GSE Systems Inc (GVP) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the GSE Systems, Incorporated second quarter 2010 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to the Chief Executive Officer, Mr. John Moran. Please go ahead, sir.

Thank you, good afternoon and welcome everyone to GSE's 2010 mid year conference call. I'm John Moran, GSE's Chief Executive Officer. I'm joined here today with our Chief Financial Officer, Jeff Hough. Today's call will begin with a brief overview of our second quarter and first half 2010 financial results. That will be followed by an overview and update on several very material and exciting announcements that we've made since our last call. Specifically our acquisition of TAS Holdings, the formation of our joint venture in china with Beijing based UNIS Investment Company and first domestic plant specific Westinghouse AP 1000 nuclear simulation contract. I will then comment regarding my plans to retire from GSE at the end of October and discuss Jim Eberle's initial areas of focus over the next few months, as well as his role moving forward. As most of you are aware Jim joined GSE as its Chief Operating Officer on June 1st. He was originally scheduled to join me and Jeff but called to China to pursue some very exciting new opportunities that are developing there. I will conclude with cling comments and a general outlook for the balance of 2010 followed by time for any questions that you might have.

But, before we begin, I would like to turn it over to Jeff to address the subject of forward-looking statements.

This presentation contains forward-looking statements regarding the future performance of GSE Systems Inc. that involve risks and uncertainties that could cause results to differ materially including but not limited to economic conditions, customer demand increased competition in the relevant market and others. We refer you to the documents that the Company's files from time to time with the Securities and Exchange Commission, which is form 10K, form 10Q and form 8K reports, which can contain additional important factors that could cause results to differ from its current expectations and from the forward-looking statements made in this presentation.

Thank you, Jeff, as noted in the press release today the Company reported revenue for the three months ended June 30, 2010 of $11.8 million, that's a 10.5% increase from the revenue reported for the three months ended June 30, 2009, of $10.7 million. GSE reported operating income of $751,000 for the second quarter of 2010, as compared to operating income of $658,000 in the second quarter of 2009. Net income for the second quarter of 2010 was $370,000, or $0.02 per share on both basic and diluted basis as compared to net income of $571,000, or $0.04 per share on a basic basis, and $0.03 per share on a diluted basis for the second quarter of 2009.

GSE reported revenue for the six months ended June 30, 2010, of $23 million, a 22.4% increase, from the revenue reported for the six months ended June 30, 2009, of $18.8 million. For the six months ended June 30, 2010, the Company generated $17 million or 74% of our total revenue of nuclear simulation, $5 million or 22% of our total revenue from non-nuclear simulation and $915,000 or 4% of our total revenue from the training and education services sector. GSE reported operating income of $1.204 million for the six months ended June 30, 2010, as compared with operating income of $1.189 million for the six months ended June 30, 2009. The Company generated net income of $819,000 for the six months ended June 30, 2010, or $0.04 per share on both a basic and diluted basis compared to net income of $904,000 or $0.06 per share on basic basis and $0.05 per share on diluted basis, for the six months ended June 30, 2009.

The Company continued through the first six months of the year to have zero borrowings against its revolving line of credit with Bank of America and in fact, negotiated an increase of $1.5 million, that is from $6 million to $7.5 million, in total availability. The Company's cash balance at June 30, 2010, was $25.9 million, today it exceeds $30 million.

GSE as most of you know periodically enters in to forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign denominated trade receivables. Again, the purpose and structure of foreign exchange contracts that GSE has entered in to designed to protect the contract value and margins at the time the contracts are signed and are not designed to speculate on the direction of any currency up or down. Keep in mind that the gain or loss reported due to these contracts will net out to zero at the time the contract expires. For the three months ended June 30, 2010, the Company incurred $374,000 pretax non-cash loss on foreign exchange contracts. For the six months ended June 30, 2010, the Company incurred $678,000 pretax non-cash loss on its foreign exchange contracts.

Excluding the impact of this loss, GSE net income for three months ended June 30, 2010 would have increased to $641,000 or $0.03 per share on both basic and diluted basis, for the six months ended June 30, 2010, net income would have increased to $1.35 million, or $0.07 on both basic and diluted basis. GSE backlog as of June 30, 2010, was approximately $49.8 million, compared to $53.9 million at the end of 2009. Backlog is defined as remaining value of signed contracts, does not include value for contracts being negotiated or for contracts that have been signed since June 30, 2010. Of the $49.8 million backlog, 73% was in the nuclear simulation sector, 23% in the non-nuclear sector and 4% in the training and services sector.

