Monday, June 5, 2023

Activism and Change at GVP

I bought into GSE Systems (GVP) a couple years ago due to change and here today I sit seeking more.  

In the past year the stock is down ~70% yet somehow the CEO's compensation went up by 75%.  The CFO's pay is up 50%.  The market cap is only $10.2m and they get $1.84m+0.91m = $2.75m!!  These idiots are not worth a quarter of the company.  That is a really bad look and I do not approve.  

I am voting against the director nominees, against the ridiculous executive compensation, and against their planned >20% dilution.  I invite you to do the same.

There is activism from several parties.  Ankur Saggar has written several board letters and organized a website   SpearPointCapital has posted a deck and pushes for others to vote against the status quo.  Silverback is trying to get on the board.

The problem is GVP just looks so good.  The stock is cheap and the company has wind at their back.  Look at these charts.  Lowest point in 10 years and lowest all time.  

GSE Systems provides staffing, technology, engeering services, and software to the power industry with a major focus on nuclear energy.  I think the future is bright due to the global focus on carbon neutral energy as well as energy independence.  Some quotes from the latest 10k).
"Our services help our customers provide clean energy to all in a reliable and safe manner. There is growing recognition of the importance of low and zero carbon energy as the United States in particular, and the world in general, races to decarbonize power grids. We are uniquely positioned as one of the largest independent nuclear services companies in the United States to support decarbonization of the power industry. In fact, the more wind and solar that comes onto the grid, the greater zero carbon base-load becomes to ensure grid stability, reliability and safety. Decarbonization is a leading means of delivering environmental equity – ensuring that anyone regardless of background and economic status can benefit from a safe and healthy environment, free of pollution related to carbon intensive power generation. Our operations also include interactive software for tutorials and simulation for the refining, chemical, and petrochemical industries."

"As we look ahead to 2023 and beyond, there is a continued focus from the current administration on decarbonizing the power sector, which is recognized as a key means in achieving environmental equity. In 2021, the United States rejoined the Paris Agreement on Climate Change climate accord. Consistent with that decision, the current administration has promoted zero carbon power sources such as nuclear energy and increased public spending in support of the industry and related industries. The bipartisan infrastructure plan passed in 2021, and Inflation Reduction Act passed in August 2022, each included spending elements specifically in support of nuclear power and nuclear technology development."

"In light of these continuing policies, there has been a significant increase in the public awareness that nuclear power can be a big part of the grid in order to achieve zero carbon goals. In an article early in 2020,, highlighted the potential of new generation Small Module Reactors (“SMRs”) in driving the achievement of a zero-carbon grid. Nuclear, especially SMRs, are recognized for their potential to replace carbon intensive power generation while maintaining a smaller footprint than existing coal plants. In February 2021, the Montana State Senate approved a feasibility study to evaluate replacing coal fired power generation with SMRs at the Colstrip power plant. Further, the benefits of SMRs are also noted as a key element to restore ecological systems while simultaneously maintaining zero carbon power generation. Idaho GOP Rep. Mike Simpson has proposed a sweeping $33.5 billion plan to save the Pacific Northwest’s iconic salmon that includes breaching four of the most controversial dams in the country. The power generation of the dams would be replaced by building SMRs as part of this plan. As 2022 unfolded, Canada, Poland, the Czech Republic, Bulgaria and Romania have all announced plans to pursue the build out of nuclear power generation, especially initial review of SMRs. These economic and political factors support Management’s view that we are well positioned as one of the few publicly held companies serving the nuclear power industry with essential engineering services, technology and workforce solutions."
My favorite part of the company conference calls are the CEOs comments on the macro environment becuase it sounds so, so good.  I've been waiting and expecting the company to branch out into other energy fields but so far it hasn't happened.  I feel like they could do similar work for wind, solar, etc.  

The reason I initially got excited about the company is their software and margins.  I had a call with the CEO Kyle Loudermilk almost two years ago now.  He comes from a software background and what caught my eye was the company had started breaking out software specifically.  He explained to me in the past the company had just sort of given away their software and he had worked on packaging that up for separate sale.  He formed it into a division and began reporting software specifically in early 2017.  He was adopting a Saas model which you know caught my eye due to the margins and recurring revenue.  

The numbers look like a buy to me but man they have to stop the bleeding (from the most recent 10k):
  • 23.6m shares out which is a bit high for me but not too bad
  • $0.44 stock price = 10.2m market cap
  • $47.7m rev
  • $10.2m book
  • $15m loss
The losses are bad right now but I'm trying to give them the benefit of the doubt after covid.  The company has been around a breakeven historically.  Problem is they are not differentiating themselves from the market.  Listening to conf call after call it's clear the company is banking on the industry lifting them up but I'm not buying into an energy ETF here.  I want the company to force the market to take notice, not blend into the background.  The talk was all software and Saas and margins but it just hasn't shown up.  

Here is revenue over the past 6 years.  Not pretty.

Software revenue has been trending in the right direction but is not inspiring.

