SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(I.R.S. Employer Identification Number)

QUARTERLY REPORT ON FORM 10-Q

PART I - FINANCIAL INFORMATION

~~Item 1.~~

Item 1.

Financial Statements

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

Unaudited
September 30, 2015 December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents $ 12,832 $ 13,583
Restricted cash 223 613
Contract receivables, net 12,240 15,830
Prepaid expenses and other current assets 2,380 1,703
Total current assets 27,675 31,729

Equipment, software and leasehold improvements 7,039 7,055
Accumulated depreciation (5,387 ) (5,229 )
Equipment, software and leasehold improvements, net 1,652 1,826

Software development costs, net 996 1,414
Goodwill 5,612 5,612
Intangible assets, net 903 1,279
Long-term restricted cash 3,305 3,591
Other assets 78 548
Total assets $ 40,221 $ 45,999

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ 339
Accounts payable 2,015 2,330
Accrued expenses 1,944 1,554
Accrued compensation and payroll taxes 3,707 2,595
Billings in excess of revenue earned 7,062 8,684
Accrued warranty 1,614 1,456
Current contingent consideration 2,601 2,842
Other current liabilities 444 473
Total current liabilities 19,387 20,273

Contingent consideration 2,221 1,948
Other liabilities 238 38
Total liabilities 21,846 22,259

Stockholders' equity:
Preferred stock $.01 par value, 2,000,000 shares authorized, shares issued and outstanding none in 2015 and 2014 - -
Common stock $.01 par value, 30,000,000 shares authorized, 19,496,770 shares issued and 17,897,859 shares outstanding in 2015, 19,486,770 shares issued and 17,887,859 shares outstanding in 2014 195 195
Additional paid-in capital 73,324 72,917
Accumulated deficit (50,708 ) (45,142 )
Accumulated other comprehensive loss (1,437 ) (1,231 )
Treasury stock at cost, 1,598,911 shares in 2015 and 2014 (2,999 ) (2,999 )
Total stockholders' equity 18,375 23,740
Total liabilities and stockholders' equity $ 40,221 $ 45,999

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~GSE SYSTEMS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

Three Months ended
September 30,

Nine Months ended
September 30,

2015 2014 2015 2014

Contract revenue $ 14,961 $ 7,823 $ 42,589 $ 24,823

Cost of revenue 11,158 5,368 32,649 17,497
Write-down of capitalized software development costs 1,538 - 1,538 -
Gross profit 2,265 2,455 8,402 7,326

Operating expenses:
Selling, general and administrative 3,811 3,954 11,031 11,939
Restructuring charges 1,600 272 1,746 883
Depreciation 119 140 383 413
Amortization of definite-lived intangible assets 123 36 370 108
Total operating expenses 5,653 4,402 13,530 13,343

Operating loss (3,388 ) (1,947 ) (5,128 ) (6,017 )

Interest income, net 19 44 67 103
Gain (loss) on derivative instruments, net 20 69 (59 ) 178
Other expense, net (156 ) - (235 ) (7 )
Loss before income taxes (3,505 ) (1,834 ) (5,355 ) (5,743 )

Provision for income taxes 50 61 211 162
Net loss $ (3,555 ) $ (1,895 ) $ (5,566 ) $ (5,905 )

Basic loss per common share $ (0.20 ) $ (0.11 ) $ (0.31 ) $ (0.33 )

Diluted loss per common share $ (0.20 ) $ (0.11 ) $ (0.31 ) $ (0.33 )

	Unaudited
	September 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	14,093		$	11,084
Restricted cash		1,601			1,771
Contract receivables, net		16,430			13,053
Prepaid expenses and other current assets		2,715			2,506
Total current assets		34,839			28,414

Equipment, software and leasehold improvements		6,862			7,003
Accumulated depreciation		(5,559	)		(5,407	)
Equipment, software and leasehold improvements, net		1,303			1,596

Software development costs, net		1,045			1,145
Goodwill		5,612			5,612
Intangible assets, net		533			775
Long-term restricted cash		1,735			1,779
Other assets		65			50
Total assets	$	45,132		$	39,371

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,367		$	1,238
Accrued expenses		1,930			1,723
Accrued compensation		3,196			2,431
Billings in excess of revenue earned		12,358			9,229
Accrued warranty		1,534			1,614
Current contingent consideration		731			2,647
Other current liabilities		827			826
Total current liabilities		22,943			19,708

Contingent consideration		1,210			1,085
Other liabilities		866			210
Total liabilities		25,019			21,003
Commitments and contingencies		-			-

Stockholders' equity:
Preferred stock $.01 par value, 2,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock $.01 par value, 30,000,000 shares authorized, 20,281,920 shares issued and 18,683,009 shares outstanding in 2016, 19,510,770 shares issued and 17,911,859 shares outstanding in 2015		203			195
Additional paid-in capital		74,952			73,481
Accumulated deficit		(50,431	)		(50,849	)
Accumulated other comprehensive loss		(1,612	)		(1,460	)
Treasury stock at cost, 1,598,911 shares in 2016 and 2015		(2,999	)		(2,999	)
Total stockholders' equity		20,113			18,368
Total liabilities and stockholders' equity	$	45,132		$	39,371

The accompanying notes are an integral part of these consolidated financial statements.

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE LOSS~~OPERATIONS

(in ~~thousands)~~thousands, except per share data)

(Unaudited)

Three Months ended
September 30,

Nine Months ended
September 30,

2015 2014 2015 2014

Net loss $ (3,555 ) $ (1,895 ) $ (5,566 ) $ (5,905 )

Foreign currency translation adjustment, net of tax (76 ) (261 ) (206 ) (362 )

Comprehensive loss $ (3,631 ) $ (2,156 ) $ (5,772 ) $ (6,267 )

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~GSE SYSTEMS, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY~~

~~(in thousands)~~

~~(Unaudited)~~

Common
Stock

Additional
Paid-in
Accumulated
Accumulated
Other Comprehensive

Treasury
Stock

Shares Amount Capital Deficit Loss Shares Amount Total
Balance, December 31, 2014 19,487 $ 195 $ 72,917 $ (45,142 ) $ (1,231 ) (1,599 ) $ (2,999 ) $ 23,740

Stock-based compensation expense - - 392 - - - - 392
Common stock issued for services provided 10 - 15 - - - - 15
Foreign currency translation adjustment - - - - (206 ) - - (206 )
Net loss - - - (5,566 ) - - - (5,566 )
Balance, September 30, 2015 19,497 $ 195 $ 73,324 $ (50,708 ) $ (1,437 ) (1,599 ) $ (2,999 ) $ 18,375

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015

Revenue	$	14,428		$	14,809		$	39,820		$	42,476

Cost of revenue		10,704			11,214			28,913			32,701
Write-down of capitalized software development costs		-			1,538			-			1,538
Gross profit		3,724			2,057			10,907			8,237

Operating expenses:
Selling, general and administrative		3,043			3,811			9,032			11,031
Restructuring charges		85			1,600			487			1,746
Depreciation		91			119			294			383
Amortization of definite-lived intangible assets		72			123			219			370
Total operating expenses		3,291			5,653			10,032			13,530

Operating income (loss)		433			(3,596	)		875			(5,293	)

Interest income, net		11			19			52			67
(Loss) gain on derivative instruments, net		(211	)		20			(346	)		(59	)
Other income (expense), net		15			(156	)		112			(235	)
Income (loss) before income taxes		248			(3,713	)		693			(5,520	)

Provision for income taxes		80			50			275			211
Net income (loss)	$	168		$	(3,763	)	$	418		$	(5,731	)


Basic earnings (loss) per common share	$	0.01		$	(0.21	)	$	0.02		$	(0.32	)

Diluted earnings (loss) per common share	$	0.01		$	(0.21	)	$	0.02		$	(0.32	)

The accompanying notes are an integral part of these consolidated financial statements.

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

Nine Months ended
September 30,

2015 2014
Cash flows from operating activities:
Net loss $ (5,566 ) $ (5,905 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Write-down of capitalized software development costs 1,538 -
Depreciation 383 413
Amortization of definite-lived intangible assets 370 108
Capitalized software amortization 291 173
Change in fair value of contingent consideration 739 69
Stock-based compensation expense 407 514
Equity loss on investments 233 38
(Gain) loss on derivative instruments 59 (178 )
Changes in assets and liabilities:
Contract receivables 3,580 11,928
Prepaid expenses and other assets (409 ) 419
Accounts payable, accrued compensation and accrued expenses 1,262 (2,292 )
Billings in excess of revenue earned (1,618 ) 792
Accrued warranty reserves 158 (349 )
Other liabilities (120 ) (575 )
Net cash provided by operating activities 1,307 5,155

Cash flows from investing activities:
Capital expenditures (217 ) (240 )
Capitalized software development costs (1,411 ) (590 )
Restrictions of cash as collateral under letters of credit (1,148 ) (3,159 )
Releases of cash as collateral under letters of credit 1,824 34
Net cash used in investing activities (952 ) (3,955 )

Cash flows from financing activities:
Payments on line of credit (339 ) -
Payments of the liability-classified contingent consideration arrangements (500 ) (500 )
Net cash used in financing activities (839 ) (500 )

Effect of exchange rate changes on cash (267 ) (315 )
Net increase (decrease) in cash and cash equivalents (751 ) 385
Cash and cash equivalents at beginning of year 13,583 15,643
Cash and cash equivalents at end of period $ 12,832 $ 16,028

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015


Net income (loss)	$	168		$	(3,763	)	$	418		$	(5,731	)

Foreign currency translation adjustment		(50	)		(76	)		(152	)		(206	)

Comprehensive income (loss)	$	118		$	(3,839	)	$	266		$	(5,937	)

The accompanying notes are an integral part of these consolidated financial statements.

GSE SYSTEMS, INC. AND SUBSIDIARIES

~~NOTES TO~~ CONSOLIDATED ~~FINANCIAL STATEMENTS~~STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

~~For the Three and Nine Months ended September 30, 2015 and 2014~~(in thousands)

(Unaudited)

	Common Stock													Treasury Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			Amount			Total
Balance, December 31, 2015		19,511	$	195	$	73,481		$	(50,849	)	$	(1,460	)		(1,599	)	$	(2,999	)	$	18,368

Stock-based compensation expense		-		-		882			-			-			-			-			882
Common stock issued for options exercised		322		3		594			-			-			-			-			597
Common stock issued for RSUs vested		449		5		(5	)		-			-			-			-			-
Foreign currency translation adjustment		-		-		-			-			(152	)		-			-			(152	)
Net income		-		-		-			418			-			-			-			418
Balance, September 30, 2016		20,282	$	203	$	74,952		$	(50,431	)	$	(1,612	)		(1,599	)	$	(2,999	)	$	20,113

The accompanying notes are an integral part of these consolidated financial statements.

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine months ended September 30,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	418		$	(5,731	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Write-down of capitalized software development costs		-			1,538
Depreciation and amortization		294			383
Amortization of definite-lived intangible assets		219			370
Capitalized software amortization		296			291
Change in fair value of contingent consideration		(370	)		739
Stock-based compensation expense		900			407
Equity loss on investments		-			233
Loss on derivative instruments		346			59
Deferred income taxes		96			-
Loss on sales of equipment, software, and leasehold improvements		3			-
Changes in assets and liabilities:
Contract receivables		(3,616	)		3,446
Prepaid expenses and other assets		(269	)		(358	)
Accounts payable, accrued compensation and accrued expenses		2,254			1,262
Billings in excess of revenue earned		3,183			(1,370	)
Accrued warranty		(80	)		158
Other liabilities		208			(120	)
Net cash provided by operating activities		3,882			1,307

Cash flows from investing activities:
Proceeds from sale of equipment, software and leasehold improvements		30			-
Capital expenditures		(53	)		(217	)
Capitalized software development costs		(196	)		(1,411	)
Restrictions of cash as collateral under letters of credit		(4	)		(1,148	)
Releases of cash as collateral under letters of credit		254			1,824
Net cash provided by (used in) investing activities		31			(952	)

Cash flows from financing activities:
Proceeds from issuance of common stock		594			-
Payments on line of credit		-			(339	)
Payments on contingent consideration		(1,421	)		(500	)
Net cash used in financing activities		(827	)		(839	)

Effect of exchange rate changes on cash		(77	)		(267	)
Net increase (decrease) in cash and cash equivalents		3,009			(751	)
Cash and cash equivalents at beginning of year		11,084			13,583
Cash and cash equivalents at end of period	$	14,093		$	12,832

The accompanying notes are an integral part of these consolidated financial statements.

1.	~~Basis~~Summary of ~~Presentation and Revenue Recognition~~Significant Accounting Policies

Basis of Presentation

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the ~~"Company"~~"Company," "GSE," "we," "us," or ~~"GSE"~~"our") without independent audit. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted. The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015 filed with the Securities and Exchange Commission on March ~~19, 2015.~~25, 2016. Certain reclassifications have been made to prior period amounts to conform to the current presentation.

The Company has two reportable segments as follows:

·	~~Performance Improvement Solutions~~

~~Our~~ ●Performance Improvement Solutions ~~business~~(approximately 69% of revenue)

The Company's Performance Improvement Solutions segment primarily encompasses ~~all of the solution-oriented technologies~~next generation power plant and ~~services traditionally associated with GSE which focus on both our client's people and their plants and operations.~~process high-fidelity simulation solutions, as well as engineering solutions. This segment includes various simulation products, engineering services, and operation training ~~and engineering products and services~~systems delivered across the ~~breadth of~~ industries ~~we serve. Our simulation~~the Company serves: primarily nuclear and fossil fuel power generation, and the process industries. Simulation solutions include ~~platforms ranging from~~the following: (1) simulation software and services, including operator training systems, for the ~~non-specific plant~~nuclear power industry, (2) simulation software and services, including operator training systems, ~~of our EnVision product line~~for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industry processes and control systems to newly hired employees ~~to (2) custom plant-specific simulators used to train plant operators, to (3) engineering-grade simulation solutions used to help clients verify~~ and ~~validate control systems prior to new plant construction or modification of existing plants, to (4) engineering-grade simulation solutions used~~ for ~~human factors engineering. Training applications include turnkey~~ongoing workforce development and ~~custom training~~training. GSE and its predecessors have been providing these services ~~to make training more effective. Our engineering services include plant design, automation and control systems design, functional safety and compliance analysis, and engineering consultations.~~since 1976.

·	~~Nuclear Industry Training and Consulting (formerly our "Staff Augmentation" segment)~~

●Nuclear Industry Training and Consulting (approximately 31% of revenue)

Nuclear Industry Training and Consulting ~~services provide~~provides highly specialized ~~workforce solutions primarily~~and skilled nuclear operations instructors and other consultants to the nuclear power industry. These employees work at ~~our~~ clients' facilities under client direction. Examples of these highly skilled positions are ~~primarily~~ senior reactor operations instructors, procedure writers, work management specialists, planners, and training material developers. This business is managed through ~~our~~the Company's Hyperspring ~~LLC~~ subsidiary. The business model, management focus, margins, and other factors clearly separate this business line from the rest of the GSE product and service portfolio. Hyperspring has been providing these services since 2005.

Financial information about the two business segments is provided in Note 1514 of the accompanying ~~Consolidated Financial Statements.~~consolidated financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. The Company's most significant estimates relate to revenue recognition on long-term contracts, product warranties, capitalization of software development costs, valuation of goodwill and intangible assets acquired, valuation of contingent consideration issued in business acquisitions, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.