Backlog of $49.8 million does not include roughly $7 million of the $15 million of new nuclear sector simulation awards, announced in our June 6th and June 29 press releases. Included in this $7 million of new awards not in the backlog, was a contract to build the first US based AP 1000 nuclear power plant simulator. The $49.8 million backlog also does not include approximately $3.3 million of the $4.3 million of new non-nuclear awards that we announced on August 5th, primarily for new gas and coal fired plants being constructed in the kingdom of Saudi Arabia and Chile. In total, therefore, it is important to note that the $49.8 million backlog does not include a total of approximately $10.3 million in awards received since the quarter closed on June 30, 2010. So we are currently sitting on a contract backlog at near record levels.

At this point in the conference call, I generally provide a summary of activity in each of the Company's three business sectors. However, as I mentioned in my opening remarks since your last call, we made a series of important and exciting announcements that have the potential over time to significantly accelerate our growth rate and our presence in a number of targeted markets and geographies. So I would now like to focus on the acquisition of TAS Holdings and formation of joint venture company in China, which together represent the successful culmination of two of our strategic initiatives that we stated for sometime now were progressing. I'll also provide some additional information on recent announcement regarding contract to construct Westinghouse AP 1000 plant simulator for Southern Company's Vogtle nuclear power plant and then elaborate on the expected future domestic AP 1000 opportunities.

On April 26, the Company announced acquisition of TAS Holdings Limited, a private company located in Stockton on Tees in the UK. TAS is an engineering consulting company specializing in electrical system design, instrumentation and controlled engineering, automation engineering and safety consultancy. Importantly they provide computer modeling services for major electrical generation and distribution systems. The majority of TAS customers reside in the petroleum refining, oil and gas, chemical, petro chemical and power industries.

The acquisition of TAS is strategically important for both companies from a number of different perspectives. First, TAS's expertise in electrical distribution system modeling with variable power sources will help GSE extend its capability into the modeling and simulation of electrical distribution and grid systems. Secondly, TAS routinely encounters training opportunities that coincide with their engineering and consulting projects there by creating cross selling opportunities for GSE's growing training organization. Third, the acquisition expands GSE's presence in the UK, through access to TAS's existing marquee clients such as BP and Conoco Phillips. Lastly, the acquisition of TAS coupled with GSE's on going training activities at the University of Strathclyde will enhance our ability to support the UK's plan construction of 12 new nuclear plants in the coming years, through both our nuclear simulation and training divisions which are currently pursuing opportunities in those areas.

As part of GSE Systems, TAS will be able to build and expand upon the presence they already established in their targeted UK, and global markets. TAS is established a strong reputation with their customer base, and experienced steady growth during the past few years. Providing simulation, training technology and services, is a natural progression for TAS and should enable the Company to rapidly expand in the UK and globally.

Since the acquisition, GSE TAS's proposal activity is significantly increased in the number of proposals developed as well as their size. Cross selling activities with other business units are well underway, and have produced numerous opportunities including opportunities in the nuclear sector. Though early in the game, the GSE TAS financial contribution has met expectations and been accretive to GSE operating and net income from day one. So those small terms of current revenue, this acquisition offers growth potential over time and representative of the type of strategic acquisitions the Company will continue to pursue.

On July 1, 2010, the Company announced the formation of the GSE UNIS simulation technology company, a limited liability company formed by GSE and the Beijing UNIS Investment company. GSE UNIS will be headquartered in Beijing, China. When fully operational, the Company will be comprised of approximately 80 simulation engineers creating the largest simulation company in China that's focused on the energy market. In addition to Beijing, GSE UNIS will are have a production office in Zhuhai, Guangdong Province near the city of Macao.

The joint venture which has been submitted to the Chinese government for formal registration, will be 51% owned by UNIS and 49% owned by GSE. Upon receipt of the Chinese government approval, GSE will contribute projects, technology, simulation engineers, facilities and approximately $1.5 million in working capital. GSE will contribute technologies, simulation engineers, facilities and approximately $1.4 million in working capital. Because GSE is a minority owner, the joint venture will be accounted for on the equity method of accounting as a single line entry on the Company's income statement indicating its share of GSE UNIS's profit or loss. GSE received a Certificate of Approval from the Chinese Commission of Commerce and we just received its formal business license this past weekend and so it is now empowered to enter in to formal contracts with its customers and begin to recognize revenue.

