GSE SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Financial Information
On September 20, 2017, GSE, through its wholly-owned subsidiary GSE Performance Solutions, Inc. ("Performance Solutions"), acquired 100% of the capital stock of Absolute Consulting, Inc. ("Absolute") for $8.8 million pursuant to the Stock Purchase Agreement by and among Performance Solutions and the sellers of Absolute. The purchase price was subject to a customary working capital adjustment resulting in total consideration of $9.5 million. The acquisition of Absolute was completed on an all-cash transaction basis.
The unaudited pro forma condensed statements of operations are presented for the most recent fiscal year ended December 31, 2016 and for the nine months ended September 30, 2017, which is the most recent interim date for which a balance sheet is required. No pro forma condensed balance sheet as of September 30, 2017 is presented as the acquisition is already reflected in the balance sheet in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. The following unaudited pro forma condensed combined financial statements are based on our historical consolidated financial statements and Absolute's historical financial statements as adjusted to give effect to the Company's acquisition of Absolute. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2017 and the 12 months ended December 31, 2016 give effect to these transactions as if they had occurred on January 1, 2016.
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements should be read together with the Company's historical financial statements, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, our Quarterly Report on Form 10-Q for the period ended September 30, 2017, and the historical financial statements of Absolute for the year ended December 31, 2016 contained in this Form 8-K/A.
GSE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
(in thousands, except per share data)
| | GSE | | Absolute | | Pro Forma | | | | Pro Forma |
| | Historical | | Historical | | Adjustments | | Notes | | Combined |
| Revenue | $ | 53,101 | | $ | 40,046 | | $ | - | | | | $ | 93,147 |
| Cost of revenue | | 37,857 | | | 34,962 | | | - | | | | | 72,819 |
| Gross profit | | 15,244 | | | 5,084 | | | - | | | | | 20,328 |
| | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | |
| Selling, general and administrative | | 11,127 | | | 4,122 | | | - | | | | | 15,249 |
| Research and development | | 1,380 | | | - | | | - | | | | | 1,380 |
| Restructuring charges | | 490 | | | - | | | - | | | | | 490 |
| Depreciation | | 383 | | | 97 | | | 16 | | (a) | | | 496 |
| Amortization of definite-lived intangible assets | | 289 | | | | | | 545 | | (b) | | | 834 |
| Total operating expenses | | 13,669 | | | 4,219 | | | 561 | | | | | 18,449 |
| | | | | | | | | | | | | | |
| Operating income | | 1,575 | | | 865 | | | (561) | | | | | 1,879 |
| | | | | | | | | | | | | | |
| Interest income, net | | 85 | | | (1) | | | - | | | | | 84 |
| Gain (loss) on derivative instruments, net | | (18) | | | - | | | - | | | | | (18) |
| Other (expense) income, net | | 130 | | | - | | | - | | | | | 130 |
| Income before income taxes | | 1,772 | | | 864 | | | (561) | | | | | 2,075 |
| | | | | | | | | | | | | | |
| Provision for income taxes | | 350 | | | - | | | 121 | | (c) | | | 471 |
| Net income | $ | 1,422 | | $ | 864 | | $ | (682) | | | | $ | 1,604 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Basic earnings per common share | $ | 0.08 | | | | | | | | | | $ | 0.09 |
| | | | | | | | | | | | | | |
| Diluted earnings per common share | $ | 0.08 | | | | | | | | | | $ | 0.09 |
| | | | | | | | | | | | | | |
| Weighted-average shares: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Basic | | 18,218,681 | | | | | | | | | | | 18,218,681 |
| | | | | | | | | | | | | | |
| Diluted | | 18,512,266 | | | | | | | | | | | 18,512,266 |
GSE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(in thousands, except per share data)
| | GSE | | Absolute | | | Pro Forma | | | | Pro Forma |
| | Historical | | Historical | | | Adjustments | | Notes | | Combined |
| Revenue | $ | 48,876 | | $ | 28,594 | | | $ | - | | | | $ | 77,470 |
| Cost of revenue | | 35,513 | | | 25,095 | | | | - | | | | | 60,608 |
| Gross profit | | 13,363 | | | 3,499 | | | | - | | | | | 16,862 |
| | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | |
| Selling, general and administrative | | 11,740 | | | 3,017 | | | | (580) | | (d) | | | 14,177 |
| Research and development | | 1,103 | | | - | | | | - | | | | | 1,103 |
| Restructuring charges | | 45 | | | - | | | | - | | | | | 45 |
| Depreciation | | 254 | | | 54 | | | | 12 | | (a) | | | 320 |
| Amortization of definite-lived intangible assets | | 148 | | | - | | | | 409 | | (b) | | | 557 |
| Total operating expenses | | 13,290 | | | 3,071 | | | | (159) | | | | | 16,202 |
| | | | | | | | | | | | | | | |
| Operating income | | 73 | | | 428 | | | | 159 | | | | | 660 |
| | | | | | | | | | | | | | | |
| Interest income, net | | 60 | | | (1) | | | | - | | | | | 59 |
| Gain (loss) on derivative instruments, net | | 226 | | | - | | | | - | | | | | 226 |
| Other (expense) income, net | | (4) | | | - | | | | - | | | | | (4) |
| Income before income taxes | | 355 | | | 427 | | | | 159 | | | | | 941 |
| | | | | | | | | | | | | | | |
| Provision for income taxes | | 399 | | | - | | | | 234 | | (c) | | | 633 |
| Net income | $ | (44) | | $ | 427 | | | $ | (75) | | | | $ | 308 |
| | | | | | | | | | | | | | | |
| Basic earnings per common share | $ | (0.00) | | | | | | | | | | | $ | 0.02 |
| | | | | | | | | | | | | | | |
| Diluted earnings per common share | $ | (0.00) | | | | | | | | | | | $ | 0.02 |
| | | | | | | | | | | | | | | |
| Weighted-average shares: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Basic | | 19,204,778 | | | | | | | - | | | | | 19,204,778 |
| | | | | | | | | | | | | | | |
| Diluted | | 19,204,778 | | | | | | | 396,883 | | (e) | | | 19,601,661 |
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in thousands, except per share information)
The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of Absolute's assets acquired and liabilities assumed and conformed the accounting policies of Absolute to its own accounting policies.