Revenue Recognition ~~on Long-Term Contracts~~

The Company ~~recognizes revenue through~~has (1) ~~fixed price~~fixed-price contracts onfor the sale of uniquely ~~designed~~designed/customized systems containing hardware and software, (2) fixed-price contracts for the sale of software licenses which may include post-contract support ("PCS") and other ~~material~~elements such as installation and ~~(2)~~training, and (3) time and material contracts ~~primarily~~ for ~~Nuclear Industry Training and Consulting~~ support and service agreements.

In accordance with ~~ASC~~Accounting Standards Codification ("ASC") 605-35 ~~Construction-Type~~, "Construction-Type and Production-Type ~~Contracts, our~~Contracts", the Performance Improvement Solutions segment ~~accounts~~recognizes revenue for ~~revenue under~~its fixed-price contracts for the sale of customized systems using the percentage-of-completion method. This methodology recognizes revenue and earnings as work progresses on the contract and is based on an estimate of the revenue and earnings ~~earned~~ to date, less amounts recognized in prior periods. The Company bases its estimate of the degree of completion of the contract by reviewing the relationship of costs incurred to date to the expected total costs that will be incurred on the project. Estimated contract earnings are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which the change is identified. Estimated losses are charged against earnings in the period such losses are identified. The Company recognizes revenue arising from contract claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is a legal basis of the claim.

Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

~~As the~~

The Company ~~recognizes revenue under the percentage-of-completion method, it provides an accrual~~accrues for estimated ~~future~~ warranty costs at the time the related revenue is recognized based on historical and projected claims experience. The Company's long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.

The Company's system design contracts do not normally provide for "post customer support service" (PCS) in terms of software upgrades, software enhancements or telephone support. In order to obtain PCS, the customers normally must purchase a separate contract. Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases.

The Company ~~recognizes revenue from these contracts ratably over the life of the agreements.~~

Revenue from the sale of software licenses which do not require significant modifications or customization for the Company's modeling tools are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable.

~~We evaluate our~~evaluates customized system contracts for multiple deliverables under ASC ~~605-~~605-25,~~25 Revenue~~ "Revenue Recognition-Multiple Element ~~Arrangements~~Arrangements", and when appropriate, ~~separate~~separates the contracts into separate units of accounting for revenue recognition. Contracts with multiple element arrangements typically include, but are not limited to, components such as training ~~licenses,~~ and PCS, ~~as described above,~~which are embedded in the ~~agreement.~~contract. When a contract contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence ("VSOE") if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. Amounts allocated to training and support services are based on VSOE and revenue is deferred until the services have been performed. ~~Amounts allocated to~~

The Company also provides stand-alone PCS contracts. Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases. The Company recognizes revenue from these contracts ratably over the life of the agreements.

Revenue from the sale of software licenses without other elements in the contract and which do not require significant modifications or customization for the Company's modeling tools are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable. The Company utilizes written contracts as a means to establish the terms and conditions by which product support and services are sold to customers. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs after a license key has been delivered electronically to the customer and as support and services are delivered.

The Company also ~~based on VSOE. Revenue related to~~recognizes revenue from the sale of software licenses with multiple deliverables. These software license sales are evaluated under ASC 985-605, "Software Revenue Recognition". Contracts with multiple element arrangements typically include, but are not limited to, components such as installation, training, licenses, and PCS listed in the contract. The Company has not established VSOE for all elements of its bundled software license arrangements. If a PCS element exists in the software license arrangement, revenue is recognized ~~once~~ratably over the ~~license has~~PCS service period. If no PCS element exists in the arrangement, revenue is deferred until all elements have been delivered.

The Company recognizes revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain ~~consulting agreements.~~cost-reimbursable contracts. Revenue on time and ~~materials~~material contracts is recognized as services are rendered and performed. Under a typical time-and-materials billing arrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly. ~~At the end of each accounting period, revenue is estimated and accrued for services performed since the last billing cycle. These~~Any earned but unbilled amounts are typically billed the following month. Under cost-reimbursable contracts, which are subject to a contract ceiling amount, the Company is reimbursed for allowable costs and paid a fee, which may be fixed or performance based. However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, the Company may not be able to obtain reimbursement for all such costs.

~~For~~Revisions

Historically, the Company recognized revenue on multiple element arrangements which included sales of its EnVision software product as delivery occurred on each element except PCS. PCS revenue was recognized ratably over the PCS term. During the fourth quarter of 2015, management determined that the Company had not established VSOE of the fair value for any of the elements in multiple element transactions including sales of its EnVision software licenses. Accordingly, the consolidated financial statements were revised to recognize all revenue on multiple element transactions including EnVision software license sales ratably over the PCS terms on these transactions since VSOE did not exist for any of the non-software elements in these multiple element transactions. The revision resulted in a decrease to revenue of $152,000, an increase to cost of revenue of $56,000, and an increase in operating loss of $208,000 for the three months ended September 30, 2015. The revision resulted in an decrease to revenue of $113,000, an increase to cost of revenue of $52,000, and a increase in operating loss of $165,000 for the nine months ended September 30, ~~2015 and 2014, the following customers provided more than 10% of the Company's consolidated revenue:~~2015.

Three Months ended
September 30,

Nine Months ended
September 30,
2015 2014 2015 2014
Tennessee Valley Authority 14.3 % 0.0 % 17.9 % 0.0 %
Public Service Enterprise Group Inc. 11.3 % 0.6 % 10.6 % 0.6 %

Certain prior year amounts have also been revised in the consolidated statements of cash flows to reflect the corrections to net loss and changes in billings in excess of revenue earned, prepaid expenses and other assets. The revision had no impact on cash provided by operations or the net decrease in cash and cash equivalents.

The Company assessed the materiality of these misstatements on prior periods' consolidated financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250, Accounting Changes and Error Corrections, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the consolidated financial statements as of September 30, 2015, which are presented herein, have been revised.

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three months ended September 30, 2015									Nine months ended September 30, 2015
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised

Revenue	$	14,961		$	(152	)	$	14,809		$	42,589		$	(113	)	$	42,476
Cost of revenue		11,158			56			11,214			32,649			52			32,701
Write-down of capitalized software development costs		1,538			-			1,538			1,538			-			1,538

Gross profit		2,265			(208	)		2,057			8,402			(165	)		8,237

Operating loss		(3,388	)		(208	)		(3,596	)		(5,128	)		(165	)		(5,293	)

Loss before income taxes		(3,505	)		(208	)		(3,713	)		(5,355	)		(165	)		(5,520	)

Net loss	$	(3,555	)	$	(208	)	$	(3,763	)	$	(5,566	)	$	(165	)	$	(5,731	)


Basic loss per common share	$	(0.20	)	$	(0.01	)	$	(0.21	)	$	(0.31	)	$	(0.01	)	$	(0.32	)

Diluted loss per common share	$	(0.20	)	$	(0.01	)	$	(0.21	)	$	(0.31	)	$	(0.01	)	$	(0.32	)

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

	Three months ended September 30, 2015									Nine months ended September 30, 2015
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised

Net loss	$	(3,555	)	$	(208	)	$	(3,763	)	$	(5,566	)	$	(165	)	$	(5,731	)

Comprehensive loss	$	(3,631	)	$	(208	)	$	(3,839	)	$	(5,772	)	$	(165	)	$	(5,937	)

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine months ended September 30, 2015
	As Reported			Adjustment			As Revised

Cash flows from operating activities:
Net loss	$	(5,566	)	$	(165	)	$	(5,731	)
Changes in assets and liabilities:
Contract receivables, net		3,580			(134	)		3,446
Prepaid expenses and other assets		(409	)		51			(358	)
Billings in excess of revenue earned		(1,618	)		248			(1,370	)
Net cash provided by operating activities	$	1,307		$	-		$	1,307

Net decrease in cash and cash equivalents	$	(751	)	$	-		$	(751	)

2.	Recent Accounting Pronouncements ~~Not Yet Adopted~~

Accounting Pronouncements Recently Adopted

In ~~May 2014,~~November 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The Company adopted ASU 2015-17 effective January 1, 2016. The adoption of this guidance did not have a material effect on the Company's consolidated financial position.

Accounting ~~Standards Update ("ASU")~~Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company in the first quarter of its fiscal year ending December 31, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently in the process of evaluating the impact of its pending adoption of this ASU on the Company's consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018.

11In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company is still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and the Company expects that upon adoption the recognition of ROU assets and lease liabilities could be material.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based Accounting". The new guidance is intended to simplify the accounting for share based payment award transactions. The amendments in the update include the following aspects for share based accounting: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. We are currently evaluating the potential impact of the adoption of ASU 2016-09 on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". The new guidance addresses eight specific cash flow issues and applies to all entities that are required to present a statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. We are currently evaluating the potential impact of the adoption of ASU 2016-15 on our consolidated financial statements.

Basic and Diluted ~~Loss~~Earnings (Loss) per Common Share

Basic ~~loss~~earnings (loss) per share is based on the weighted average number of outstanding common shares for the period. Diluted ~~loss~~earnings (loss) per share adjusts the weighted average shares outstanding for the potential dilution that could occur if stock options or other common stock equivalents were exercised into common stock.

The number of common shares and common share equivalents used in the determination of basic and diluted ~~loss~~earnings (loss) per share were as follows:

(in thousands, except for share amounts)	Three Months ended						Nine Months ended						Three months ended					Nine months ended
	September 30,						September 30,						September 30,					September 30,
	2015			2014			2015			2014			2016		2015			2016		2015
Numerator:
Net loss	$	(3,555	)	$	(1,895	)	$	(5,566	)	$	(5,905	)
Net income (loss)													$	168	$	(3,763	)	$	418	$	(5,731	)

Denominator:
Weighted-average shares outstanding for basic earnings per share		17,894,272			17,887,859			17,890,020			17,887,859			18,230,148		17,894,272			18,052,019		17,890,020

Effect of dilutive securities:
Employee stock options		-			-			-			-			239,969		-			235,851		-
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		17,894,272			17,887,859			17,890,020			17,887,859			18,470,117		17,894,272			18,287,870		17,890,020

Shares related to dilutive securities excluded because inclusion would be anti-dilutive		2,513,321			2,736,703			2,548,401			2,730,558			734,833		2,513,321			741,862		2,548,401

~~Acquisition~~Contingent Consideration

~~Hyperspring, LLC~~

On November 14, 2014, (the "Closing Date") the Company, through its operating subsidiary, GSE Power Systems, Inc. (now GSE Performance Solutions, Inc. "GSE Performance"), acquired Hyperspring, LLC ("Hyperspring") pursuant to a Membership Interests Purchase Agreement ("Purchase Agreement") with the sellers of Hyperspring ("Sellers"). Hyperspring, headquartered in Huntsville, Alabama, specializes in training and development, plant operations support services, and Nuclear Industry Training and Consulting, primarily in the United States nuclear industry. Hyperspring operates as a wholly-owned subsidiary of GSE Performance Solutions, Inc. The purchase price allocation included customer relationship intangible assets valued at $779,000 which are being amortized over seven years.

~~GSE Performance paid the Sellers an aggregate of $3.0 million in cash at the closing date. Per the Purchase Agreement, a~~ $1.2 million payment was due to the former Hyperspring members if Hyperspring were successful in renewing its contract with the Tennessee Valley Authority ("TVA") for a two year period for substantially the same scope as was currently being provided and with substantially the same economics. On September 24, 2015, TVA executed a three-year renewal contract with Hyperspring; accordingly the Company paid the $1.2 million payment to the former Hyperspring members in October 2015.

In addition, GSE may be required, pursuant to the terms of the Purchase Agreement, to pay the Sellers up to an additional $7.2 million if Hyperspring attains certain EBITDA (earnings before interest, taxes, depreciation and amortization) targets for the three-year period ending November 13, 2017. Accordingly, the total cash paid to the former Hyperspring ~~members may total $11.4 million.~~

~~The following table summarizes the purchase price and purchase price allocation for the acquisition of Hyperspring, LLC, acquired on November 14, 2014.~~

(in thousands)

Cash purchase price $ 3,000
Fair value of contingent consideration 3,953
Total purchase price $ 6,953

Purchase price allocation:
Cash $ 152
Contract receivables 1,719
Prepaid expenses and other current assets 23
Property and equipment, net 12
Intangible assets 779
Goodwill 5,612
Total assets 8,297

Line of credit 749
Accounts payable, accrued expenses, and other liabilities 586
Billings in excess of revenue earned 9
Total liabilities 1,344

Net assets acquired $ 6,953

~~Pro forma results.~~ Our consolidated financial statements include the operating results of Hyperspring as of the date of acquisition. For the nine months ended September 30, 2015 and 2014, the unaudited pro forma financial information below assumes that our material business acquisition of Hyperspring occurred on January 1, 2014.

(in thousands except per share data) (unaudited)
Three Months ended Nine Months ended
September 30, September 30,
Pro forma financial information including the acquisition of Hyperspring 2015 2014 2015 2014
Revenue $ 14,961 $ 12,307 $ 42,589 $ 37,930
Operating loss (3,195 ) (1,785 ) (4,701 ) (5,848 )
Net loss (3,363 ) (1,697 ) (5,140 ) (5,749 )
Loss per common share — basic $ (0.19 ) $ (0.09 ) $ (0.29 ) $ (0.32 )
Loss per common share — diluted $ (0.19 ) $ (0.09 ) $ (0.29 ) $ (0.32 )

~~IntelliQlik LLC~~

In conjunction with the Hyperspring acquisition, GSE Performance invested $250,000 for a 50% interest in IntelliQlik, LLC ("IntelliQlik"). IntelliQlik is developing a software platform for online learning and learning management for the energy market and is jointly owned by GSE Performance and a former Hyperspring member. GSE Performance was obligated to contribute an additional $250,000 should IntelliQlik attain certain development milestones by September 30, 2015. Based on a review of the software platform as of September 30, 2015, GSE concluded that the required development milestones had not been met and did not contribute the additional $250,000 investment. The Company wrote-off the remaining $126,000 balance of its IntelliQlik investment in the third quarter 2015. The loss was recorded under other expense, net.

~~Contingent Consideration~~

~~Accounting Standards Codification~~ASC 805, "Business ~~Combinations~~ Combinations",~~("ASC 805")~~ requires that contingent consideration be recognized at fair value on the acquisition date and be re-measured each reporting period with subsequent adjustments recognized in the consolidated statement of operations. ~~We estimate~~The Company estimates the fair value of contingent consideration ~~liabilities~~ based on financial projections of the acquired companies and estimated probabilities of achievement and ~~discount~~then discounts the liabilities to present value using a weighted-average cost of capital. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. ~~We believe our~~The Company believes that the estimates and assumptions are reasonable, however, there is significant judgment involved. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisitions are reflected in income or expense in the consolidated statements of operations and could cause a material impact to, and volatility in, ~~our~~the operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods, changes in the timing and amount of revenue and/or earnings estimates, and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

As of September 30, ~~2015~~2016, and December 31, ~~2014, current~~2015, contingent consideration included in current liabilities totaled ~~$2.6~~$0.7 million and ~~$2.8~~$2.6 million, respectively. As of September 30, ~~2015~~2016, and December 31, ~~2014, we~~2015, the Company also had accrued contingent consideration totaling ~~$2.2~~$1.2 million and ~~$1.9~~$1.1 million, respectively, which was reported as a noncurrent liability and represents the portion ~~of contingent consideration~~ estimated to be payable greater than twelve months from the balance sheet date.