The largest shareholder of UNIS is Tsinghua University, a prestigious technology university in China. Established in 1988, UNIS has been acting as a incubator company transferring new technologies from the University's research laboratory to the commercial sector. The origin of its simulation platform can be traced back to 1984, a national award winning technology which was developed by Tsinghua University. Over the past 20 years, hundreds of simulators have been built based upon this technology for approximately 200 customers in the fossil fuel electric power industry. That accounts for about 50% of the total Chinese fossil fuel power simulation market. It's solid customer base and strong relationships with the academic and government sector will help GSE UNIS service contracts in both the fossil fuel and nuclear power markets in China, by the way the fastest growing power market in the world.

As I noted in my past communications, in order to effectively compete for nuclear conventional power plant contracts, it's important that non Chinese companies like GSE form joint ventures with Chinese companies. The joint ventures primary targets are the Chinese design CPR, and CNP series of nuclear power plants which 24 are in the planning or construction phase, and the conventional power plant market where UNIS is tracking nearly 40 conventional power plant opportunities. Over the next 20 years, GSE expects to build over 90 nuclear power plants and over 340 conventional power plants. In addition, GSE UNIS will provide a source of lower cost engineering resources, which can be utilized on other GSE projects thereby improving our competitiveness and profit margins.

Moving forward, we will begin to include GSE's 49% share, of GSE UNIS's net income in our financial results. In addition, we plan to announce material new contract awards and will report GSE UNIS contract backlog on a quarterly basis. We expect the joint venture to begin operations at approximately break even and over time become a significant contributor to GSE's net income. However, I want to stress that the ramp up in revenue and net income contribution will occur slowly for the first few quarters the Chinese power market will be fully opened to GSE, through GSE UNIS and the opportunity is significant. We are hopeful to close a number of fossil plant projects and at least one major nuclear simulator project by year end.

On July 29, the Company announced the contract award to construct a Westinghouse AP 1000 plant simulator for Southern Nuclear's Vogtle plant located in Georgia. The contract for first domestic AP 1000 plant simulator marks a true start for the nuclear renaissance in America.

I promised many of you I would provide some information on the expected future contract values for other AP 1000 plants built in the United States. We now have enough information to discuss this subject in more depth. The contract value for the first AP 1000 simulator being engineered and constructed for the Vogtle plant came within our historical range of between $6 million and $8 million. We expect to complete the project at gross margin of between 25% and 30%, which is in line with with projections we gave you during the 2009 year end conference call. We expect the contract value for subsequent AP 1000 -- subsequent domestic AP 1000 simulators, I should say simulator to be substantially lower than Vogtle due to high level of standardization expected in future US AP 1000 designs. However, we expect the gross margins on the future AP 1000 plant simulator projects to be substantially higher for exactly the same reason that is the high level of standardization.

The Company will not provide the expected contract values and gross margins due to competitive issues, but we can provide range of contract values between $2 million and $4 million, for future domestic AP 1000 simulators. We believe that the the trend to standardize US AP 1000s will continue. If this changes for some reason, we will provide you with an update. Keep in mind that there have been 25 applications formally filed with the nuclear regulatory commission to build new reactive plants in the United States and 13 selected the AP 1000 design. Once more, I want to make it clear that this lower price range and higher margin expectation is for just the domestic AP 1000 market. We expect the AP 1000 work outside the United States will still be within our $6 million to $8 million range, with our historical margins of between 25% and 30%.

Okay at this point I would like to make a few comments on my upcoming retirement from gse at the end of October, which the Company disclosed in May of this year, and then provide background and introduction of Jim Eberle, our new Chief Operating Officer, who as I mentioned, could not be here as originally planned. We'll then conclude with some updated projections and closing remarks. First, let me make it clear that my retirement from GSE is not related in any way to concerns about the Company's general health, strategic direction, or outlook. To the contrary, I personally believe that the Company has never been in better shape or more strategically positioned to capitalize on the opportunities ahead of it.

