The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the "Company," "GSE," "we," "us," or "our") without independent audit.and are unaudited.  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, 20152016, filed with the Securities and Exchange Commission on March 25, 2016.28, 2017.  Certain reclassifications have been made to prior period amounts to conform to the current presentation.  The Company reclassified research and development costs from selling, general and administrative expenses and presented them as a separate caption within operating expenses on the consolidated statements of operations. In addition, the Company also reclassified the stock-based compensation related to management/employees from cost of revenue and research and development expenses to selling, general and administrative expenses.

The Company has two reportable segments as follows:

Our Performance Improvement Solutions segment primarily encompasses next generationour power plant and process high-fidelity simulation solutions, as well as engineering solutions.solutions and interactive computer based tutorials/simulation focused on the process industry.  This segment includes various simulation products, engineering services, and operation training systems delivered across the industries the Company serves:we serve: primarily nuclear and fossil fuel power generation, andas well as the process industries.  SimulationOur simulation solutions include the following: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, including operator training systems, 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 and for ongoing workforce development and training.  GSE and its predecessors have been providing these services since 1976.

Nuclear Industry Training and Consulting provides highly specialized and skilled nuclear operations instructors, procedure writers, technical engineers, 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 senior reactor operations instructors, procedure writers, project managers,  work management specialists, planners and training material developers.  This business is managed through the Company'sour subsidiaries Hyperspring subsidiary.and Absolute Consulting, Inc. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSECompany's product and service portfolio. Hyperspring hasGSE and its predecessors have been providing these services since 2005.1997.

Financial information about the two business segments is provided in Note 1416 of the accompanying condensed 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, allowance for doubtful accounts, 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.

The Company has (1) fixed-pricerecognizes revenue through fixed price contracts for the sale of uniquely 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 elements such as installationmaterials which generally apply to the Performance Improvement Solutions segment and training, and (3) time and material contracts for Nuclear Industry Training and Consulting support and service agreements.

In accordance with Accounting Standards Codification ("ASC")(ASC) 605-35, "Construction-TypeConstruction-Type and Production-Type Contracts"Contracts (ASC 605), the Performance Improvement Solutions segment recognizesprimarily accounts for revenue for itsunder 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 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 compared to the expected total costs that will be incurred onestimated cost to complete 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 recognizesWe recognize 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'sour revenue recognition as a significant change in the estimates can cause the Company'sour revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

The Company accruesAs we recognize revenue under the percentage-of-completion method, we provide an accrual for estimated future warranty costs at the time the related revenue is recognized based on historical and projected claims experience.  The Company'sOur 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 evaluates customizedOur system design contracts do not normally provide for multiple deliverables under ASC 605-25, "Revenue Recognition-Multiple Element Arrangements", and when appropriate, separatespost contract support (PCS) in terms of software upgrades, software enhancements or telephone support.  To obtain PCS, the contracts intocustomers must normally purchase a separate units of accounting for revenue recognition. Contracts with multiple element arrangements typically include, but are not limited to, components such as training and PCS, which are embedded in the 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.

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 utilizesWe utilize 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.customer.

The CompanyWe also recognizesrecognize revenue from the sale of software licenses from contracts with multiple deliverables.  These software license sales are evaluated under ASC 985-605, "Software Revenue Recognition"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 hasconcluded that vendor specific objective evidence does not established VSOEexist for all elements of its bundled software license arrangements.sales.  If a PCS or professional services element exists in the software license arrangement, revenue is recognized ratably over the PCSlongest service period.  If no PCS or professional services element exists in the arrangement, revenue is deferred until all elements have beenthe last undelivered element is delivered.

The Company recognizesWe recognize revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts.  Revenue on time and 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.  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 iswe are 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 Companywe may not be able to obtain reimbursement for all such costs.