During the three and nine months ended September 30, 2016, the Company made no payments and a payment of $1.4 million, respectively, related to the liability-classified contingent consideration arrangements. During the three and nine months ended September 30, 2015, the Company made no payments and a payment of ~~$182,000 and~~ $500,000, respectively, related to the former EnVision shareholders in accordance with the purchase agreements. For the nine months ended September 30, 2015, the Company did not make any payments to the former owners of Hyperspring. Refer to the ~~Subsequent Event~~ ~~footnote in regards to the $1.2 million payout to the former Hyperspring members in October 2015.~~

(in thousands)
September 30, December 31,
2015 2014
Hyperspring, LLC $ 2,601 $ 2,152
IntelliQlik, LLC - 213
EnVision Systems, Inc. - 477
Current contingent consideration $ 2,601 $ 2,842

Hyperspring, LLC $ 2,221 $ 1,948
Contingent consideration $ 2,221 $ 1,948

liability-classified contingent consideration arrangements.

5.	Contract Receivables

Contract receivables represent balances due from a broad base of both domestic and international customers. All contract receivables are considered to be collectible within twelve months. ~~Recoverable costs and accrued profit not billed~~Unbilled receivables represent costs incurred and associated profit accrued on contracts that will become billable upon future milestones or completion of contracts.

The components of contract receivables are as follows:

(in thousands)	September 30,			December 31,			September 30,			December 31,
	2015			2014			2016			2015

Billed receivables	$	7,473		$	10,792		$	9,585		$	9,831
Recoverable costs and accrued profit not billed		4,769			5,060
Unbilled receivables								6,866			3,325
Allowance for doubtful accounts		(2	)		(22	)		(21	)		(103	)
Total contract receivables, net	$	12,240		$	15,830		$	16,430		$	13,053

~~Recoverable costs and accrued profit not billed~~Unbilled receivables totaled ~~$4.8~~$6.9 million and ~~$5.1~~$3.3 million as of September 30, ~~2015~~2016, and December 31, ~~2014,~~2015, respectively. During October ~~2015,~~2016, the Company invoiced ~~$1.9~~$0.6 million of the unbilled ~~amounts.~~amounts related to the balance at September 30, 2016.

~~The following~~As of September 30, 2016, the Company had one customer that accounted for 11.3% of consolidated contract receivables. As of December 31, 2015, the Company did not have any customers that accounted for more than 10% of the Company's consolidated contract ~~receivables as of September 30, 2015 and December 31, 2014, respectively:~~receivables.

September 30, 2015 December 31, 2014
China Nuclear Power Engineering Company 14.7 % 3.9 %
State Nuclear Power Automation System Engineering Co. 0.4 % 10.2 %

Software Development Costs

Certain computer software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenue and is determined using the straight-line method over the remaining estimated economic life of the product, typically three years. On an annual basis, and more frequently as conditions indicate, the Company assesses the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expected to be generated by the sale of the product. If the undiscounted cash flows are not sufficient to recover the unamortized software costs, the Company will ~~write-down~~write down the investment to its estimated fair value based on future undiscounted cash flows. The excess of any unamortized software development costs over the related net realizable value is written down and charged to cost of revenue.

During the third quarter of 2015, the Company's new CEO conducted a review of the Company's organizational and cost structure and software development plans. Based upon this review, GSE decided to terminate the Enterprise Data Management ("EDM") development program. As a result, GSE believes that the full value of the capitalized software development costs relating to EDM are no longer recoverable. As of September 30, 2015, GSE recorded a $1.5 million write-down of software development costs which was the full capitalized balance of its EDM development projects.

Software development costs capitalized were ~~$473,000~~$10,000 and $196,000 for the three and nine months ended September 30, 2016, respectively, and $0.5 million and $1.4 million for the three and nine months ended September 30, 2015, ~~respectively,~~respectively. Total amortization expense was $111,000 and ~~$241,000 and $590,000~~$296,000 for the three and nine months ended September 30, ~~2014, respectively. Total amortization expense was~~2016, respectively, and $96,000 and $291,000 for the three and nine months ended September 30, 2015, ~~respectively, and $78,000 and $173,000 for the three and nine months ended September 30, 2014,~~ respectively.

Goodwill and Intangible Assets

Goodwill

~~We review~~The Company reviews goodwill for impairment annually as of ~~November 30~~December 31 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. ~~We test~~The Company tests goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. ~~generally accepted accounting principles. After the acquisition of Hyperspring, LLC ("Hyperspring") on November 14, 2014, our~~GAAP. The Company's reporting units are: (i) Performance Improvement Solutions and (ii) Nuclear Industry Training and Consulting. ~~At September 30, 2015 and December 31, 2014, the~~The $5.6 million of goodwill ~~balance was related to~~originated from the Hyperspring acquisition in 2014 and is assigned to ~~our~~the Nuclear Industry Training and Consulting segment.

~~Accounting Standards Update ("ASU") 2011-08,~~ ~~Testing Goodwill for Impairment~~ ~~("ASU 2011-08") permits an entity to first assess qualitative factors to determine whether it is more likely than not~~ No events or circumstances occurred during the current reporting period that ~~the fair value~~would indicate impairment of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Under ASU 2011-08, an entity is not required to perform step one of the goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. As of September 30, 2015, no impairment has been recognized onsuch goodwill.

Intangible Assets Subject to Amortization

The Company's intangible assets include amounts recognized in connection with business acquisitions, including contractual customer relationships, contract backlog, and technology. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for contract backlog and contractual customer relationships which are recognized in proportion to the related projected revenue streams. The Company reviews specific definite-lived ~~intangibles~~intangible assets for impairment when events occur that may impact their value in accordance with the respective accounting guidance for long-lived assets.

8.	Fair Value of Financial Instruments

ASC 820, "Fair Value ~~Measurements and Disclosures~~ Measurement"~~("ASC 820")~~, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: inputs are unobservable and reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, ~~2015~~2016, and December 31, ~~2014~~2015, based upon the short-term nature of the assets and liabilities.

The following table presents assets and liabilities measured at fair value at September 30, ~~2015:~~2016:

Markets for Identical Assets

The following table presents assets and liabilities measured at fair value at December 31, ~~2014:~~2015:

Markets for Identical Assets

21The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the nine months ended September 30, 2016:

9.	Derivative Instruments

The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates. It is the Company's policy to use such derivative financial instruments to protect against market risk arising in the normal course of business in order to reduce the impact of these exposures. The Company minimizes credit exposure by limiting counterparties to nationally recognized financial institutions.

The Company has not designated any of the foreign exchange contracts outstanding as cash flow hedges and has recorded the estimated fair value of the contracts in the consolidated balance sheets as follows:

The changes in the fair value of the foreign exchange contracts are included in ~~net~~(Loss) gain ~~(loss)~~ on derivative instruments, net in the consolidated statements of operations.

The foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is also included in ~~net gain (loss)~~loss on derivative instruments, net in the consolidated statements of operations.

For the three and nine months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, the Company recognized a net (loss) gain ~~(loss)~~ on its derivative instruments as outlined below:

Remeasurement of related contract receivables,

billings in excess of revenue earned, and

subcontractor accruals

10.	Stock-Based Compensation

The Company recognizes compensation expense for all equity-based compensation awards issued to employees, directors and non-employees that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date. The Company recognized ~~$136,000~~$412,000 and ~~$175,000~~$136,000 of stock-based compensation expense for the three months ended September 30, 2016, and September 30, 2015, ~~and 2014,~~ respectively, ~~under the fair value method~~ and recognized ~~$407,000~~$900,000 and ~~$514,000~~$407,000 of stock-based compensation expense for the nine months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, respectively.

In the ~~third quarter 2015,~~nine months ended September 30, 2016, the Company granted ~~975,000 Restricted Stock Unit's~~1,322,500 performance-based restricted stock units ("RSUs") with an aggregate fair value of ~~$673,500.~~$1.9 million. In the three months ended September 30, 2016, the Company granted 1,162,500 performance-based RSUs with an aggregate fair value of $1.6 million. The RSUs vest upon the achievement of specific performance measures. The fair value of the RSUs is expensed ratably over the requisite service period, which ranges between one and five years.

The performance-based RSUs granted during 2016 include 450,000 RSUs, which were canceled and reissued in accordance with the Chief Executive Officer's amended employment agreement dated July 1, 2016 and approved by the Board of Directors. The aggregate fair value of the RSUs reissued totaled $469,000.

Additionally, on July 1, 2016, the Board of Directors approved an amendment to the performance-based RSU agreements with other employees, which reduced the time period from 90 to 30 consecutive trading days during which the volume weighted-average price ("VWAP") target must be attained in order for the RSUs to vest. This change resulted in an increase in the fair value of the RSUs granted of approximately $250,000, which will be expensed ratably over the remaining requisite service period.

In the three and nine months ended September 30, 2016, the Company granted ~~10,000~~70,000 and 204,824 time-based RSUs with an aggregate fair value of $172,300 and $471,650, respectively. The fair value of the RSUs is expensed ratably over the requisite service period.

The Company granted no new options and 40,000 stock options for the three and nine months ended September 30, 2016, respectively. The fair value of the options granted for the nine months ended September 30, 2016 was $46,000. The Company granted no new options and 60,000 stock options for the three and nine months ended September 30, 2015, respectively. The fair value of the options granted for the ~~three and~~ nine months ended September 30, 2015 was $8,000 and $48,000, respectively. The Company granted 0 and 60,000 stock options for the three and nine months ended September 30, 2014, respectively. The fair value of the granted options at the grant date was $56,000.$48,000.

At September 30, ~~2015~~2016, and December 31, ~~2014,~~2015, the Company had no long-term debt.

~~Susquehanna~~BB&T Bank

At September 30, ~~2015,~~2016, the Company had a Master Loan and Security Agreement (the "Loan Agreement") and Revolving Credit Note with ~~Susquehanna Bank ("Susquehanna").~~BB&T Bank. The Company and its subsidiary, GSE Performance Solutions, Inc., were jointly and severally liable as co-borrowers. The Loan Agreement provides a $7.5 million revolving line of credit for the purpose of (i) issuing stand-by letters of credit and (ii) providing working capital. Working capital advances bear interest at a rate equal to the Wall Street Journal Prime Rate of Interest, floating with a floor of ~~4 1/2%~~4.5%.

The agreement ~~expires~~would have expired on ~~June~~September 30, ~~2016.~~2016, but the Company and BB&T Bank amended the Loan Agreement to extend the expiration date until March 31, 2017. All other terms and conditions remained the same.

As collateral for the Company's obligations, the Company granted a first lien and security interest in all of the assets of the Company, including but not limited to, ~~accounts receivable, proceeds~~contract receivables, intangible assets, equipment, software and ~~products, intangibles, trademarks, patents, intellectual property, machinery and equipment.~~

~~On September 9, 2014, the~~The Company ~~signed a Third Comprehensive Amendment to the Master Loan and Security Agreement. According to the Third Amendment, the Company~~ is obligated to maintain a segregated cash collateral account at ~~Susquehanna~~BB&T Bank equal to the greater of (i) $3.0 million or (ii) the aggregate principal amounts of all ~~Loans~~loans outstanding under the ~~Revolving Credit Facility~~revolving credit facility (including any issued and outstanding letters of credit, working capital advances, and negative foreign exchange positions) as security for the Company's obligations. Under this ~~Amendment, Susquehanna~~agreement, BB&T Bank ~~shall have~~has complete and unconditional control over the cash collateral account.

~~On September 30, 2014, Susquehanna Bank collateralized the outstanding letters of credit issued under the line of credit.~~

At September 30, ~~2015~~2016, and December 31, ~~2014,~~2015, the cash collateral account supporting standby letters of credit totaled ~~$3.6~~$3.3 million and ~~$4.2~~$3.5 million, respectively. The balances were classified as restricted cash on the consolidated balance ~~sheet.~~sheets.

The ~~credit agreements contain~~Loan Agreement contains certain restrictive covenants regarding future acquisitions and incurrence of debt. ~~On July 31, 2015,~~In addition, the ~~Company signed a Fifth Comprehensive Amendment~~Loan Agreement contains financial covenants with respect to the ~~Master Loan~~Company's minimum tangible capital base and ~~Security Agreement in which the Company's financial covenants were reduced from four to two, and the covenant targets were adjusted.~~quick ratio.

As of September 30, ~~2015,~~2016, the Company was in compliance with its financial covenants as ~~defined~~described above.

At September 30, 2015, Hyperspring, LLC has a $1.0 million working capital line of credit with IberiaBank for a one year period. Under the executed promissory note, interest is payable monthly at the rate of 1.00 percentage points over the prime rate of interest as published in the money rate section of the Wall Street Journal resulting in an effective interest rate of 4.25%. The line is secured by all accounts of Hyperspring and guaranteed by GSE Systems, Inc. The line of credit expires on July 6, 2016. At September 30, 2015, the Company had no outstanding amounts under the line of credit.

Letters of Credit and Bonds

As of September 30, ~~2015,~~2016, the Company has ~~thirteen~~nine standby letters of credit ~~and one surety bond~~ totaling ~~$3.6~~$3.3 million which represent advance payment and performance bonds on ~~twelve~~eight contracts. The Company has deposited the full value of ~~thirteen~~nine standby letters of credit in escrow accounts, amounting to ~~$3.6~~$3.3 million, which have been restricted in that the Company does not have access to these funds until the related letters of credit have expired. The cash has been recorded on the Company's consolidated balance ~~sheet~~sheets at September 30, ~~2015~~2016, as restricted cash, of which $1.6 million is categorized as current restricted cash and $1.7 million categorized as long-term restricted cash.

12.

Product Warranty

~~As the~~The Company ~~recognizes revenue under the percentage-of-completion method, it provides an accrual~~accrues for estimated ~~future~~ warranty costs at the time the related revenue is recognized based on historical experience and projected claims. The ~~activity~~Company's long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems. The portion of the warranty ~~account~~provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.5 million, while the remaining $0.2 million is classified as long-term within other liabilities. The activity related to the warranty accrual is as follows:

The ~~Company files~~Company's income tax expense for the nine months ended September 30, 2016, and September 30, 2015, differed from the expected income tax amounts computed by applying the federal corporate income tax rate of 35% to income (loss) before income taxes for the periods as shown in the ~~United States federal jurisdiction~~table below.

The Company's increase in effective tax rate for 2016 as compared to 2015 resulted mainly from a reduction in pre-tax loss in the U.S. The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. Tax expense in both years is comprised mainly of foreign income tax expense, Alternative Minimum Tax, state taxes, and ~~in several state and foreign jurisdictions.~~ deferred tax expense relating to the tax amortization of goodwill.

Because of ~~the~~its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from ~~years~~the year 1997 ~~forward and~~forward. The Company is subject to foreign tax examinations by tax authorities for years ~~2007~~2010 forward for Sweden, 2012 forward for China, and ~~forward. Open tax years related to state~~2014 forward for both India and ~~foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.~~the UK.

An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not ~~(i.e.~~(i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense.

The Company recognizes deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. The Company has ~~appropriately accounted for~~evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its ~~uncertain tax positions.~~

U.S., Swedish, and Chinese net deferred assets as of September 30, 2016. The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in the UK and India. In ~~2014,~~2015, the Company paid income taxes in the UK and India and expects to do so again in ~~2015. The Company has a full valuation allowance on its U.S., Swedish, and Chinese net deferred tax assets at September 30, 2015.~~2016.