The pro forma combined financial statements do not necessarily reflect what the combined company's results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of Absolute as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
| 2. | Preliminary purchase price allocation |
The Company has performed a preliminary valuation analysis of the fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition of Absolute, the determination and allocation of the purchase consideration used in the unaudited pro forma condensed combined financial information are based upon preliminary estimates, which are subject to change during the measurement period (up to one year from the Acquisition Date) as we finalize the valuations of the net tangible and intangible assets acquired.
The following table summarizes the allocation of the preliminary purchase price as of the acquisition date (in thousands):
| Purchase Price Allocation | | |
| | | |
| Total purchase price | | $ | 9,519 |
| | | | |
| Purchase price allocation: | | | |
| Cash | | | 455 |
| Contract receivables | | | 5,121 |
| Prepaid expenses and other current assets | | | 54 |
| Property, and equipment, net | | | 184 |
| Intangible assets | | | 2,721 |
| Accounts payable, accrued expenses, and other liabilities | | | (134) |
| Accrued compensation | | | (1,617) |
| Total identifiable net assets | | | 6,784 |
| | | | |
| Goodwill | | | 2,735 |
| | | | |
| Net assets acquired | | $ | 9,519 |
The pro forma adjustments included in the unaudited pro forma condensed combined financial information are as follows:
| (a) | Represents the depreciation of the adjustment of $80,000 to increase the basis in the acquired property and equipment to estimated fair value of $184,000. The weighted average useful life of the property and equipment is 5 years. The fair value and useful life calculations are preliminary and subject to change after the Company finalizes its review of the valuation report. |
| (b) | Represents the amortization of the intangible assets acquired upon the acquisition of Absolute. As part of the preliminary valuation analysis, the Company identified intangible assets of $2.7 million, including customer relationships and trade name, with amortization periods of five years. These preliminary estimates of fair value and estimated useful life will likely differ from final amounts the Company will calculate after completing a detailed valuation analysis. |
The following table summarizes the preliminary fair value of intangible assets acquired at the date of acquisition and their estimated useful lives and uses a straight line method of amortization:
| | Estimated Fair Value | | Estimated Useful Life | | Amortization Expense |
| | (in thousands) | | (in years) | | Year ended December 31, 2016 | | Nine months ended September 30, 2017 |
| Customer relationships | $ | 2,068 | | | 5 | | $ | 414 | | $ | 311 |
| Trademarks/Names | | 653 | | | 5 | | | 131 | | | 98 |
| Total | $ | 2,721 | | | | | $ | 545 | | $ | 409 |
| (c) | Represents the income tax effect of Absolute's income and pro forma adjustments based on the estimated blended federal and state statutory tax rate of 40%. The table below does not reflect the net operating losses of the Company which can be used to offset a portion of the taxable income from Absolute. Before the acquisition, Absolute had elected to be taxed as an S Corporate under the Internal Revenue Code. As a result, earnings or losses of Absolute passed through to its shareholders. Therefore, no provision for income taxes had been included in their historical statements of operations. The income tax adjustment was made as if Absolute had been converted to a C Corporate upon the acquisition. |
The following table summarizes the calculation of the income tax effect of the acquisition of Absolute:
| | Year ended December 31, 2016 | | Nine months ended September 30, 2017 |
| Absolute's pre-tax income | $ | 864 | | $ | 427 |
| Pro forma adjustment | | (561) | | | 159 |
| Estimated taxable income | | 303 | | | 586 |
| Estimated blended statutory tax rate | | 40% | | | 40% |
| Pro forma tax adjustment | $ | 121 | | $ | 234 |
| (d) | Represents the elimination of non-recurring transaction costs of $473,000 and $107,000 incurred by GSE and Absolute, respectively, during the nine months ended September 30, 2017 that are directly related to the acquisition of Absolute. |
| (e) | During the nine months ended September 30, 2017, the Company reported a GAAP net loss and positive pro forma combined net income. Accordingly, there were 396,883 dilutive shares from options and RSUs included in the pro forma combined per common share calculation for the nine months ended September 30, 2017, that were considered anti-dilutive in determining the GAAP diluted loss per common share. |
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