A few months ago, I discussed with the Chairman of GSE the fact that was an excellent time for Senior Management change and we moved in that direction. The Company has asked I stay on as a consultant for a period of three years and I'm happy to do so. In the consultant role, I expect to continue certain business development activities continue to support Jim including input and guidance on certain areas relating to shareholder and investor relations efforts and activities, and will continue to assist in the identification and closing of potential strategic acquisitions.

The GSE Board of Directors will meet sometime in the fall to appoint Jim as the new Chief Executive Officer of GSE upon my departure effective November 1, 2010. Jim and I worked together at JP Strategies, the former majority owner of GSE, I can think of a better addition to our leadership team. Jim's career includes serving in the US Navy as a reactor operator instructor at the Triton Class Nuclear Power Missile Submarine Training Center. Jim then joined General Physics Corporation and rapidly progressed to be a Vice President of Operations. General Physics, the principal operating subsidiary of JP Strategies is a New York Stock Exchange listed company and one of the largest for profit technical training companies in the world with revenues the in excess of $300 million.

Most recently, Jim was the President of MXL Industries, a turnkey provider of optical quality coatings. While there, we was largely responsible for the Company's turn around and return to sustained profitability. So you can see Jim has a strong background in the training area, one of our primary business sectors as well as management skills that include improving margins and efficiencies, which is one of his initial priorities at GSE. Over time, I'm sure that many of you that have not already done so will have the opportunity to meet Jim.

In terms of outlook for remainder of 2010 and beyond, and keeping in mind that GSE does not give quantitative revenue or net income guidance, let me share general insights in to what we believe we will see for the balance of 2010. Based upon backlog, pipeline, current level of bid activity and internal expectations of new awards, we believe 2010 will prove to be another year of meaningful growth and improved financial performance. In the terms of projections provided during the year end 2009 conference call, there are few changes to discuss. During that conference call, we projected operating expenses in the range of $8.6 million to $8.9 million. We are now projecting operating expenses for the year to be in the range between $11 million and $11.2 million. Please note that this includes GSE TAS's forecasted operating expenses of approximately $800,000.

The non-GSE TAS increase in operating expenses are primarily driven by business development and leadership team additions, acquisition activity expenses such as legal, audit and travel costs, and higher than expected R&D expenses as we decided to accelerate some of our R&D projects to bring products like our relap HD thermal hydraulic product to market sooner. There is no change in our gross margin projections in between 25% and 30% with some quarter to quarter volatility continuing, based upon the specific mix of work in any given quarter. We projected a tax rate of between 26% and 30%, excluding the impact of $400,000 accrual for foreign income tax withholding, which was reversed in the first quarter of 2010, our projected tax rate remains within this range.

We will continue to mark to market the value of foreign exchange contracts which resulted in a non-cash pretax loss of $678,000 for the first six months of the year. Also again keep in mind that the gain or loss reported due to contracts will net out to zero at the time the contract expires. In summary, I think Company continues to successfully execute and deliver on many strategic objectives over the first six months of 2010. We continue to grow our topline with gross margins of between 25% and 30%, and anticipate the strong influx of new work continuing. We will continue to leverage the GSE TAS unit and cross sell our respective our product and services and continue to pursue additional strategic acquisitions.

We anticipate a strong start to China joint venture and seeing modest increases in training revenue and I have a number of new training opportunities progressing consistent with our discussion during the 2009 year end conference call. Also as we noted last time, our conventional power plant business rebounding nicely from 2009 levels, we therefore continue to remain very optimistic that our progress and momentum will continue for the remainder of the year and beyond. Thank you for taking the time to listen to our presentation, I will turn it over to q-and-a.

Thank you. (Operator Instructions). We will pause for just a moment. Our first question comes from Mark Tobin from ROTH Capital Partners.

Hi, John, thanks for taking my call.

Good afternoon, how are you?

Good, first question on the revenue break down side. Can you give us idea how much in a Slovakia hardware revenue recognized and also the Task revenue contribution during the period?

Sure, the task revenue contribution was $593,000. And for the second quarter, the hardware was $1.825 million.

Okay. Is I guess with this change in your expected ASP's on the domestic sale, I guess how far along are you in the negotiations I guess, I would assume you are talking to some of these customers to the fact that you are to a point where you have a better idea of this pricing.