14.	~~Preferred Stock Rights~~

On March 21, 2011, the Board of Directors of the Company declared a dividend, payable to holders of record as of the close of business on April 1, 2011, of one preferred stock purchase right (a "Right") for each outstanding share of common stock, par value $0.01 per share, of the Company (the "Common Stock"). In addition, the Company will issue one Right with each new share of Common Stock issued. In connection therewith, on March 21, 2011, the Company entered into a Stockholder Protection Rights Agreement (as amended from time to time, the Rights Agreement) with Continental Stock Transfer & Trust Company, as Rights Agent, which has a term of three years, unless amended by the Board of Directors in accordance with the terms of the Rights Agreement. On March 21, 2014, the Rights Agreement was amended to extend the term an additional two years. The Rights Agreement will now expire on March 21, 2016. The Rights trade with and are inseparable from the Common Stock and are not evidenced by separate certificates unless they become exercisable. Each Right entitles its holder to purchase from the Company one-hundredth of a share of participating preferred stock having economic and voting terms similar to the Common Stock at an exercise price of $8.00 per Right, subject to adjustment in accordance with the terms of the Rights Agreement, once the Rights become exercisable. Under the Rights Agreement, the Rights become exercisable if any person or group acquires 20% or more of the Common Stock or, in the case of any person or group that owned 20% or more of the Common Stock as of March 21, 2011, upon the acquisition of any additional shares by such person or group. The Company, its subsidiaries, employee benefit plans of the Company or any of its subsidiaries and any entity holding Common Stock for or pursuant to the terms of any such plan are accepted. Upon exercise of the Right in accordance with the Rights Agreement, the holder would be able to purchase a number of shares of Common Stock from the Company having an aggregate market price (as defined in the Rights Agreement) equal to twice the then-current exercise price for an amount in cash equal to the then-current exercise price. In addition, the Company may, in certain circumstances and pursuant to the terms of the Rights Agreement, exchange the Rights for one share of Common Stock or an equivalent security for each Right or, alternatively, redeem the Rights for $0.001 per Right. The Rights will not prevent a takeover of our Company, but may cause substantial dilution to a person that acquires 20% or more of the Company's Common Stock.

~~15.~~ Segment Information

The Company has two reportable business segments. The Performance Improvement Solutions business segment provides simulation, training products, and engineering products and services delivered across the breadth of industries ~~we serve.~~the Company serves. Solutions include simulation for both training and engineering applications. ~~Example training applications include turnkey and custom training services, while engineering~~Engineering services include plant design verification and validation. ~~We provide~~The Company provides these services across all ~~our~~of its market segments. Contracts typically range from ~~ten~~six months to three years, with the majority of contracts in the range from 12 months to two years. GSE and its predecessors have been providing these services since 1976.

The Nuclear Industry Training and Consulting ~~services~~business segment provides specialized workforce solutions primarily to the U.S. nuclear industry, working at ~~our clients'~~client facilities. This business is managed through ~~our~~the Company's Hyperspring ~~LLC~~ subsidiary. Contracts typically range from six months to three years. Hyperspring has been providing these services since 2005.

The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated ~~loss~~income (loss) before income tax expense:

15.Commitments and Contingencies

The Company has contingent liabilities that, in management's judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, the Company may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.

~~16.~~

~~Subsequent Events~~

Per the Hyperspring LLC Purchase Agreement, a $1.2 million payment was due to the former Hyperspring members if Hyperspring were successful in renewing its contract with the Tennessee Valley Authority ("TVA") for at least a two year period for substantially the same scope as was being provided at the acquisition date and with substantially the same economics. On September 24, 2015, TVA executed a three-year renewal contract with Hyperspring; accordingly, the Company paid the $1.2 million payment to the former Hyperspring members in October 2015.

~~Item 2.~~

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

GSE ~~Systems, Inc. ("GSE Systems", "GSE" or the "Company")~~ is a ~~world leader in real-time high fidelity simulation. The Company provides~~performance improvement company. We enhance plant performance with a combination of simulation, engineering, and ~~educational solutions~~plant services that help clients improve their plant's profitability, productivity, and ~~services to the nuclear and fossil electric utility industry, and the chemical and petrochemical industries.~~safety. GSE is the parent company of the following entities:

●

GSE Performance Solutions, Inc. (formerly 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;

●

EnVision Systems (India) Pvt. Ltd., an Indian limited liability company; and

●

Hyperspring, LLC, an Alabama limited liability company.

The Company has a 50% interest in IntelliQlik, LLC, a Delaware limited liability ~~company and a 50% interest in General Simulation Engineering RUS LLC, a Russian closed joint-stock~~ company.

The Company has two reportable business segments: Performance Improvement Solutions which provides simulation, engineering, and training solutions and services to the nuclear and fossil fuel power industry and to the chemical and petrochemical industries and Nuclear Industry Training and Consulting (formerly our "Staff Augmentation" segment) which provides personnel to fulfill staff positions on a short-term basis to energy industry customers.

Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for ~~forward looking~~forward-looking statements. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. We use words such as "expects", "intends", "believes", "may", "will" and "anticipates" to indicate forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including, but not limited to, those factors set forth under Item 1A - Risk Factors of the Company's ~~2014~~2015 Annual Report on Form 10-K and those other risks and uncertainties detailed in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the effect, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ from those expressed or implied by these forward-looking statements.

If any one or more of these expectations and assumptions proves incorrect, actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, actual results may still differ materially from those expressed in the forward-looking statements as a result of factors we may not anticipate or that may be beyond our control. While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by us, whether as a result of new information, future events or otherwise. You are cautioned not to rely unduly ~~rely~~ on such forward-looking statements when evaluating the information presented in this report.

General Business Environment

We operate through two reportable business segments: Performance Improvement Solutions and Nuclear Industry Training and Consulting. Each segment focuses on delivering solutions to ~~certain classes of~~ customers or within our targeted ~~markets.~~markets - primarily the power and process industries. Marketing and communications, accounting, finance, legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources are generally aligned with each segment to support existing customer accounts and new customer development. Our two business segments are:

Performance Improvement Solutions (approximately 69% of revenue)

The Company's Performance Improvement Solutions ~~business~~ segment primarily encompasses ~~our next-generation~~next generation power plant and process high-fidelity simulation solutions, as well as engineering solutions. This segment includes various simulation products, engineering services, and operation training systems delivered across the industries ~~we serve:~~the Company serves: primarily nuclear and fossil fuel power generation, and the ~~petroleum industry. Our simulation~~process industries. Simulation solutions include the following: (1) simulation ~~tools~~software and services, including operator training systems, for the nuclear power industry, (2) simulation ~~tools~~software and services, including operator training systems, for the fossil power industry, and (3) simulation ~~tools~~software and services for the ~~petroleum industry~~process industries used to teach fundamental industry processes and control systems to newly hired ~~employees.~~employees and for ongoing workforce development and training. GSE and its predecessors have been providing these services since 1976.

Nuclear Industry Training and Consulting (approximately 31% of revenue)

Nuclear Industry Training and Consulting provides highly specialized and skilled nuclear operations instructors and other consultants to the nuclear power industry. These employees work at ~~our~~ clients' facilities under client direction. Examples of these highly skilled positions are ~~primarily~~ senior reactor operations instructors, procedure writers, work management specialists, planners, and training material developers. This business is managed through ~~our~~the Company's Hyperspring ~~LLC~~ subsidiary. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio. Hyperspring has been providing these services since 2005.

Our objective is to create a technology-enabled engineering, software and training services platform by capitalizing on near and long-term growth opportunities primarily in the nuclear power industry. We offer our differentiated suite of products and services to adjacent markets such as process industries where our offerings are a natural fit with a clear and compelling value proposition for the market. Our primary growth strategy is twofold: (1) expand organically within our core markets by leveraging our market leadership position and drive increased usage and product adoption via new products and services, and (2) seek acquisitions to accelerate our overall growth in a manner that is complementary to our core business. To accomplish this, we will pursue the following activities:

Expand our total addressable market. Our focus on growth means introducing product capabilities or new product categories that create value for our customers and therefore expand our total addressable market. Currently we are working on initiatives to expand our solution offerings in both our business segments which may include, but not be limited to, the following: expanding our software product portfolio to the industries we serve with enhanced power and process simulation tools and systems that are complementary to our core offerings; delivering enhanced learning management systems/solutions; offering fully outsourced training solutions to our customers; adding work flow process improvement solutions; and tailoring operational reporting and business intelligence solutions to address the unique need of our end user markets. Initiatives such as these will broaden our scope and enable us to engage more deeply with the segments we serve. Recently, we have delivered a compelling new solution, the GSE GPWR^TM Generic Pressurized Water Reactor simulation technology, proving that our modeling technology can be sold via traditional license terms and conditions to the nuclear industry ecosystem. We have both upgraded and expanded the EnVision library of simulation and eLearning tutorials for the process industries with specific new products for training clients in the upstream segment of the oil and gas industry. We continue to provide cutting edge training systems by adapting our technology to systems to meet the specific needs of customers such as U.S. government laboratories.

Pursue strategic acquisitions opportunistically. We intend to complement our organic growth strategy through selective acquisitions of other software, technical engineering, and service businesses, both domestic and international, which would enhance our existing portfolio of products, strengthen our relationships with our existing customers, and potentially expand our footprint to include new customers in our core served industries. We have made several small acquisitions in recent years and believe the opportunity exists to do more. For example, in January 2011 we acquired EnVision Systems Inc., which provided interactive multi-media tutorials and simulation models, primarily to the process industries. We have integrated the technology assets from this acquisition and expanded the firm's application to other industries, and we intend to repeat this successful process. In 2014, we acquired Hyperspring, which enabled GSE to offer highly skilled nuclear operations and consulting know-how on site at a large segment of our client base on an operational basis providing essential services. This deepened our relationship with existing clients and won business for us at new client sites in the nuclear industry. This acquisition has proven to be very synergistic, enabling cross selling domestically, and in 2015, expanding these services internationally for the first time.

Continue to provide technology-enabled, market-leading solutions. We invest in research and development ("R&D") in order to deliver unique solutions that add value to our end-user markets. We have delivered nuclear core and Balance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry's need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP^® and RELAP5-HD^® solutions. Our entire JADE^TM suite of simulation software, including industry leading JTOPMERET^® and JElectric^TM software, provides the most accurate simulation of Balance-of-Plant and electrical systems available to the nuclear and fossil plant simulation market. The significant enhancements we have made to our SimExec^® and OpenSim^TM platforms enables customers to be more efficient in the daily operation of their simulators. We are bringing SimExec^®and OpenSim^TMtogether into a next generation unified environment that will add new capabilities as requested by clients and driven by market need. We intend to continue to make prudent investments in R&D that first and foremost are driven by the market, and are complementary to advancing our growth strategy. Such investments in R&D may result in on-going enhancement of existing solutions as well as the creation of new solutions to serve our target markets, ensuring that we add greater value, in an easier to use fashion, than any alternative available to customers and that we delight them in the process. GSE has pioneered a number of industry standards over our lifetime and will continue to be one of the most innovative companies in our industry.

Strengthen and develop our human capital. Our experienced employees and management team are our most valuable resources. Attracting, training, and retaining key personnel have been and will remain critical to our success. To achieve our human capital goals, we intend to remain focused on providing our personnel with entrepreneurial opportunities to increase client contact within their areas of expertise and to expand our business within our service offerings. We will also continue to provide our personnel with training, personal and professional growth opportunities, performance-based incentives including opportunities for stock ownership, and other competitive benefits.

Continue to deliver industry-recognized high quality services. We believe that we have developed a strong reputation for quality services based upon our industry-recognized depth of experience, ability to attract and retain quality professionals, and expertise across multiple service sectors. We have received many industry certificates and awards including being recognized for outstanding work on projects by Bechtel's Nuclear, Security & Environmental global business unit (NS&E) at the Bechtel Supply Chain Recognition awards in April 2016. In addition, we have a recognized high-value brand as one of the most respected providers of software and services to the industry, as evidenced by our marquee client base and significant market wins over the past year. A recently conducted survey of clients with projects underway and/or just delivered validates our brand with a Net Promoter Score of +65, a compelling score for an industrial technology and services company.

Expand international operations in selected markets. We believe there are additional opportunities for us to market our software and services to international customers, and to do so in a cost effective manner. For example, we believe partnerships with Value Added Resellers ("VAR") could significantly expand our sales pipeline for the EnVision software suite. Such VARs may yield positive results for our pursuing international nuclear opportunities globally (see industry trends below). We may explore the creation of appropriate joint ventures to target nuclear new-build programs in key growth regions.

Employees. As of September 30, 2016, we had approximately 275 employees, which includes approximately 190 in our Performance Improvement segment and 85 in our Nuclear Industry Training and Consulting segment. In addition we have approximately 100 licensed engineers and other advanced degreed professionals. Excluding our Hyperspring business, which consists primarily of contracted instructors, our employee attrition rate for 2016 among all staff was approximately 10%. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.

Backlog. As of September 30, 2016, we had approximately $69.3 million of total gross revenue backlog. Most of our contracts range from 9 to 24 months. With respect to our backlog, it includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. Our backlog includes future expected revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client. We calculate backlog without regard to possible project reductions or expansions or potential cancellations unless and until such changes may occur.

Backlog is expressed in terms of gross revenue and, therefore, may include significant estimated amounts of third-party or pass-through costs to subcontractors and other parties. Because backlog is not a defined accounting term, our computation of backlog may not necessarily be comparable to that of our industry peers.

Industry need for building and sustaining a highly skilled workforce

We believe ~~the most serious future~~a critical ongoing challenge facing the industries we serve is access to and continued development of a highly trained and efficient workforce. This challenge manifests ~~itself~~primarily in two ways: the increasing pace of the knowledge and experience lost as a ~~large~~significant percentage of the existing experienced workforce reaches retirement age over the next ~~ten years.~~several years; and the fact that as new power plants come on-line, there is an increased demand for more workers to staff and operate those plants in addition to the plants in the existing fleet.

According to Power Engineering magazine, in the United States every sector in the energy industry is expected to lose a large percentage of its workforce within the next few years as baby boomers retire on the traditional schedule. The ~~replacement of these experienced~~power sector alone will be forced to replace more than 100,000 skilled workers by 2018 simply to replace those retiring. The Nuclear Energy Institute estimates that 39% of the nuclear workforce will be eligible to retire by 2018. As the nuclear industry expands its fleet and strains to maintain the high standards of training the existing workforce, existing plant simulator systems, which provide these training services, are operating 24 hours a day. With workers retiring and the need to backfill as well as expand the workforce for new ~~generation who have different learning styles and work expectations is a critical challenge that~~units, certain operators are exploring the ~~power and process industries must address.~~ opportunity to de-bottleneck their existing simulator capabilities through the creation of dual reference simulators.

Globally, as more people increase their standard of living, ~~so too~~their demand for power will ~~global power demand~~ increase, which in turn will require the on-going construction of power ~~plants.~~plants to meet this surging demand. Developing a skilled labor force to operate these plants and ~~keep~~keeping their skills ~~honed~~current and ~~evergreen~~their certifications in compliance with regulatory requirements is ~~another~~a key challenge facing the global power industry. ~~Additionally, there~~Similar challenges face the process industries.

An important emerging trend to note seems to be ~~an emerging enlightenment~~a growing recognition that nuclear energy is an increasingly desirable form of energy production fulfilling a key component of zero carbon initiatives across the globe. Support for generating power from zero carbon emissions sources is evidenced by initiatives such as ~~there are no greenhouse gas emissions associated with nuclear~~the 2015 United Nations Climate Change Conference. Nuclear power ~~generation.~~generation is a critical means of zero carbon power generation that is growing in importance as a result. We believe that GSE is well positioned to take advantage of these trends as they ~~emerge.~~emerge and develop.

