |||||||||||
Total liabilities and stockholders’ equity | $ | 53,614 | $ | 1,839 | $ | 2,293 | $ | 58,067 | |||||||||
See accompanying notes to unaudited proforma condensed consolidated financial statements. |
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GSE SYSTEMS, INC. AND SUBSIDIARIES | |||||||||||||||||
Unaudited Proforma Condensed Consolidated Statement of Operations | |||||||||||||||||
Years ended December 31, 2010 | |||||||||||||||||
(in thousands, except share data) | |||||||||||||||||
Historical GSE Year Ended 12/31/2010 | Historical EnVision Year Ended 12/31/2010 | Pro Forma Adjustments | Pro Forma | ||||||||||||||
Contract revenue | $ | 47,213 | $ | 3,234 | $ | — | $ | 50,447 | |||||||||
Cost of revenue | 36,081 | 1,488 | (1,170 | ) | (i) | 36,399 | |||||||||||
Gross profit | 11,132 | 1,746 | 1,170 | 14,048 | |||||||||||||
Operating expenses: | |||||||||||||||||
Selling, general, and administrative | 11,683 | 1,287 | 353 | (g) | 13,323 | ||||||||||||
Depreciation | 579 | 5 | — | 584 | |||||||||||||
Amortization of definite-lived intangible assets | 102 | — | 267 | (h) | 369 | ||||||||||||
Total operating expenses | 12,364 | 1,292 | 620 | 14,276 | |||||||||||||
Operating income (loss) | (1,232 | ) | 454 | 550 | (228 | ) | |||||||||||
Interest income, net | 19 | 14 | — | 33 | |||||||||||||
(Loss) on derivative instruments | (913 | ) | — | — | (913 | ) | |||||||||||
Other income (expense), net | 83 | — | — | 83 | |||||||||||||
Income (loss) before income taxes | (2,043 | ) | 468 | 550 | (1,025 | ) | |||||||||||
Provision (benefit) for income taxes | 206 | 179 | (172 | ) | (j) | 213 | |||||||||||
Net income (loss) | (2,249 | ) | 289 | 722 | (1,238 | ) | |||||||||||
Net (income) loss attributable to the noncontrolling interest | — | 73 | — | 73 | |||||||||||||
Net income (loss) attributable to GSE | $ | (2,249 | ) | $ | 362 | $ | 722 | $ | (1,165 | ) | |||||||
Basic loss per common share | $ | (0.12 | ) | $ | (0.06 | ) | |||||||||||
Diluted loss per common share | $ | (0.12 | ) | $ | (0.06 | ) | |||||||||||
Weighted average number of common shares outstanding | |||||||||||||||||
Basic | 18,975 | 18,975 | |||||||||||||||
Diluted | 18,975 | 18,975 | |||||||||||||||
See accompanying notes to unaudited proforma condensed consolidated financial statements. |
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NOTES TO UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Adjustments to the unaudited pro forma condensed consolidated balance sheet as of December 31, 2010 and consolidated statements of operations for the year ended December 31, 2010 for GSE and EnVision, respectively; are presented below:
(a) | Adjustment to reflect the cash payment of $1.2 million to the former EnVision shareholders as part of the acquisition. |
(b) | Adjustment to record $1.97 million of goodwill resulting from the acquisition. |
(c) | Adjustment to record $1.53 million of other intangible assets resulting from the acquisition. The intangible assets include; (i) contractual customer relationships of $469,000, (ii) non-contractual customer relationships of $540,000, (iii) developed technology of $252,000, (iv) in-process research and development of $246,000, along with (v) website and domain name of $22,000. These intangible assets are amortized over their respective useful lives, ranging from 3 to 10 years. |
(d) | Adjustment to record the $611,000 deferred tax liability resulting from the other intangible assets related to the acquisition. |
(e) | Adjustment to record the remaining payments of $2.86 million due to the EnVision shareholders resulting from the acquisition. The discounted value of EnVision shareholder's earn out payment, is $2.13 million payable over a four year period. An additional $733,000 is payable to the EnVision shareholders due to the working-capital true up provisions of the agreement. |
(f) | Adjustment to eliminate stockholders’ equity from EnVision’s historical balance sheet. |
(g) | Adjustment reflects accretion expense of $353,000 for the twelve months ended December 31, 2010, attributable to the contingent consideration due to the EnVision shareholders as a result of the acquisition. |
(h) | Adjustment reflects amortization expense of $267,000 for the twelve months ended December 31, 2010, attributable to amortizable intangibles acquired as a result of the acquisition. |
(i) | Adjustment reflects the removal of excess management compensation. For the twelve months ended December 31, 2010, EnVision distributed excess compensation of $560,000 and $540,000 to its two directors. An additional reduction of $70,000 reflects the reduction of salary expense attributable to EnVision’s two directors. For the twelve months ended December 31, 2010, EnVision paid salaries of $270,000. Per their GSE employment agreements their total salaries would be reduced to $200,000. |
(j) | Adjustment reflects the tax impact on the consolidated operations of GSE Systems, Inc. |
(k) | Adjustment reflects the EnVision shareholder's indemnification to GSE Systems, Inc. for uncertain tax positions as identified in the purchase agreement. |
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