In NovemberJuly 2015, the Financial Accounting Standards Board ("FASB")(FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes"2015-11).  The standard  ASU 2015-11 requires that deferred tax assetsan entity measure inventory at the lower of cost and liabilities be classified as noncurrent onnet realizable value.  This ASU does not apply to inventory measured using the balance sheet rather than being separated into current and noncurrent.last-in, first-out method.  ASU 2015-17 is2015-11 was effective for fiscal years, and interimannual reporting 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 Company2016, including interim periods within that reporting period.  We adopted ASU 2015-172015-11 effective January 1, 2016.2017.  The adoption of this guidancestandard did not have a material effectsignificant impact on our consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based Payment Accounting (ASU 2016-09).  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 Company'sstatement 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.  The adoption of ASU 2016-09 was required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years.  We adopted ASU 2016-09 effective January 1, 2017. The adoption of this standard did not have a significant impact on our consolidated financial position.position, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers(ASU 2014-09), 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 infor 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 isWe are currently in the process of evaluating the impact of its pendingthe adoption of this ASU on the Company'sour consolidated financial statementsstatements.  The adoption is expected to impact our revenue recognition and has not yet determinedrelated disclosures.  For example, our revenue from software arrangements with multiple elements including services are currently recognized ratably due to the method by which itlack of vendor-specific objective evidence ("VSOE") of fair value.  We are currently evaluating these arrangements under the new revenue guidance to identify the distinct performance obligations and to determine the timing and pattern of recognition of each performance obligation. We are also evaluating other revenue streams, including power plant simulator design and build systems and training services. The Company will adopt the new standard in 2018.on January 1, 2018 using the modified retrospective method.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)".  The new standard establishes a right-of-use ("ROU")(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 forwith 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 isWe are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and the Company expectswe expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments"Payments (ASU 2016-15).  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 (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 outstanding vested stock options or other common stock equivalents were exercised into common stock.exercised.

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

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, "Business Combinations"Combination", requires that contingent consideration is required to be recognized at fair value onas of the acquisition date and be re-measured each reporting period with subsequent adjustments recognized in the consolidated statement of operations. The Company estimatesdate. We estimate the fair value of contingent considerationthese liabilities based on financial projections of the acquired companies and estimated probabilities of achievement and 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.  The Company believes that the estimates and assumptions are reasonable, however, there is significant judgment involved.achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisitionsacquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to and volatility in, theour operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, 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, 2016,2017 and December 31, 2015,2016, contingent consideration, related to our acquisition of Hyperspring via an earnout,  included in current liabilities totaled $0.7$1.7 million and $2.6$2.1 million, respectively. As of September 30, 2016, and December 31, 2015, theThe Company also had accrued contingent consideration totaling $1.2 million and $1.1 million, respectively, which was reported as a noncurrent liability and represents the portion 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 $0.9 million and $1.4 million in the first quarter of 2017 and 2016, respectively, related to the liability-classified contingent consideration arrangements. DuringAs of November 14, 2017, we will not record contingent consideration adjustments for the three and nine months ended September 30, 2015, the Company made no payments and a payment of $500,000, respectively, relatedHyperspring acquisition due to the liability-classified contingent consideration arrangements.expiration of the earnout period.

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.  Unbilled receivablesRecoverable costs and accrued profit not yet billed 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:

Unbilled receivables totaled $6.9 million and $3.3 million as of September 30, 2016, and December 31, 2015, respectively.  During October 2016,2017, the Company invoiced $0.6$4.6 million of the unbilled amounts related to the balance at September 30, 2016.2017.

As of September 30, 2016,2017, the Company had one customer that accounted for 11.3%26.3% of the Company's consolidated contract receivables.  As of December 31, 2015,2016, the Company did not have any customers that accounted for more than 10% of the Company's consolidated contract receivables.

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 the investmentcarrying amount of such asset to its estimated fair value based on the future undiscounteddiscounted cash flows. The excess of any unamortized computer software development costs over the related net realizablefair value is written down and charged to cost of revenue.operations.

Software development costs capitalized were $38,000 and $126,000 for the three and nine months ended September 30, 2017, respectively, and $10,000 and $196,000 for the three and nine months ended September 30, 2016, respectively,respectively.  Total amortization expense was $118,000 and $0.5 million and $1.4 million$352,000 for the three and nine months ended September 30, 2015, respectively.  Total amortization expense was2017, respectively, and $111,000 and $296,000 for the three and nine months ended September 30, 2016, respectively, and $96,000 and $291,000 for the three and nine months ended September 30, 2015, respectively.

The Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of an assetgoodwill may not be recoverable. 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. GAAP. The Company'sAfter the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, are:which are the same as our two operating segments: (i) Performance Improvement SolutionsSolutions; and (ii) Nuclear Industry Training and Consulting.  TheConsulting (which includes Hyperspring and Absolute).  As of the report date, the Company is still evaluating the impact of the Absolute acquisition on our reporting units. As of September 30, 2017, and December 31, 2016, goodwill of $7.1 million and $5.6 million, of goodwill originated from the Hyperspring acquisition in 2014 andrespectively, is assignedrelated to the Nuclear Industry Training and Consulting segment.  The increase of $1.5 million in the carrying amount of goodwill during the nine months ended September 30, 2017 was due to the acquisition of Absolute. No events or circumstances occurred during the current reporting period that would indicate impairment of such goodwill.goodwill and indefinite-lived intangible assets.

ASC 820, "Fair Value Measurement"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 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 cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2016,2017, and December 31, 2015,2016, 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, 2016:2017:

The following table presents assets and liabilities measured at fair value at December 31, 2015:2016:

The 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, 2016:2017:

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.