Growing global power demand and the increasing emphasis on nuclear power

~~Growing Global Power Demand~~

World Energy Outlook 2015 projects that electricity demand will increase by more than 70% over the time period from 2013 to 2040. At the same time, countries globally are pledging to reduce greenhouse gas emissions despite this growth in demand for power. These trends are increasingly favorable to nuclear power. The United Kingdom illustrates this trend, with a recently announced energy policy that ~~experienced~~places a much greater reliance on nuclear ~~workforce is retiring,~~power and unveiled plans for a new nuclear fleet, while slashing subsidies for solar energy and seeking to phase out coal fired power plants. With plans to build at least three new nuclear plants, the UK plans to add 16GWe of new nuclear capacity ~~will be coming into operation. According~~operating by 2030 according to ~~the International Energy Agency's,~~ World Energy Outlook 2014, global energy demand is projected to rise 37% by 2040. Similarly the BP Energy Outlook 2035 projects a 41% rise in global energy consumption between 2012 and 2035. While a diverse mix of power generation technologies will be used to satisfy the increasing demand, nuclear energy will continue to play a significant role. Nuclear ~~energy output is expected to rise at around 1.9% per year until 2035.~~ Association.

There are currently 6764 nuclear plants under construction in 15 countries, including 24 in China, 9nine in Russia, 6six in India and 4four in the United Arab Emirates according to the Nuclear Energy Institute. ~~Other countries with multiple reactors under construction include Slovakia, Korea, Pakistan, Belarus and Japan.~~

~~Five~~Four reactors are currently under construction in the USU.S. including two for Southern Nuclear at the Vogtle, ~~Site;~~Georgia site and two at SCANA's VC Summer ~~site and one at the~~site. Tennessee Valley Authority's Watts Bar generating ~~facility. The UK recently announced collaboration with Chinese~~facility is up and running which represents a watershed for the US nuclear ~~entities that will help finance new reactors at the Hinkley Point site and set the stage for additional reactor projects in the UK in the future.~~

power industry. According to the World Nuclear Association, there are 165 reactors in 27 countries in specific phases of planning that will be operating by 2030. This pace of construction is surpassing the peak construction velocity of the 1970s and 1980s.

In addition to new plants, generating more power through enhanced plant performance - especially reducing unplanned outage time - is a critical objective for the nuclear power industry to meet growing global electricity demand. Capacity factors, also known as load factors, have been greater than 90% in the U.S. in five of ~~strategic environmental advantages~~the seven years from 2007 to 2013. The U.S. is recognized as the leader in load factor performance. The U.S. accounts for nearly one-third of the world's nuclear electricity, highlighting its importance as a market as well as its need for high levels of performance.

For the existing U.S. fleet, there is recognition that these nuclear plants are essential to meeting goals of reducing carbon emissions even as renewable energy sources are introduced. This recognition of the importance of nuclear providing zero-carbon baseload is demonstrated most recently by the state of New York's Clean Energy Standard that values the emission-free energy of New York's nuclear fleet and in so doing providing an emissions-free subsidy of 1.7¢/kWh. This subsidy helps ensure the state's existing nuclear plants remain economically viable in an era of low cost natural gas and even with wind and solar receiving a subsidy of 4.5¢/kWh. In regulated markets where the economy is growing, the nuclear fleet is profitable and expanding. In addition to the four reactors under construction in the US southeast, Georgia Power, a subsidiary of Southern Company, has gained approval from state regulators to spend up to $99 million on site investigation and licensing costs for a new nuclear power plant in Stewart County, Georgia. For the longer term, the trends for nuclear power are favorable as well. The US Department of Energy recently released a draft plan to double America's nuclear power capacity by 2050. The plan, dubbed "Vision 2050", promotes expanding America's nuclear capacity through advanced reactor designs including small modular reactors (SMRs).

As countries around the world recognize the importance of lowering carbon emissions from power generation, nuclear energy is ~~aided~~an essential component of the solution. India and the UK have recently announced plans to significantly expand nuclear power generation capacity through new builds. China continues to aggressively build out its fleet. In Japan, the strategic importance of nuclear power had led the Institute of Energy and Economics to estimate that 19 of Japan's temporarily shut down reactors will restart before March 2018.

We believe GSE is well positioned to take full advantage of these strategic global and domestic trends by ~~its increasing recognition as a critical technology for reaching the CO2 emission reduction targets recommended by the scientific community. According~~providing high fidelity simulation and training solutions to the ~~UN's Intergovernmental Panel on Climate Change~~global power and research from the National Renewable Energy Laboratory, greenhouse gas emissions across the entire lifecycle of nuclear energy from uranium mining to decommissioning, are comparable with those of wind power.process industries.

~~Workforce Trends~~

~~Power Engineering Magazine article:~~ ~~Who will Replace Power Aging Workforce?~~ cites the Nuclear Energy Institute estimates that 39% of the nuclear workforce will be eligible to retire by 2018 resulting in the need for 20,000 new workers to replace them. The article goes on to discuss the US Department of Labor estimates as much as 50% of the nation's utility workforce will be retiring in the next 5-10 years.

Exacerbating this workforce trend is the continuing domestic and global population increases which will continue to increase the overall demand for energy. As the U.S.' current educational system is not able to provide the needed trained workers in adequate numbers, the onus is on the energy industry itself to address its training needs at both entry levels and more senior levels. A complete lifecycle of training, from a worker's entry into the energy industry through to the achievement of expert knowledge and skills, is now required for the energy industry more than ever.

~~Power Magazine article~~ ~~Manpower Report: Power Industry Faces Talent Shortage~~, (May 2014) cites a survey by Manpower which say 58% of executives struggle finding the talent they need. Students are consistently underperforming in science, technology, engineering and math and, on average, only 45% of applicants are passing basic skilled-trade aptitude tests.

Business leaders are recognizing the problem and the challenge ahead. A study published in Harvard Business Review (May 28, 2013) revealed that Boards of Directors identified Talent Management as their number one concern. Those same executives rated their companies very poorly on key elements of talent management including attracting, hiring, assessing and developing top talent.

~~As companies are always under pressure to improve productivity, reduce costs~~Products and improve operating margins, energy industry companies have been working to create leaner, more competent organizations that can rapidly respond to a changing environment. Increasing pressures to improve profitability have resulted in flatter organizational structures within companies with less middle management to exercise control. According to the International Atomic Energy Agency (IAEA) article, ~~A Systematic Approach to Human Performance Improvement in Nuclear Power Plants: Training Solutions~~, companies understand and value the potential contribution that every employee can make to their overall success. As a result, companies have been emphasizing the quality of their human performance processes and the building of excellent educational processes for their employees.Services

~~Our~~Performance Improvement Solutions

~~Entry2Expert Performance Cycle~~

To assist our clients in creating world-class internal training and ~~performance~~engineering improvement ~~programs,~~processes, we ~~are building the E2E Performance Solution,~~offer a set of integrated and scalable products and services which provide a structured program ~~from employee selection and onboarding through~~focused on continuous skills improvement for experienced ~~employees. GSE can now~~employees to engineering services, which include plant design verification and validation. We provide the right solution to solve our clients' most pressing needs.

Our major elements of the Entry2Expert^(R) Performance Solution include defining specific training needs by analyzing job functions, following proven processes to structure the entire training program for clients, providing world-class training content and series of simulation solutions for both the new employee and most experienced workers, and providing the expert training staff and consultants to ensure this is all implemented effectively.

For workforce development and training, students and instructors alike must have a high degree of confidence that their power plant simulator truly reflects plant behavior across the entire range of operations. To achieve this, GSE's simulation solution starts with the most robust engineering approach possible. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, GSE provides simulation solutions that achieve unparalleled fidelity and accuracy. The solutions that GSE provides are also known for ease of use, resulting in increased productivity by end-users. For these reasons, GSE has delivered more nuclear power plant simulators than any other company in the world.

For virtual commissioning, designers of first-of-a-kind plants or existing plants need a highly accurate dynamic simulation platform to model a wide variety of design assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in new technology being deployed, often involving the integration of disparate technologies for the ~~right step in each employee's career.~~first time, a high fidelity simulator allows designers to see the interaction between systems for the very first time. GSE's combination of simulation technology and expert engineering was chosen to build first-of-a-kind simulators for the AP1000, PBMR, NuScale, and mPower plants.

~~The goal~~Examples of ~~our E2E performance lifecycle offering is~~the types of simulators we sell include, but are not limited to, ~~help improve our customer's bottom line through superior human achievement in screening and selecting~~ the ~~right workforce, shortening the learning process, reducing human errors, improving worker agility and mitigating the effects of retirements and turnover.~~following:

~~Design2Decom Performance Cycle~~

●

Universal Training Simulators: These products complement the Self-Paced Training Tutorials by reinforcing what the student learned in the tutorial, putting it into practice on the Universal Simulator. The simulation models are high fidelity and engineering correct, but represent a typical plant or typical process, rather than the exact replication of a client's plant. We have delivered over 250 such simulation models to clients consisting of major oil companies and educational institutions.

●

Part-Task Training Simulators: Like the Universal Simulators, we provide other unique training solutions such as a generic nuclear plant simulator and VPanel^(R) displays, which replicate control room hardware and simulator solutions specific to industry needs such as severe accident models to train on and aid in the understanding of events like the Fukushima Daiichi accident.

●

Plant-Specific Operator Training Simulators: These simulators provide an exact replication of the plant control room and plant operations. They provide the highest level of realism and training and allow users to practice their own plant-specific procedures. Clients can safely practice startup, shutdown, normal operations, as well as response to abnormal events we all hope they never have to experience in real life. We have delivered nearly 450 plant-specific simulators to clients in the nuclear power, fossil power and process industries worldwide.

Nuclear Industry Training and Consulting

As our customers' experienced staff retire, access to experts that can help with training existing and new employees in how to operate their plants is essential to ensure safe ongoing plant operations. In addition, training needs change over time and sometimes our clients require specialized courses. Industry needs instructors who can step in and use the client's training material. Finding professional instructors, who know the subject, can teach it and can adapt to the client's culture, is critical. GSE provides both qualified instructors and turnkey courses that work within the client's system and complement the training methods they already have in place. Examples of our training program courses are senior reactor operator certification, generic fundamentals training, and simulation supervisor training. In addition, we also provide expert support through staff augmentation or turnkey projects for the training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability.

GSE brings together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high fidelity simulation and training solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate level training solutions of EnVision and the extensive nuclear industry training and consulting services of Hyperspring.

Results of Operations

The following table sets forth the results of operations for the periods presented expressed in thousands of dollars and as a percentage of revenue:

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

A summary of the Company's significant accounting policies as of December 31, ~~2014~~2015, is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014.~~2015. Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, ~~on long-term contracts,~~impairment of intangible assets, including goodwill, capitalization of computer software development costs, valuation of contingent consideration ~~issued in~~for business acquisitions, and ~~the recoverability of~~ deferred income tax ~~assets.~~valuation allowance. These critical accounting policies and estimates are discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in the ~~2014~~2015 Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014.~~

Results of Operations - Three and ~~Nine Months~~nine months ended September 30, ~~2015~~2016, versus ~~Three~~three and ~~Nine Months~~nine months ended September 30, ~~2014~~2015

~~Contract~~ Revenue. Total ~~contract~~ revenue for the three months ended September 30, ~~2015~~2016, totaled ~~$15.0~~$14.4 million, which was ~~91.2% more~~2.6% less than the ~~$7.8~~$14.8 million total revenue for the ~~quarter~~three months ended September 30, ~~2014.~~2015. For the nine months ended September 30, ~~2015, contract~~2016, revenue totaled ~~$42.6~~$39.8 million, which was ~~71.6% greater~~6.3% less than the ~~$24.8~~$42.5 million of revenue for the nine months ended September 30, ~~2014.~~2015. The ~~increase~~decrease in revenue was primarily driven by the ~~acquisition of~~year over year decrease in revenue at Hyperspring, represented by our Nuclear Industry Training and Consulting segment, described below.

Performance Improvement Solutions revenue increased ~~26.6%~~4.8% from ~~$7.8~~$9.8 million for the three months ended September 30, ~~2014~~2015, to ~~$9.9~~$10.2 million for the three months ended September 30, 2016. We recorded total Performance Improvement Solutions orders of $10.2 million in the three months ended September 30, 2016, as compared to $3.8 million in the three months ended September 30, 2015. For the nine months ended September 30, 2016, Performance Improvement Solutions revenue was $27.4 million compared to $26.8 million for the nine months ended September 30, 2015. We recorded total orders of $50.7 million in the nine months ended September 30, 2016, as compared to $27.6 million in the nine months ended September 30, 2015.

Nuclear Industry Training and Consulting revenue decreased 16.7% from $5.1 million for the three months ended September 30, 2015, to $4.2 million for the three months ended September 30, 2016. Nuclear Industry Training and Consulting orders totaled $3.6 million in the three months ended September 30, 2016, as compared to $1.5 million for the three months ended September 30, 2015. ~~The main driver of this increase was~~ a $1.0 million increase in Fossil project revenue. In addition, Performance Improvement Solutions saw increases in revenue from a mix of other industries between those periods, including Nuclear and Process. ~~We recorded total Performance Improvement Solutions orders of $3.8 million in the three months ended September 30, 2015 as compared to $17.6 million in the three months ended September 30, 2014.~~ For the nine months ended September 30, ~~2015 Performance Improvement Solutions~~2016, Nuclear Industry Training and Consulting revenue ~~was $26.9~~totaled $12.4 million compared to ~~$24.8~~$15.7 million for the nine months ended September 30, ~~2014. Again, the main driver of this increase was Fossil project revenue which increased~~ $3.4 million in the third quarter 2015 as compared to the third quarter 2014. The increase in Fossil project revenue for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was partially offset by decreases in project revenue in a mix of other industries. 2015. We recorded total ~~Performance Improvement Solutions~~ orders of ~~$27.6~~$12.1 million in the nine months ended September 30, ~~2015 as~~2016, compared to ~~$33.5~~$14.6 million in the nine months ended September 30, ~~2014.~~2015.

~~As discussed earlier, our Nuclear Industry Training and Consulting business segment was created due to the acquisition of Hyperspring, LLC~~ on November 14, 2014. Revenue for the three months ended September 30, 2015 totaled $5.1 million. Nuclear Industry Training and Consulting orders totaled $1.5 million during the same period. Revenue for the nine months ended September 30, 2015 totaled $15.7 million and orders totaled $14.6 million during the same period.

At September 30, ~~2015,~~2016, backlog was ~~$47.5~~$69.3 million: ~~$42.1~~$63.5 million for the Performance Improvement Solutions business segment and ~~$5.4~~$5.8 million for Nuclear Industry Training and Consulting. At December 31, ~~2014,~~2015, the Company's backlog was ~~$48.4~~$47.9 million: ~~$41.7~~$41.9 million for the Performance Improvement Solutions business segment and ~~$6.7~~$6.0 million for Nuclear Industry Training and Consulting.

~~Write-down of capitalized software development costs.~~ The Company makes ongoing evaluations of the recoverability of its capitalized software projects. During the third quarter of 2015, the Company's new CEO conducted a review of the Company's organizational and cost structures and software development plans. As a result of this review, the Company has terminated further development of its Enterprise Data Management ("EDM") system and has concluded that the capitalized software development costs relating to EDM were no longer recoverable. Accordingly, in the three months ended September 30, 2015, GSE recorded a $1.5 million write-down of software development costs which was the full capitalized balance of the EDM configuration management system.