Yes. As I side in my remarks, I think we can now talk about price levels between $2 million and $4 million for future domestic AP 1000s, again the spread will depend upon how different the balance of plant of the secondary side of the plant is, however as I mentioned the margins are standard margins are 25% to 30%, they will be substantially higher for the follow on AP 1000s and of course we would rather we are not sure who is listening would rather not provide that margin level but again it's certainly north of the 25% to 30% standard.

Understood. Can you give us a sense of the timing of typically, you talk about a number of orders that you expect by year end or that sort of thing can you give us some sort of sense of what you are seeing in the crystal ball?

What the I would say is that is pipeline is large and growing. I would say that there are more nuclear opportunities, new build opportunities coming at us than we anticipated. So I would say it's kind of hard not to be optimistic. But again, the issue and we discussed this quite a bit tissue is really customer timing and of course we can't control that. But I would say that we in advanced discussion certainly with next one for sure.

Thank you, I will jump back in to queue.

Next question will come from Richard Todaro from Kennedy Capital.

Couple of quick questions. The accounts receivables increased sequentially in year-over-year on absolute days basis, then you guys decided you collected cash too, I didn't know if there th was a timing issue or any issue going on with receivables.

There is no issues going on with receivables. More of a timing issue than anything else. Jeff do you want to comment?

Yes, we issued a large invoice at the end of the quarter for about $9 million, which was paid to us here at the end of July.

Did you say $9 million? Then the acquisition that I think you said it was like $593,000, is that a kind of a run rate of the revenues per quarter that we should expect?

Well, I would expect that to grow as the cross selling activities continue. So I would consider that to be a low level market if you or low water mark.

That was a full quarter of revenue.

It wasn't a full quarter because we purchased them on April 26. So effectively, it was two months.

Two months. That's what I wanted to know. Then, just a point of clarification you guys have that I think joint venture over in the Middle East that is losing money and I think they owe you money and I maybe messing this up, but do you have any future potential liability because they're in default of their debt?

Yes. I think you are referring to the Emirates Simulation Academy in the UAE, we have zero future exposure to the project, we are still engaged in terms of collecting the $1.6 million receivable, but I don't really have anything material to report on that front.

My final question you talked about revenues lower per opportunity in the US but margins being higher, how do we get comfortable with the fact that the margins would be higher, and I understand you are saying they are standardized but is this because you can produce them faster the same way? Could you give us some comfort tho those margins will in fact be higher.

Sure , there is two parts to it, number one technical part and of course the more standardization than the less risk from engineering perspective. And then the second part is really the negotiation with the customer in this case our customer is Westinghouse. So we've gone down the line on the next AP 1000, and we are happy and I think they are happy. We will see once we actually are awarded the next contract then we can talk a little bit more about it.

From this stand point when you are looking at it, what could go wrong or right that would make those margins be higher, or lower relative to your expectations? I'm not familiar with how this would work out.

There is always the, there is always the opportunity when ever you are building simulators to have an element of risk. We are doing original work, even on the standardized domestic AP 1000s, there are certain features if what we call the balance of plant or non-nuclear part of the nuclear power plant that are different so we do have work to do but there is a lot less of it and hence there is a lot less risk.

When you get in to the international markets is the reason why the ASP's is higher is that much more customization work to be done?

That's precisely correct.

Okay. That's all my questions thanks a lot, guys.

You're welcome.

We will now go to Mark Schappel from The Benchmark Company.

Hi, John, good evening.

Hi, Mark.

Congratulations on your retirement. Starting with China, with respect to the CPR 1000 designs how many of the 24 plants or future plants are already working with a simulator vendor to your knowledge.

I'm not aware of any.

Okay. With respect to backlog, could you remind us about how much backlog the Company is burning a quarter?

Well, I can tell you that we talked about we anticipate about $20 million will come out of backlog between now and the end of 2010.

Between now and the end of the year.

Yes.

And the hardware slug from the Slovakian simulator project appears to be a little bit higher than normal. For modeling purposes how should we think about that in the coming quarter? Should we anticipate the high end of the range?