As of September 30, 2016,2017, the Company had foreign exchange contracts outstanding of approximately 341.4212.5 million Japanese Yen, 1.60.2 million Euro, 0.7and 0.2 million Australian Dollars, and 0.5 million Canadian Dollars at fixed rates.  The contracts expire on various dates through December 2018.  At December 31, 2015,2016, the Company had contracts outstanding of approximately 2.1281.4 million Japanese Yen, 0.1 million Euro, 0.40.6 million Australian Dollars, 1.3 million Canadian Dollars, and 0.5 million Pounds SterlingCanadian Dollars at fixed rates.

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

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

For the three and nine months ended September 30, 2016,2017 and September 30, 2015,2016, the Company recognized a net gain (loss) gain on its derivative instruments as outlined below:

The Company recognizes compensation expense for all equity-based compensation awards issued to employees directors and non-employeesdirectors that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date. The Company recognized $412,000$0.5 million and $136,000$0.4 million of stock-based compensation expense related to equity awards for the three months ended September 30, 2016,2017 and September 30, 2015,2016, respectively, and recognized $900,000$1.8 million and $407,000$0.9 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 2017 and 2016, respectively. In addition to the equity-based compensation expense recognized, the Company also recognized $92,000 and $80,000 of stock-based compensation related to the change in the fair value of cash-settled restricted stock units ("RSUs") during the three and nine months ended September 30, 2015,2017, respectively.

InFor the three and nine months ended September 30, 2017, the Company did not grant market-based RSUs. For the three and nine months ended September 30, 2016, the Company granted 1,162,500 and 1,322,500 performance-based restricted stock units ("RSUs") with an aggregate fair value of $1.9 million.  In the three months ended September 30, 2016, the Company granted 1,162,500 performance-basedmarket-based RSUs with an aggregate fair value of $1.6 million.  Themillion and $1.9 million, respectively. In accordance with ASC 718, Compensation - Stock Compensation, the RSUs are considered market-based because they vest upon the achievement of specific performance measures.a specified price of the Company's shares. The fair value of the RSUs is expensed ratably over the requisite service period, which ranges between one and five years.

The performance-basedmarket-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-basedmarket-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.

InDuring the three months ended September 30, 2017, the Company did not grant time-based RSUs. For the nine months ended September 30, 2017, the Company granted 396,677 time-based RSUs with an aggregate fair value of $1.4 million. A portion of the RSUs vested immediately, a portion will vest quarterly in equal amounts over the course of eight quarters, a portion will vest one year after grant, and the remainder will vest annually in equal amounts over the course of three years. For the three and nine months ended September 30, 2016, the Company granted 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.period.

The Company granted no new options and 40,000did not grant stock options forduring the three andor nine monthsmonth periods ended September 30, 2017. The Company did not grant any options during the three month period ended September 30, 2016, respectively.and granted 40,000 stock options during the nine month period ended September 30, 2016. The fair value of the options granted forduring 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 nine months ended September 30, 2015 was $48,000.

The maximum availability under the RLOC is subject to a borrowing base equal to 80% of eligible accounts receivable, and is reduced for any issued and outstanding letters of credit and working capital advances.  At September 30, 2016,2017, there were no outstanding borrowings on the RLOC and December 31, 2015,six letters of credit totaling $1.7 million. We have two letters of credit with Citizen Bank totaling $0.4 million, which have expired and are pending release by the bank and customer. The amount available at September 30, 2017, after consideration of the borrowing base, letters of credit and working capital advances was approximately $3.3 million.

The credit facility agreement is subject to standard financial covenants and reporting requirements. At September 30, 2017, the Company had no long-term debt.

The Company accrues for estimated warranty costs at the time the related revenue is recognized based on historical experience and projected claims.  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 portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.5$1.3 million, while the remaining $0.2$0.5 million is classified as long-term within other liabilities.  The activity related toin the accrued warranty accrualaccounts is as follows:

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 yearsperiods is comprised mainly of foreign income tax expense, Alternative Minimum Tax, state taxes, and deferred tax expense relating to the tax amortization of goodwill.

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 1997 forward.  The Company is subject to foreign tax examinations by tax authorities for years 20102011 forward for Sweden, 20122014 forward for China, and 20142015 forward for both India and 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., 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 recorded uncertain tax positions for certain foreign tax contingencies in China, South Korea, and Ukraine.

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 evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its U.S., Swedish, U.K., and Chinese net deferred assets as of September 30, 2016.2017.  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 2015,2016, the Company paid income taxes in the UK and India and expects to do so again in 2016.2017.