Gross Profit. ~~Excluding the $1.5 million write-down of software development costs, gross~~Gross profit ~~was $3.8~~totaled $3.7 million for the three months ended September 30, ~~2015~~2016, compared to ~~$2.5~~$2.1 million for the same period in ~~2014.~~2015. As a percentage of revenue, gross profit ~~decreased~~increased from ~~31.4%~~13.9% for the three months ended September 30, ~~2014~~2015, to ~~25.4%~~25.8% for the three months ended September 30, 2016. For the nine months ended September 30, 2016, gross profit was $10.9 million compared to $8.2 million for the same period in 2015. ~~Excluding the $1.5 million write-down~~As a percentage of ~~software development costs,~~revenue, gross profit increased from 19.4% for the nine months ended September 30, 2015, ~~gross profit was $9.9 million compared~~ to ~~$7.3 million for the same period in 2014. As a percentage of revenue, gross profit decreased from 29.5%~~27.4% for the nine months ended September 30, 2014 to 23.3% for the nine months ended September 30, 2015. The reduction in gross profit in 2015 reflects the Company's acquisition of Hyperspring LLC in November 2014. Hyperspring, which comprises our Nuclear Industry Training and Consulting segment, has an overall gross profit which is significantly lower than the historical gross profit of our Performance Improvement Solution segment.2016.

Excluding the $1.5 million write-down of software development costs in the third quarter of fiscal year 2015, Performance Improvement Solutions had gross profit of ~~$3.1~~$3.2 million or 31.6% of segment revenue for the three months ended September 30, ~~2015~~2016, compared to ~~$2.5~~$2.9 million or ~~31.4%~~29.9% of segment revenue for the ~~quarter~~three months ended September 30, ~~2014.~~2015.

Excluding the $1.5 million write-down of software development costs in the third quarter of fiscal year 2015, Performance Improvement Solutions had gross profit of ~~$8.2~~$9.3 million or ~~30.3%~~33.9% of segment revenue for the nine months ended September 30, ~~2015~~2016, compared to gross profit of ~~$7.3~~$8.0 million or ~~29.5%~~29.8% of segment revenue for the nine months ended September 30, ~~2014.~~ 2015.

The increase in gross margin percent for Performance Improvement Solutions for the nine months ended September 30, ~~2015~~2016, as compared to the same period in ~~2014~~2015, is mainly due ~~to:~~

·	~~The restructuring of our Swedish operations in 2014 which has reduced their operations overhead costs and facility expenses in 2015,~~

·	~~The completion in 2014 of a process simulation project that had a 14% gross margin, and~~

·	~~Higher margined engineering consulting projects in 2015 for our UK subsidiary.~~

to the decrease in total overhead costs. Total overhead costs, including capitalized software amortization and excluding the write-down of capitalized software, decreased from approximately $3.4 million, or 13.9% of revenue, during the nine months ended September 30, 2015 to $2.5 million, or 9.7% during the same period of 2016. The reduction mainly reflects the reduction in operations headcount in conjunction with the Company's September 2015 restructuring.

Nuclear Industry Training and Consulting had gross profit of $0.5 million or 11.7% of segment revenue for the three months ended September 30, 2016, compared to $0.7 million or 13.4% of segment revenue for the three months ended September 30, 2015.

Nuclear Industry Training and Consulting had gross profit of $1.6 million or 13.0% of segment revenue for the nine months ended September 30, 2016, compared to gross profit of $1.8 million or 11.4% of segment revenue for the nine months ended September 30, 2015.

The increase in Nuclear Industry Consulting and Training gross profit percent for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, mainly reflects the reduction in Tennessee Valley Authority ("TVA") revenue as a percentage of total revenue. TVA generally has lower margins than most of Hyperspring's contracts.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses totaled ~~$3.8~~$3.0 million in the three months ended September 30, ~~2015,~~2016, a ~~3.6%~~20.2% decrease from the ~~$4.0~~$3.8 million for the same period in ~~2014.~~2015. For the nine months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, SG&A expenses totaled $9.0 million and $11.0 million, ~~and $11.9 million,~~ respectively. ~~The~~These decreases reflect the following spending variances:

●

Business development and marketing costs decreased from ~~$1.5 million for the three months ended September 30, 2014 to~~ $1.2 million for the three months ended September 30, 2015, ~~and decreased from $4.5~~to $0.8 million for the ~~nine~~three months ended September 30, ~~2014 to~~2016, and decreased from $4.0 million for the nine months ended September 30, ~~2015.~~2015, to $2.4 million for the nine months ended September 30, 2016. Bidding and proposal costs, a component of business development costs which are the costs of operations personnel assisting with the preparation of contract proposals, were ~~$180,000~~$0.1 million and ~~$420,000~~$0.2 million for the three months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, respectively, and ~~$679,000~~$0.3 million and ~~$1.2~~$0.7 million for the nine months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, respectively.

●

The Company's general and administrative expenses ("G&A") ~~increased~~decreased to ~~$2.2~~$1.9 million from ~~$1.7~~$2.2 million for the three months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, respectively, and ~~increased~~decreased to ~~$5.9~~$5.6 million from ~~$5.2~~$5.9 million for the nine months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, respectively. Some components of G&A are as follows:

For the three months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, contingent consideration accretion income was $0.5 million compared to accretion expense ~~was $306,000 and $22,000,~~of $0.3 million, respectively. For the nine months ended September 30, 2016, and September 30, 2015, ~~and 2014,~~contingent consideration accretion income was $0.4 million compared to accretion expense of $0.7 million, respectively. The decrease in contingent consideration accretion expense ~~was $739,000 and $69,000, respectively. The increase~~ in ~~contingent consideration~~2016 is a result of ~~the Hyperspring acquisition~~Hyperspring's former partners being paid their prior year earnout based on ~~November 14, 2014 and is associated with the deferred contingent consideration due to~~EBITDA targets as well as the former ~~Hyperspring members if certain EBITDA targets are met.~~partners being paid their one-time payment for securing a long-term contract renewal with TVA in 2015.

~~In 2014,~~During the ~~Company's Board of Directors agreed to waive their fees for 2014. These fees were reinstated in 2015 and totaled $51,000 and $149,000 in the three and~~ nine months ended September 30, ~~2015.~~

~~For the three and nine months ended September 30, 2014,~~2016, the Company hired an outside consultant to review and document its procedures regarding revenue recognition, with special focus on software license and software maintenance revenue. The total cost incurred ~~acquisition expenses of $35,000 and $108,000, respectively, related to the acquisition of Hyperspring. No acquisition expenses were incurred in 2015.~~for these services was $0.2 million.

●

Gross spending on software product development ("development") expenses for the three and nine months ended September 30, 2015 totaled $866,000 and $2.6 million, respectively, as compared to $1.0 million and $2.8 million for the three and nine months ended September 30, 2014, respectively. The Company capitalized $473,000 and $1.4 million of product development expenses for the three and nine months ended September 30, 2016, totaled $0.4 million and $1.3 million, respectively, as compared to $0.9 million and $2.6 million for the three and nine months ended September 30, 2015, respectively. The Company capitalized less than $0.1 million and $0.2 million of software product development expenses for the three and nine months ended September 30, 2016, respectively, and ~~$241,000~~$0.4 million and ~~$590,000~~$1.4 million for the same periods in ~~2014,~~2015, respectively. Net software product development spending ~~decreased from $795,000~~was $0.4 million for the three months ended September 30, ~~2014 to $393,000 for the three months ended~~2016 and September 30, 2015, and decreased from ~~$2.2 million for the nine months ended September 30, 2014 to~~ $1.2 million for the nine months ended September 30, ~~2015.~~

2015, to $1.1 million for the nine months ended September 30, 2016. Spending on simulator software development and modeling tools totaled ~~$518~~$0.3 million~~,000~~ and $0.9 million for the three and nine months ended September 30, 2016, respectively. Spending on software product development totaled $0.5 million and $1.7 million for the three and nine months ended September 30, 2015, respectively. ~~Spending on~~The Company's software product ~~development totaled $760,000 and $2.2~~ ~~million for the three and nine months ended September 30, 2014, respectively. The Company's~~ development expenses were mainly related to a new configuration management system and the enhancement of JADE™ and SimExec® applications. ~~However, the Company wrote off the capitalized costs related to the new configuration management system in the third quarter 2015. See~~ ~~Write-down of capitalized software development costs, above.~~

During the three months ended September 30, 2015 the Company completed its new Propane Refrigeration Process and Feed Gas Conditioning Process computer based tutorial and simulation training tools. Development expense related to the EnVision product line totaled $276,000 and $233,000 for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, EnVision incurred $775,000 and $455,000 of development expense, respectively.

The Company's 3D visualization team, which develops 3D technology to add to our training programs, incurred $72,000 and $108,000 of costs related to this effort during the three and nine months ended September 30, 2015, respectively, as compared to $43,000 and $178,000 for the same periods in 2014, respectively. The Company's 3D development activities have been curtailed as a part of the third quarter 2015 restructuring.

Restructuring Charges. ~~In July 2015, GSE entered into a separation~~Restructuring charges totaled $0.1 million and release agreement with James Eberle, the former Chief Executive Officer of the company. Effective July 31, 2015, Mr. Eberle resigned his position as Chief Executive Officer and as a director on GSE's board of directors. The Company incurred a $380,000 charge in the third quarter 2015 in severance expense related to the termination of Mr. Eberle.

~~In the third quarter 2015, the Board of Directors of the Company approved restructuring actions~~$1.6 million for the ~~Company's worldwide operations.~~three months ended September 30, 2016, and September 30, 2015, respectively. For the ~~three and~~ nine months ended September 30, 2016, and September 30, 2015, ~~the Company incurred $1.2~~restructuring charges totaled $0.5 million and ~~$1.3~~$1.7 million, ~~respectively, of restructuring~~respectively. Restructuring charges ~~including severance expense, facility closing costs, and other restructuring costs. The restructuring actions were designed to deliver cost reductions and operating efficiencies throughout~~for the ~~Company and reduce both operations overheads and selling, general, and administrative expenses.~~

~~During the three and~~ nine months ended September 30, ~~2014, the Company incurred~~2016, are primarily due to severance costs ~~of $193,000 and $474,000, respectively, associated with the downsizing of our Swedish operations. We also incurred severance costs of $272,000~~ for terminations in the U.S. in the third quarter 2014. In addition, we recorded a $137,000 charge in the second quarter of 2014 related to the renegotiation of our Swedish office lease to reduce the size of the office.

two departing executives.

Depreciation. Depreciation expense totaled ~~$119,000 and $140,000~~$0.1 million for the three months ended September 30, ~~2015~~2016, and ~~2014, respectively.~~September 30, 2015. For the nine months ended September 30, ~~2015~~2016, and ~~2014,~~September 30, 2015, depreciation expense totaled ~~$383,000~~$0.3 million and ~~$413,000,~~$0.4 million, respectively.

Amortization of Definite-lived Intangible Assets. Amortization expense related to definite-lived intangible assets totaled ~~$123,000 and $36,000~~$0.1 million for the three months ended September 30, ~~2015~~2016 and ~~2014, respectively.~~September 30, 2015. For the nine months ended September 30, ~~2015~~2016 and ~~2014,~~September 30, 2015, amortization expense related to definite-lived intangible assets totaled ~~$370,000~~$0.2 million and ~~$108,000,~~$0.4 million, respectively.

~~In conjunction~~ The decrease in 2016 amortization expense reflects a decrease of amortization related to the intangible assets recorded with the Hyperspring acquisition onin November ~~14,~~ 2014 ~~we recorded $779,000 of customer-related intangible assets~~ which isare being amortized ~~on a waterfall basis~~ over seven years. ~~We recognized $91,000 and $274,000 of amortization expense for the Hyperspring intangibles for the three and nine months ended September 30, 2015, respectively.~~

The balance of the intangible asset amortization relates to the amortization of EnVision and TAS intangible assets which is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for contractual customer relationships and contract backlog which are recognized in proportion to the related projected revenue streams.

Operating ~~Loss~~Income (Loss). The Company had an operating ~~loss~~income of ~~$3.4~~$0.4 million, ~~(22.7%~~or 3.0% of ~~revenue)~~revenue, during the three months ended September 30, ~~2015, as~~2016, compared ~~with~~to an operating loss of ~~$1.9~~$3.6 million, ~~(24.9%~~or 24.3% of ~~revenue)~~revenue, for the same period in ~~2014.~~2015. For the nine months ended September 30, ~~2015~~2016 and ~~2014,~~September 30, 2015, the Company had an operating ~~loss~~income of ~~$5.1~~$0.9 million, ~~(12.1%~~or 2.2% of ~~revenue)~~revenue, and an operating loss of ~~$6.0~~$5.3 million, ~~(24.2%~~or 12.5% of ~~revenue),~~revenue, respectively. The variances were due to the factors outlined above. Excluding the impact of the $1.5 million capitalized software write-down from the three and nine months ended September 30, 2015 and the $1.6 million and $1.7 million restructuring charges for the three and nine months ended September 30, 2015, respectively, the Company generated an operating loss of $250,000 (1.7% of revenue) during the three months ended September 30, 2015, and an operating loss of $1.8 million (4.3% of revenue) during the nine months ended September 30, 2015.

~~Interest Income, Net~~. Net interest income totaled $19,000 and $44,000 for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, net interest income totaled $67,000 and $103,000, respectively.

(Loss) Gain ~~(Loss)~~ on Derivative Instruments, Net. The Company periodically enters into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated trade receivables. As of September 30, 2016, the Company had foreign exchange contracts outstanding of approximately 341.4 million Japanese Yen, 1.6 million Euro, 0.7 million Australian Dollars and 0.5 million Canadian Dollars at fixed rates. The contracts expire on various dates through December 2018. The Company has not designated the contracts as cash flow hedges and has recognized a loss on the change in the estimated fair value of the contracts of $125,000 and $302,000 for the three and nine months ended September 30, 2016, respectively.

As of September 30, 2015, the Company had foreign exchange contracts outstanding of approximately 2.6 million Euro, ~~0.6~~ ~~Pounds Sterling,~~ 0.5 million Australian Dollars, and ~~12.5~~0.6 million ~~Japanese Yen~~Pounds Sterling at fixed rates. The contracts expire on various dates through December 2016. The Company has not designated the contracts as hedges and has recognized a gain on the change in the estimated fair value of the contracts of $34,000 for both the three months ended September 30, 2015 and a loss $53,000 for the nine months ended September 30, 2015.

As of September 30, 2014, the Company had foreign exchange contracts outstanding of approximately 1.5 million Euro, 0.1 million Pounds Sterling and 33,000 Canadian Dollars at fixed rates. The contracts expire on various dates through June 2016. The Company had not designated the contracts as hedges and had recognized ~~gains~~a gain of ~~on the change in the estimated fair value~~$34,000 and a loss of ~~the contracts of $58,000 and $312,000~~$53,000 for the three and nine months ended September 30, ~~2014,~~2015, respectively.

The foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals that are related to the outstanding foreign exchange contracts were remeasured into the functional currency using the current exchange rate at the end of the period. For the three and nine months ended September 30, 2016, the Company recognized a loss of $86,000 and $44,000, respectively. For the three and nine months ended September 30, 2015, the Company recognized losses of $14,000 and $6,000, respectively, from the remeasurement of such contract receivables, billings in excess of revenue earned and subcontractor accruals. For the same periods in 2014, the Company recognized a gain of $11,000 and a loss of $134,000, respectively.