It's variable, Mark. It depends upon the timing of the purchases so I mean we anticipate a -- I mean first quarter, second quarter pretty much tracked. It was like $1.8 million in the first quarter, $1.825 million in the second quarter. Third quarter, I think we will see fluctuation up, fourth quarter looks like it will come down a little bit. It's going to be a little bit of a rocky next six months. We anticipate about -- at that point we are at the end of the year we anticipate something like $7 million, of the $13 million will be there have been accounted for, so we are looking at 2011 probably being a little bit smoother with about $2.2 million.

Good. That's helpful. And could you give us a little bit of update on the Southern Company training program where that stands as far as people you brought through there and material revenue you are getting out of that program?

As we I think as we discussed in the year end conference call, we anticipated moving with Southern based upon the success of the program the parallel or rather than in serious training programs we are now there. We graduated the first two classes of what I will call new nuclear plant operators. We now got two courses running concurrently and so you will start to see revenues ramp up from that particular area.

As I mentioned we also have a number of opportunities around the world to basically and in the United States to replicate that AP 1000 program. We now sold the technology that that's based upon is something called the V Panel, our V Panel sales are up to six different customers, each of those represent an opportunity for us as well it's now starting to be recognized that the program we are running for Southern is really ideal for those emergent nuclear countries where they are basically starting from a work force, nuclear work force of zero. So I anticipate between now and the end of the year you will hear more from us as we are able to disclose it on that front.

Great, thank you.

Okay.

(Operator Instructions). We will move on now to Peter McMullin from IPC Inc.

Hi, John.

Hi, Peter.

Little figuring here but nice increase on the gross margin for the three months versus last three months and 2009 can you describe dynamics and that and just on the other hand the expenses went up more than usual I can explain some of them but that will calm down I think if you give the totals. So, just how do you see the improve in the gross margin and I guess sort of falls in to on the backlog is the gross margin, would that be better than historical or not?

Well, what we are looking at again, quarter to quarter, is there will be some degree of variability continuing. We are sticking with our projection of gross margins year end between 25% and 30%. As I mentioned at the year end conference call, we see a increase or many opportunities to increase gross margin but it will be very gradual, we know for example GSE task is higher than is coming in at higher than our 25% to 30% gross margin, but and of course we talked about the Southern Company, training program and others like it being at a much higher margin.

So you are seeing a little bit of that here in the second quarter, you will see more of that as the Company progresses quarter to quarter. But the difference between 2009 and 2010 is probably the majority of that is simply the mix of work, the timing of contracts ending where we have a contingency and we are generally able to pick up a positive reserve. I would say it's more mix than anything else. There is a elements of training revenues of higher margins and the acquisition of task there revenue. And in terms of the backlog itself, again I think there is again I think we will just stick to the projection of 25% to 30%, we will give you an update on that at the end of the year conference call.

Okay. If I could ask any second the income tax fluctuates quite a bit too from quarter to quarter. You were trying to do work on getting the tax rate down, give me the status report of progress made there. Was that partly evident in the second quarter?

No. We have really nothing material to report on the income tax front. We are still looking at 25% or 26% to 30%, we are taking certain measures to try and shelter some of our revenue from the income tax but I don't have anything definitive to report at this point. And we did have the one anomaly in the first quarter, so excluding that $400,000 anomaly, looking at 26% to 30%, we will also update that number at the year end call.

Thank you.

Okay.

(Operator Instructions). We will now go to Dick Ryan from the Dougherty.

Good afternoon, John.

Hi, Dick.

So you mentioned increase R&D efforts and mentioned relapse specifically. Is that moving from kind of a nice to have feature set to need to have when you look either domestically or internationally?

Well we got some very, very good news, which we disclosed in our I think it was in the second to last press release the NRC, basically selected GSE for they have simulators as well to train their staff, and they selected GSE on a significant upgrade project and one of the primary purposes was the fact that we were able to deliver the relap HD code. So, what we are hoping is that once the NRC gets run time with the simulator and they obviously already appreciate the significant upgrade that relap provides, we were hoping that we will become the defacto standard in the industry. So we will see how that works out.

What would an upgrade cost the customer?

Well it depends of course our upgrades are quite variable depending upon the extent of the scope of work. We have some upgrades that we are replacing models that can be as low as $200,000 to $300,000 of course executing a project for British Energy which is in the upgrade category, which is pretty much in line with our full scope simulators. So very highly variable.