And as for board politics GVP had one of the funnier things I've seen in the market.  Last year the Chairman of the Board was VOTED OUT YET STAYED.  What the hell.  I don't even understand how that's possible but you can read about it here.  She was voted out and tendered her resignation then the board voted to keep her anyhow.  I don't care what side you're on but they all need to go for that.
  • "Kathryn O’Connor Gardner did not receive a majority of the votes cast
  • Ms. Gardner tendered her resignation as a member of the Board
  • The Board resolved to not accept the Tendered Resignation"
The nail in the coffin for management here is the latest financing.  In 2022 GVP entered into a financing agreement with Lind Global and they want to pay back in stock.  Since the stock has fallen in the toilet they have to pay over 20% off the common outstanding and due to Nasdaq rules need shareholder approval.  I don't want to give it to them because this is the worst arrangement ever.  Try cutting back on ridiculous executive pay before diluting me or cutting pay to the board who don't even know how to follow a shareholder vote.  Maybe don't pay the CEO 18% of our market cap PER YEAR for starters.

In the end we have a cheap stock in a niche market with entrenched customers and macro tailwinds.  I am surprised this stock has been a loser for me but from here at $0.43 at an all time low I think it will be a winner.  I've been buying more recently and have voted against what I can.  

I hope the activists agitate for the greater good.  I'm with them.

disclosure: long GVP

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  1. I bought because of how well spoken the CEO was on their conference calls too. Then I realized last year that they're spending money on an IR consultant and sold. Not a justifiable expense for a Nano-cap company.

  2. I have listened to the earnings calls, and "well-spoken" is not my impression of the CEO. He did some hilarious slips though, like confusing South and North Korea.

  3. I just can't see how they get to breakeven fast enough to not have to dilute again.

    1. Maybe it's a question of how to get funding. I had a call with the CEO of Silverback and he mentioned alternative funding that might be available rather than the toxic Lind agreement

    2. It´s seems the worst possible outcome: huge dilution for shareholders. Hope new contracts come fast.

    3. yeah it stinks. not really new news since the LIND agreement has been in place for a long time. but not good

    4. Hi Dan, one question about dilution:
      They informed that fixed conversion price was 1.94. For the initial 5M$ agreement that´s 5/1.94 like 2,6M shares to add. The last report they issued the share price was 3.47 and they informed they would issue 1.7M shares for 5.8M$. Now whith the share at 1.40$ its seems like they could add 2.6 M shares. I´m a little bit lost with this agreement and don´t know hoy many shares they could sale.
      Could you please clarify the maximum dilution in shares for the shareholders?

      The stock has been down a lot by shorts and maybe it´s a good entry point again.

    5. well there is dilution from the financing as well as dilution from paying the CEO's salary in stock.

  4. GVP is a good bet. Think of it as a Option but for that option to pay, CEO needs to go.

    This company is market leader in Nuclear Simulation. In 2015, they won a mega project to provide 3 full scope simulators for Southern nuclear.

    That project was worth 27m as each simulator costs about 10m-12m. GVP has created 800 simulators out of 1200 in operation as of today.
    Most Simulators are either Old or nuclear plants need a second one as they are using for it for operations and training. Even if the company
    was to charge simply maintenance or hunt for maintenance work, that business alone was 20m-30m business at 35% gross margin.

    But CEO has ruined the business by using a wrong pricing strategy, failed to capture sales. There competiton is low bidding them on each deal
    and none of the competitors are really US based so Nuclear plants are forced to award business to Foreign competitors for maintenance work on simulators created by GSE Systems.

    This is just the tip of iceberg.

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  6. It would actually make more sense to invest in companies that generate sustainable profits. I would also say in comparison with companies that make losses but are very favourably valued. The problem is that losses reduce the substance of a company in the long term. This is probably even more serious in the case of very small companies, as they have difficulty refinancing themselves. The risk of bankruptcy and delisting is likely to be higher than for profitable, small companies. With profits, on the other hand, the price should automatically rise in the long run, even if the share is slightly overvalued. This is almost inevitable.

    1. that's pretty different from how I operate

    2. I see. There may be different approaches to profiting from the stock market... But no strategy will work always and everywhere.

  7. Hi Dan,
    I don't know if you follow GVP shares in Europe, with the symbol GSE, quoted in Francfurt. I invest in those shares for avoiding too much exposure in dollars. But since one year ago the shares totally collapsed without news. Have you got any idea of whats going on with this shares? Thanks.

    1. No idea on the collapse or the recent rise which happened right after the reverse split. I've been buying all the way down just feeling like something has to happen. maybe something is happening

  8. In an effort to reduce air pollution and because of sanctions on Russian gas The E.U. is currently moving away from natural gas. Nuclear power now accounts for 25% of energy production up from 23% last year, hydro accounts for 14%, wind 14%, and solar 13%.
    This should be a huge opportunity for GVP and yet the company is in decline—pitiful!

    1. sorry it took so long to publish your comment. work and family have been a lot recently

  9. potentially exciting macro news

    "The United States is preparing to announce a pledge to triple the world’s production of nuclear energy by 2050, with more than 10 countries on four continents already signed on to the first major international agreement in modern history to ramp up the use of atomic power."

  10. Merry Christmas Dan and happy new year!