Other ~~Expense,~~Income (Expense), Net. For the three and nine months ended September 30, 2016, the Company recognized other income, net, of $15,000 and $112,000, respectively. For the three and nine months ended September 30, 2015, the Company recognized other expense, net, of $156,000 and $235,000, respectively. ~~For~~During the first quarter of 2016, the Company's Chinese subsidiary received a $101,000 refund of Value Added Tax.

Provision for Income Taxes

Income tax expense was $80,000 and $275,000 with effective income tax rates of 32.3% and 39.7% for the three and nine months ended September 30, ~~2014,~~2016, respectively. This is compared to income tax expense of $50,000 and $211,000 with effective income tax rates of (1.3%) and (3.8%), for the ~~Company recognized other expense, net of $0~~three and ~~$7,000,~~nine months ended September 30, 2015, respectively. The ~~major components~~Company's income tax provision for interim periods is determined using an estimate of ~~other~~its annual effective tax rate, adjusted for discrete items arising in that quarter. Tax expense ~~net included~~in both years is comprised mainly of foreign income tax expense, Alternative Minimum Tax, state taxes, and deferred tax expense relating to the ~~following items:~~tax amortization of goodwill.

On November 14, 2014, in conjunction with the Hyperspring acquisition, the Company invested $250,000 for a 50% interest in IntelliQlik, LLC ("IntelliQlik"). For the three and nine months ended September 30, 2015, the Company recognized equity losses of $28,000 and $107,000, respectively, on its investment in IntelliQlik. IntelliQlik is developing a software platform for online learning and learning management for the energy market. The Company was obligated to contribute an additional $250,000 should IntelliQlik attain certain development milestones by September 30, 2015. Based on a review of the software platform as of September 30, 2015, GSE concluded that the required development milestones had not been met and did not contribute the additional $250,000 investment. The Company wrote-off the remaining $126,000 balance of its IntelliQlik investment in Q3 2015.

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 nine months ended September 30, 2014, the Company recognized a loss of $38,000 relating to its pro rata share of operating results from GSE-RUS. Although the company's entire investment in GSE-RUS was written off by the end of December 2014, we have not received a request for additional funding from the joint venture and, due to the political issues with Russia regarding the conflict in Ukraine, we do not intend to contribute additional equity in the foreseeable future.

·	The Company had other miscellaneous losses of $2,000 for the three and nine months ended September 30, 2015, respectively. For the nine months ended September 30, 2014, the Company had other miscellaneous income of $31,000.

~~Provision (Benefit)~~Our income tax expense, deferred tax assets and liabilities and liabilities for ~~Income Taxes~~

~~The Company files~~unrecognized tax benefits reflect management's best estimate of current and future taxes to be paid. We are subject to income taxes in the United States ~~federal jurisdiction~~ and ~~in several state and~~numerous foreign jurisdictions. ~~Because~~Significant judgments and estimates are required in the determination of the ~~net operating loss carryforwards, the Company is subject to U.S. federal and state~~consolidated income tax ~~examinations~~expense. Deferred income taxes arise from ~~years 1997~~temporary differences between the tax basis of assets and ~~forward~~liabilities and is subject to foreign tax examinations by tax authorities for years 2007 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.

~~An uncertain tax position taken or expected to be taken in a tax return is recognized~~their reported amounts in the financial statements, ~~when it~~which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The Company has evaluated each jurisdiction independently and determined that is more likely than not ~~(i.e.~~that it will place a full valuation allowance on its U.S., ~~a likelihood of more than fifty percent) that the position would be sustained upon examination by~~Swedish, and Chinese net deferred tax ~~authorities that have full knowledge of all relevant information. A recognized tax position is then measured~~assets at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense. The Company has appropriately accounted for its uncertain tax positions.

September 30, 2016. In ~~2014,~~2015, the Company paid income taxes in the UK and India and expects to do so again in ~~2015. The Company has~~2016. Therefore, it will not place a ~~full~~ valuation allowance on ~~its U.S., Swedish, and Chinese net~~these deferred tax ~~assets at September 30, 2015.~~assets.

Liquidity and Capital Resources

As of September 30, ~~2015,~~2016, the Company's cash and cash equivalents totaled ~~$12.8~~$14.1 million compared to ~~$13.6~~$11.1 million at December 31, ~~2014.~~2015.

Cash provided by operating activities. For the nine months ended September 30, 2016, net cash provided by operations totaled $3.9 million. Significant changes in the Company's assets and liabilities in the nine months ended September 30, 2016, included:

●

A $3.6 million increase in the Company's contract receivables, which is comprised of trade receivables and unbilled receivables. The Company's unbilled receivables increased by approximately $3.5 million to $6.9 million at September 30, 2016, as compared to December 31, 2015. The increase in the unbilled receivables is due to the timing of contracted billing milestones of the Company's current projects, including $3.2 million from the Company's largest customer. In October 2016, the Company invoiced $0.6 million of the unbilled amounts; the remaining balance is expected to be invoiced and collected within one year.

●

A $3.2 million increase in billings in excess of revenue earned. The increase is due to the timing of contracted billing milestones of the Company's current projects.

●

A $2.3 million increase in accounts payable, accrued compensation and accrued expenses. The increase reflects an increase in Hyperspring accrued payroll due to the timing of their biweekly payroll cycle and the timing of payments made by the Company to vendors and subcontractors.

For the nine months ended September 30, 2015, net cash provided by operations totaled $1.3 million. Significant changes in the Company's assets and liabilities in the nine months ended September 30, 2015, included:

●

A ~~$3.6~~$3.4 million decrease in the Company's contract receivables. The ~~Company's~~company's trade receivables, net of ~~the~~ allowance for doubtful accounts, decreased from $10.8 million at December 31, 2014 to $7.5 million at September 30, 2015. At September 30, 2015, trade receivables outstanding ~~for more~~greater than 90 days, net of ~~the~~ bad debt reserve, totaled approximately $1.1 million as compared to ~~$369,000~~$0.4 million at December 31, 2014. ~~The Company believes the entire 90-day balance at September 30, 2015 will be received.~~ The Company's unbilled receivables decreased by approximately ~~$291,000~~$0.3 million to $4.8 million at September 30, 2015 as compared to December 31, 2014. The decrease in ~~the~~ unbilled receivables is due to the timing of contracted billing milestones of the Company's current projects. ~~In October 2015, the Company invoiced $1.9~~ ~~million~~ ~~of the unbilled amounts; the balance is expected to be invoiced and collected within one year.~~

●

A ~~$1.6~~$1.4 million decrease in billings in excess of revenue earned. The decrease is due to the timing of contracted billing milestones of the Company's current projects.

●

A $1.3 million increase in accounts payable, accrued compensation and accrued expenses. The increase was due to the timing of payments made by the Company to vendors and subcontractors.

~~For~~Cash provided by (used in) investing activities. Net cash provided by investing activities totaled $31,000 for the nine months ended September 30, ~~2014, net~~2016. Capital expenditures totaled $53,000, capitalized software development costs totaled $196,000, and releases of restricted cash ~~provided by operations~~ totaled ~~$5.2 million. Significant changes in the Company's assets and liabilities in~~$254,000 for the nine months ended September 30, ~~2014 included:~~

An $11.9 million decrease in the Company's contract receivables. The Company's trade receivables, net of the allowance for doubtful accounts, decreased from $19.0 million at December 31, 2013 to $6.2 million at September 30, 2014. At September 30, 2014, trade receivables outstanding for more than 90 days, net of the bad debt reserve, totaled approximately $549,000 as compared to $623,000 at December 31, 2013. The Company's unbilled receivables increased by approximately $760,000 to $6.3 million at September 30, 2014 as compared to December 31, 2013. The increase in the unbilled receivables was due to the timing of contracted billing milestones of the Company's current projects.

·	~~A $2.3 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.~~

2016. Proceeds from the sale of fixed assets totaled $30,000.

~~Cash used in investing activities.~~ Net cash used in investing activities totaled $1.0 million for the nine months ended September 30, 2015. Capital expenditures totaled $217,000 and capitalized software development costs totaled $1.4 million for the nine months ended September 30, 2015. ~~Restrictions~~For the nine months ended September 30, 2015 releases of restricted cash as collateral under letters of credit totaled $1.8 million and restrictions of cash used as collateral for outstanding letters of credit ~~decreased by $676,000 for the nine months ended September 30, 2015.~~

Net cash used in investing activities totaled $4.0 million for the nine months ended September 30, 2014. Capital expenditures totaled $240,000 and capitalized software development costs totaled $590,000 for the nine months ended September 30, 2014. On September 30, 2014 Susquehanna Bank collateralized the Company's outstanding letters of credit and segregated $3.2 million into a restricted cash account. Releases of restricted cash as collateral under letters of credit totaled $34,000 for the nine months ended September 30, 2014.increased $1.1 million.

Cash used in financing activities. ~~Cash~~Net cash used in financing activities totaled ~~$839,000~~$0.8 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, the Company made payments of $1.4 million to the former Hyperspring owners in accordance with the 2014 purchase agreement due to the achievement of certain EBITDA targets in 2015. During the same period, the Company received $0.6 million for stock options exercised.

Net cash used in financing activities totaled $0.8 million for the nine months ended September 30, 2015. The Company ~~has a working capital line of credit with IberiaBank for its Hyperspring subsidiary. In the first quarter 2015, the Company~~ paid down $339,000 of the outstanding balance of the line of credit ~~$339,000, and at September 30, 2015, the Company had no outstanding borrowings. During~~during the nine months ended September 30, ~~2015,~~2015. During the same period, the Company made payments of $500,000 to the former EnVision Systems, Inc. members in accordance with the 2011 purchase agreement due to the achievement of certain revenue targets in 2014.

Net cash used in financing activities totaled $500,000 for the nine months ended September 30, 2014. During the nine months ended September 30, 2014, the Company made payments of $500,000 in accordance with the 2011 purchase agreement due to the achievement of certain revenue targets in 2013.

At September 30, ~~2015,~~2016, the Company had cash and cash equivalents of ~~$12.8~~$14.1 million. The Company believes that its (i) cash and cash equivalents and (ii) cash generated from normal operations will be sufficient to fund its working capital and other requirements for at least the next twelve months. However, notwithstanding the foregoing, the Company may be required to look for additional capital to fund its operations if the Company is unable to operate profitably and generate sufficient cash from operations. There can be no assurance that the Company would be successful in raising such additional funds.

Lines of Credit ~~Facilities~~

~~Susquehanna~~BB&T Bank

~~On September 9, 2014, the Company signed a Third Comprehensive Amendment to the Master Loan and Security Agreement. According to the Third Amendment, the~~

The Company is to maintain a segregated cash collateral account at ~~Susquehanna~~BB&T Bank equal to the greater of (i) $3.0 million or (ii) the aggregate principal amounts of all ~~Loans~~loans outstanding under the ~~Revolving Credit Facility~~revolving credit facility (including any issued and outstanding letters of credit, working capital advances, and negative foreign exchange positions) as security for the Company's obligations. Under this ~~Amendment, Susquehanna~~amendment, BB&T Bank ~~shall have~~has complete and unconditional control over the cash collateral account.

~~On September 30, 2014, Susquehanna Bank collateralized the outstanding letters of credit issued under the line of credit.~~

As of September 30, ~~2015,~~2016, the Company was in compliance with its financial covenants as defined above.

At September 30, 2015, Hyperspring, LLC had a $1.0 million working capital line of credit with IberiaBank. Under the executed promissory note, interest is payable monthly at the rate of 1.00 percentage points over the prime rate of interest as published in the money rate section of the Wall Street Journal resulting in an effective interest rate of 4.25%. The line is secured by all accounts of Hyperspring and guaranteed by GSE Systems, Inc. The line of credit expires on July 6, 2016. At September 30, 2015, the Company had no outstanding amounts under the line of credit.

Letters of Credit and Bonds

As of September 30, ~~2015,~~2016, the Company ~~had thirteen~~has nine standby letters of credit ~~and one surety bond~~ totaling ~~$3.6~~$3.3 million which represent advance payment and performance bonds on ~~twelve~~eight contracts. The Company has deposited the full value of ~~thirteen~~nine standby letters of credit in escrow accounts, amounting to ~~$3.6~~$3.3 million, which have been restricted in that the Company does not have access to these funds until the related letters of credit have expired. The cash has been recorded on the Company's consolidated balance ~~sheet~~sheets at September 30, ~~2015~~2016, as restricted cash, of which $1.6 million is categorized as current restricted cash and $1.7 million categorized as long-term restricted cash.

~~Item 3.~~

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

The Company's market risk is principally confined to changes in foreign currency exchange rates. The Company's exposure to foreign exchange rate fluctuations arises in part from customer contracts that are denominated in currencies other than the Company's functional currency as well as from inter-company accounts in which costs incurred in one entity are charged to other entities in different foreign jurisdictions. The Company is also exposed to foreign exchange rate fluctuations as the financial results of all foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, those results when translated may vary from expectations and adversely impact overall expected profitability.

The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates. The principal currencies for which such forward exchange contracts are entered into are the ~~Pound Sterling,~~Japanese Yen, the Euro, the Australian Dollar, the Canadian Dollar and ~~the Japanese Yen.~~Pound Sterling. It is the Company's policy to use such derivative financial instruments to protect against market risk arising in the normal course of business in order to reduce the impact of these exposures. The Company minimizes credit exposure by limiting counterparties to nationally recognized financial institutions.

As of September 30, ~~2015,~~2016, the Company had foreign exchange contracts outstanding of approximately ~~2.6~~341.4 million Japanese Yen, 1.6 million Euro, ~~0.6 million Pounds Sterling, 0.5~~0.7 million Australian Dollars, and ~~12.5~~0.5 million ~~Japanese Yen at fixed rates.~~Canadian Dollars. The contracts expire on various dates through December ~~2016.~~2018. The Company ~~had~~has not designated the contracts as cash flow hedges and ~~had~~has recognized a ~~gain of $34,000 and a~~ loss ~~of $53,000~~on the change in the estimated fair value of the contracts of $125,000 for the three months ended September 30, 2016, and a loss of $302,000 for the nine months ended September 30, 2016. The foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals that are related to the outstanding foreign exchange contracts were remeasured into the functional currency using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is also included in gain (loss) on derivative instruments, net in the consolidated statements of operations. For the three and nine months ended September 30, 2016, the Company recognized a loss of $86,000 and $44,000, respectively, from the remeasurement of such contract receivables, billings in excess of revenue earned and subcontractor accruals. For the same periods in 2015, the Company recognized losses of $14,000 and $6,000, respectively. A 10% fluctuation in the foreign currency exchange rates up or down as of September 30, ~~2015~~2016, would have increased/decreased the change in the estimated fair value of the contracts by ~~$1,700.~~$11,300.

As of September 30, 2014, the Company had foreign exchange contracts outstanding of approximately 1.5 million Euro, 0.1 million Pounds Sterling, and 34,000 Canadian Dollars at fixed rates. The contracts expire on various dates through June 2016. The Company had not designated the contracts as hedges and had recognized gains on the change in the estimated fair value of the contracts of $58,000 and $312,000 for the three and nine months ended September 30, 2014, respectively. A 10% fluctuation in the foreign currency exchange rates up or down as of September 30, 2014 would have increased/decreased the change in the estimated fair value of the contracts by $1,400.