Okay. Questions on the gross margin, do you have what the margin would have been if you would have excluded the Slovakian revenue?

No, we haven't done that calculation yet, Dick, but that's generally something we will do.

Also, when you look at the new model, kind of net-net, lower revenue, higher margin, is it comparable to the old model, is it favor you a little more or the customer a little more?

You're referring to the domestic AP 1000?

Yes. Yes.

I think it would be at the end of the day, we will do just fine I would like to garner as many of those as I possibly can. Without and again the Company would rather not discuss the gross margin for competitive reasons.

I can't remember, did you mention the opportunity of another domestic nuke simulator this year, I can't remember if you mentioned that or not.

We did not because of course we would have disclosed that had we gotten the next one. I would say we are in the advanced stages of discussions/negotiation, though.

Thanks, John.

We have a follow-up question from Peter McMullin from IPC Inc.

John, just a question, on the UK with the change in government do you sense any difference in priorities, either accelerating, decelerating the whole commitment to nuclear.

Yep it was something that concerned me quite a bit because we do have a number of opportunities but happily the changing government has had no impact on nuclear policy or programs and certainly none of the ones that we are involved in and pursuing.

Thank you.

Yep.

We have a follow-up question from Richard Todaro from Kennedy Capital.

Sorry one more, when we met maybe a couple of mops ago at The Benchmark Conference one of the key things you guys were highlighting is that you didn't have to increase expenses very much to see the revenues ramp up. So I guess I'm surprised to hear that we are ramping expenses at this point I'm not holding that against you I'm trying to understand how we are seeing the leverage flow through the model and of the increase from $8 million to $11 million, you said $800,000 was from the acquisitions, some legal, I don't know if you broke that out, but I'm trying to understand how you guys think this plays out for you.

Right. Well let me clarify the $800,000 is their estimate of expenses that does not include any of the audit or legal fees associated with the acquisition. That was certainly one of the drivers in the quarter. Were those expenses and the second again we added to our leadership team and then the third is the R&D expenses, now we anticipate the R&D expenses to return to more normal levels in the second half of the year. But again we are active in the strategic acquisition area and so we are going to we are going to see some expenses in that area. Our leadership team is at this point is stable. I do not anticipate any additional overhead hires or executive team or leadership team hires and so I think our expense levels should steady out and again I think our projection for the end of the year between $11 million and $11.2 million, that should hold for quite sometime. So again we are not adding any selling assets we don't have to create a new production line, our facilities are fine relative to those costs we should be able to hold the line.

I haven't completed a model with the acquisition but if you looked at your operating margin adding in the revenues you expect from the acquisition do you expect your margins to go down going forward based on the increased expenses offset by the revenues or staying flat.

Well we look, I look at it from a perspective of gross margin from a per perspective of gross margin we are going to hold between 25% and 30%, our expense levels are going to be between 11% and 11.2%, so at the end of the day and of course we anticipate our revenues being in line with the consensus. So that should provide enough of the key factors to put a model together.

Did you say 11.2% or $11.2 million.

No, $11.2 million. Between $11 million and $11.2 million projecting for expenses.

That's what I thought you said. I just wanted to clarify. Thank you.

You're welcome.

We will now take a follow-up question from Dick Ryan from Dougherty.

Quick question on the backlog you said it doesn't include the $7 million and $3.3 million and any other part that is being negotiated -- and some of the other $15 million, that is not in there now can that move in the backlog or part of the $4.3 million that's not in there now.

Well, the out of the total of $15 million, there's $7 million, that is not in backlog. And out of the $4.3 million, there is $3.3 million that is not in backlog. That's why we said if you look at a snapshot today, based upon all of the work that we sold over the last couple of weeks, you would increase that backlog at to roughly $10.3 million. So --

You mentioned that there might be some that's under negotiation that occurred Hijuang and domestic part of those awards but not in backlog that's $7 million and $3.3 million you mentioned.

Nope it's all -- it's very clean at this point. So it's all contracted.

Great, thanks.

You're welcome.

There are no further questions I would like to turn the conference back over to you, Mr. Moran, for additional or closing remarks.

Again, thank you very much for participating and allowing us to make our presentation. And I guess I won't look forward to the ends of the year conference call but I will be around. Thank you very much. If you have follow-up questions feel free to give me a call.

This concludes today's presentation, thank you for your participation