~~Item 4.Controls and Procedures~~

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to management, including the Company's Chief Executive Officer ("CEO"), who is its principal executive officer, and Chief Financial Officer ("CFO"), who is its principal financial officer, to allow timely decisions regarding required disclosure. At the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management including our CEO and our CFO, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13-15(e) of the Exchange Act. Based on the evaluation of our disclosure controls and procedures as of September 30, ~~2015,~~2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ~~effective.~~not effective because of the material weakness identified below.

(b) Changes in Internal Control over Financial Reporting

As described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, management assessed the effectiveness of the Company's internal control over financial reporting and identified a material weakness in internal control over financial reporting related to ineffective controls over revenue recognition on software license sales with multiple deliverables.

~~There~~As of September 30, 2016, the Company has not completed the implementation of control procedures to ensure that the material weakness related to revenue recognition on software license sales has been mitigated. As a result of this material weakness in our internal control over financial reporting, we performed additional review and analysis over our consolidated financial statements for the nine months ended September 30, 2016. As a result of these procedures, we believe that our consolidated financial statements are presented in accordance with U.S. GAAP. We anticipate that we will complete the revision of our controls over revenue recognition on software license sales with multiple deliverables in the fourth quarter 2016. We believe the measures will remediate the control deficiencies; however, the material weakness will not be considered remediated until management has concluded, through required testing, that these controls are operating effectively.

Except as described above, there were no changes in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

PART II - OTHER INFORMATION

~~Item 1.~~

Item 1.

Legal Proceedings

None.

~~Item 1A.~~

Item 1A.

Risk Factors

The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014.~~2015.

~~Item 2.~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

~~Item 3.~~

Item 3.

Defaults Upon Senior Securities

None

~~Item 4.~~

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

~~None~~The Board of Directors authorized and directed that the Company file a Certificate of Elimination to eliminate the Series A Cumulative Convertible Preferred Stock, par value $0.01 per share, none of which was outstanding, and cause such shares to resume the status of authorized and unissued shares of preferred stock of the Company, without designation as to series. On November 14, 2016, the Company filed such Certificate of Elimination and it became effective on such date.

Item 6.

Exhibits

	3.1	Restatement of Certificate of Incorporation dated November 14, 2016.

	3.2	Certificate of the Elimination of the Series A Cumulative Convertible Preferred Stock dated November 14, 2016.

	3.3	Third Amended and Restated Bylaws of GSE Systems, Inc. Incorporated herein by reference to Exhibit 3.2 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on September 16, 2016.

	10.1	Letter dated October 31, 2016, from Branch Banking and Trust Company, agreeing to extend the Revolving Credit Expiration Date as defined in the Master Loan and Security Agreement dated November 22, 2011, between the Company, GSE Performance Solutions (as co-borrowers), and Branch Banking and Trust Company (as successor by merger to Susquehanna Bank), until March 31, 2017.

	10.2	Form of Restricted ~~Stock~~Share Unit Agreement ~~Under~~pursuant to the GSE Systems, Inc. 1995 Long-Term Incentive Plan, as amended and restated ~~effective March 6, 2014,~~dated as of ________, 2016.

	10.3	Employment Agreement between Christopher D. Sorrells and GSE Systems, Inc. dated as of August 15, 2016. Incorporated herein by reference to Exhibit 10.1 of GSE Systems, Inc. Form 8-K filed ~~herewith.~~with the Securities and Exchange Commission on August 19, 2016.

	10.4	Restricted Share Unit Agreement between Christopher D. Sorrells and GSE Systems, Inc. dated as of August 15, 2016. Incorporated herein by reference to Exhibit 10.2 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on August 19, 2016.

	10.5	Restricted Share Unit Agreement between Christopher D. Sorrells and GSE Systems, Inc. dated as of August 15, 2016. Incorporated herein by reference to Exhibit 10.3 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on August 19, 2016.

	10.6	Restricted Share Unit Agreement (Cash Award) between Christopher D. Sorrells and GSE Systems, Inc. dated as of August 15, 2016. Incorporated herein by reference to Exhibit 10.4 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on August 19, 2016.

	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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November ~~12, 2015~~14, 2016

GSE SYSTEMS, INC.

/S/ KYLE J. LOUDERMILK

Kyle J. Loudermilk

Chief Executive Officer

(Principal Executive Officer)

/S/ ~~JEFFERY G. HOUGH~~EMMETT A. PEPE

~~Jeffery G. Hough~~Emmett A. Pepe

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

(Mark One)
☒		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, ~~2015~~2016

		or

☐		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____

Delaware		52-1868008
(State of incorporation)		(I.R.S. Employer Identification Number)
1332 Londontown Blvd., Suite 200, Sykesville MD		21784
(Address of principal executive offices)		(Zip Code)

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
		(Do not check if a smaller reporting company)

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
(in thousands)	(Level 1)		(Level 2)			(Level 3)		Total			Level 1		Level 2			Level 3			Total

Money market funds	$	12,129	$	-		$	-	$	12,129		$	11,219	$	-		$	-		$	11,219
Foreign exchange contracts		-		124			-		124

Total assets	$	12,129	$	124		$	-	$	12,253		$	11,219	$	-		$	-		$	11,219

Foreign exchange contracts	$	-	$	(107	)	$	-	$	(107	)	$	-	$	(230	)	$	-		$	(230	)
Contingent consideration liability												-		-			(1,941	)		(1,941	)

Total liabilities	$	-	$	(107	)	$	-	$	(107	)	$	-	$	(230	)	$	(1,941	)	$	(2,171	)

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
(in thousands)	(Level 1)		(Level 2)			(Level 3)		Total			Level 1		Level 2			Level 3			Total

Money market funds	$	11,661	$	-		$	-	$	11,661		$	8,979	$	-		$	-		$	8,979
Foreign exchange contracts		-		92			-		92			-		121			-			121

Total assets	$	11,661	$	92		$	-	$	11,753		$	8,979	$	121		$	-		$	9,100

Foreign exchange contracts	$	-	$	(24	)	$	-	$	(24	)	$	-	$	(57	)	$	-		$	(57	)
Contingent consideration liability												-		-			(3,732	)		(3,732	)

Total liabilities	$	-	$	(24	)	$	-	$	(24	)	$	-	$	(57	)	$	(3,732	)	$	(3,789	)

		PAGE
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, ~~2015~~2016 (unaudited) and December 31, ~~2014~~ 2015	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2015~~2016, and September 30, ~~2014~~ 2015	4
	Unaudited Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the Three and Nine Months Ended September 30, ~~2015~~2016, and September 30, ~~2014~~ 2015	5
	Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, ~~2015~~ 2016	6
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2015~~2016 and September 30, ~~2014~~ 2015	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3025
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4841
Item 4.	Controls and Procedures	4942

PART II.	OTHER INFORMATION	5044
Item 1.	Legal Proceedings	5044
Item 1A.	Risk Factors	5044
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5044
Item 3.	Defaults Upon Senior Securities	5044
Item 4.	Mine Safety Disclosures	5044
Item 5.	Other Information	5145
Item 6.	Exhibits	5145
	SIGNATURES	5246

	Unaudited
	September 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	12,832		$	13,583
Restricted cash		223			613
Contract receivables, net		12,240			15,830
Prepaid expenses and other current assets		2,380			1,703
Total current assets		27,675			31,729

Equipment, software and leasehold improvements		7,039			7,055
Accumulated depreciation		(5,387	)		(5,229	)
Equipment, software and leasehold improvements, net		1,652			1,826

Software development costs, net		996			1,414
Goodwill		5,612			5,612
Intangible assets, net		903			1,279
Long-term restricted cash		3,305			3,591
Other assets		78			548
Total assets	$	40,221		$	45,999

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit	$	-		$	339
Accounts payable		2,015			2,330
Accrued expenses		1,944			1,554
Accrued compensation and payroll taxes		3,707			2,595
Billings in excess of revenue earned		7,062			8,684
Accrued warranty		1,614			1,456
Current contingent consideration		2,601			2,842
Other current liabilities		444			473
Total current liabilities		19,387			20,273

Contingent consideration		2,221			1,948
Other liabilities		238			38
Total liabilities		21,846			22,259

Stockholders' equity:
Preferred stock $.01 par value, 2,000,000 shares authorized, shares issued and outstanding none in 2015 and 2014		-			-
Common stock $.01 par value, 30,000,000 shares authorized, 19,496,770 shares issued and 17,897,859 shares outstanding in 2015, 19,486,770 shares issued and 17,887,859 shares outstanding in 2014		195			195
Additional paid-in capital		73,324			72,917
Accumulated deficit		(50,708	)		(45,142	)
Accumulated other comprehensive loss		(1,437	)		(1,231	)
Treasury stock at cost, 1,598,911 shares in 2015 and 2014		(2,999	)		(2,999	)
Total stockholders' equity		18,375			23,740
Total liabilities and stockholders' equity	$	40,221		$	45,999

	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive			Treasury Stock
	Shares		Amount		Capital		Deficit			Loss			Shares			Amount			Total
Balance, December 31, 2014		19,487	$	195	$	72,917	$	(45,142	)	$	(1,231	)		(1,599	)	$	(2,999	)	$	23,740

Stock-based compensation expense		-		-		392		-			-			-			-			392
Common stock issued for services provided		10		-		15		-			-			-			-			15
Foreign currency translation adjustment		-		-		-		-			(206	)		-			-			(206	)
Net loss		-		-		-		(5,566	)		-			-			-			(5,566	)
Balance, September 30, 2015		19,497	$	195	$	73,324	$	(50,708	)	$	(1,437	)		(1,599	)	$	(2,999	)	$	18,375

(in thousands)

Cash purchase price	$	3,000
Fair value of contingent consideration		3,953
Total purchase price	$	6,953

Purchase price allocation:
Cash	$	152
Contract receivables		1,719
Prepaid expenses and other current assets		23
Property and equipment, net		12
Intangible assets		779
Goodwill		5,612
Total assets		8,297

Line of credit		749
Accounts payable, accrued expenses, and other liabilities		586
Billings in excess of revenue earned		9
Total liabilities		1,344

Net assets acquired	$	6,953

(in thousands except per share data)	(unaudited)
	Three Months ended								Nine Months ended
	September 30,								September 30,
Pro forma financial information including the acquisition of Hyperspring	2015				2014				2015				2014
Revenue		$	14,961			$	12,307			$	42,589			$	37,930
Operating loss			(3,195	)			(1,785	)			(4,701	)			(5,848	)
Net loss			(3,363	)			(1,697	)			(5,140	)			(5,749	)
Loss per common share — basic		$	(0.19	)		$	(0.09	)		$	(0.29	)		$	(0.32	)
Loss per common share — diluted		$	(0.19	)		$	(0.09	)		$	(0.29	)		$	(0.32	)

	September 30, 2015	December 31, 2014
China Nuclear Power Engineering Company	14.7 %	3.9 %
State Nuclear Power Automation System Engineering Co.	0.4 %	10.2 %

(in thousands)

Contingent consideration:
Beginning balance at January 1, 2016	$	3,732
Payments made on contingent liabilities		1,421
Change in fair value		370
Ending balance	$	1,941

		As of
	Covenant	September 30, ~~2015~~2016

Minimum tangible capital base	Must ~~Exceed~~exceed $10.5 million	$~~10.9~~27.0 million
Quick ratio	Must ~~Exceed~~exceed 1.00 : 1.00	~~1.43~~1.52 : 1.00

(in thousands)

Balance at December 31, 2014	$	1,456
Balance at January 1, 2016				$	1,614
Warranty provision		514			459
Warranty claims		(312	)		(385	)
Currency adjustment		(44	)		(4	)
Balance at September 30, 2015	$	1,614
Balance at September 30, 2016				$	1,684

(in thousands)	Three Months ended September 30,												Nine Months ended September 30,												Three months ended September 30,												Nine months ended September 30,
	2015			%			2014			%			2015			%			2014			%			2016			%			2015			%			2016			%			2015			%
Contract revenue	$	14,961			100.0	%	$	7,823			100.0	%	$	42,589			100.0	%	$	24,823			100.0	%
Revenue																									$	14,428			100.0	%	$	14,809			100.0	%	$	39,820			100.0	%	$	42,476			100.0	%
Cost of revenue		11,158			74.6	%		5,368			68.6	%		32,649			76.7	%		17,497			70.5	%		10,704			74.2	%		11,214			75.7	%		28,913			72.6	%		32,701			77.0	%
Write-down of capitalized software development costs		1,538			10.3	%		-			0.0	%		1,538			3.6	%		-			0.0	%		-			0.0	%		1,538			10.4	%		-			0.0	%		1,538			3.6	%

Gross profit		2,265			15.1	%		2,455			31.4	%		8,402			19.7	%		7,326			29.5	%		3,724			25.8	%		2,057			13.9	%		10,907			27.4	%		8,237			19.4	%
Operating expenses:
Selling, general and administrative		3,811			25.5	%		3,954			50.5	%		11,031			25.9	%		11,939			48.0	%		3,043			21.2	%		3,811			25.7	%		9,032			22.8	%		11,031			26.0	%
Restructuring charges		1,600			10.7	%		272			3.5	%		1,746			4.1	%		883			3.6	%		85			0.6	%		1,600			10.8	%		487			1.2	%		1,746			4.1	%
Depreciation		119			0.8	%		140			1.8	%		383			0.9	%		413			1.7	%		91			0.6	%		119			0.8	%		294			0.7	%		383			0.9	%
Amortization of definite-lived intangible assets		123			0.8	%		36			0.5	%		370			0.9	%		108			0.4	%		72			0.5	%		123			0.8	%		219			0.5	%		370			0.9	%
Total operating expenses		5,653			37.8	%		4,402			56.3	%		13,530			31.8	%		13,343			53.7	%		3,291			22.8	%		5,653			38.2	%		10,032			25.2	%		13,530			31.9	%

Operating loss		(3,388	)		(22.7	)%		(1,947	)		(24.9	)%		(5,128	)		(12.1	)%		(6,017	)		(24.2	)%
Operating income (loss)																										433			3.0	%		(3,596	)		(24.3	)%		875			2.2	%		(5,293	)		(12.5	)%

Interest income, net		19			0.1	%		44			0.6	%		67			0.2	%		103			0.4	%		11			0.1	%		19			0.1	%		52			0.1	%		67			0.2	%
Gain (loss) on derivative instruments, net		20			0.1	%		69			0.9	%		(59	)		(0.1	)%		178			0.7	%
Other expense, net		(156	)		(0.9	)%		-			0.0	%		(235	)		(0.6	)%		(7	)		0.0	%
(Loss) gain on derivative instruments, net																										(211	)		(1.5	)%		20			0.1	%		(346	)		(0.9	)%		(59	)		(0.1	)%
Other income (expense), net																										15			0.1	%		(156	)		(1.0	)%		112			0.3	%		(235	)		(0.6	)%

Loss before income taxes		(3,505	)		(23.4	)%		(1,834	)		(23.4	)%		(5,355	)		(12.6	)%		(5,743	)		(23.1	)%
Income (loss) before income taxes																										248			1.7	%		(3,713	)		(25.1	)%		693			1.7	%		(5,520	)		(13.0	)%

Provision for income taxes		50			0.4	%		61			0.8	%		211			0.5	%		162			0.7	%		80			0.6	%		50			0.4	%		275			0.7	%		211			0.5	%

Net loss	$	(3,555	)		(23.8	)%	$	(1,895	)		(24.2	)%	$	(5,566	)		(13.1	)%	$	(5,905	)		(23.8	)%
Net income (loss)																									$	168			1.2	%	$	(3,763	)		(25.4	)%	$	418			1.0	%	$	(5,731	)		(13.5	)%