Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer",  and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the "Company," "GSE," "we," "us,"Company, GSE, we, us, or "our")our) 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")(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, 2016,2017, filed with the Securities and Exchange Commission on March 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.16, 2018.

The Company has two reportable segments as follows:

Our Performance Improvement Solutions segment primarily encompasses our technical engineering and power plant high-fidelity simulation solutions, as well as engineering 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 we serve: primarily nuclear and fossil fuel power generation, as well as the process industries. Our 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 ourthe Hyperspring subsidiary.and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the Company'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 1518 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 with customers, allowance for doubtful accounts, product warranties, capitalization of software development costs, valuation of goodwill and intangible assets acquired, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.

The Company recognizesderives its revenue through fixed pricethree broad revenue streams: 1) System Design and Build (SDB), 2) Software, and 3) Training and Consulting services. We recognize revenue from SDB and software contracts for the sale of uniquely designed/customized systems containing hardware, software and other materials which generally apply tomainly through the Performance Improvement Solutions segment and timethe training and materialconsulting service contracts forthrough both the Performance Improvement Solutions segment and Nuclear Industry Training and Consulting segment.

The SDB contracts are typically fixed-price and consist of initial design, engineering, assembly and installation of training simulators which include hardware, software, labor, and post contract support (PCS) on the software. We generally have two main performance obligations for an SDB contract: the training simulator build and PCS. The training simulator build performance obligation generally includes hardware, software, and labor. The transaction price under the SDB contracts is allocated to each performance obligation based on its standalone selling price. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method as our performance creates or enhances assets with no alternative use to the Company, and we have an enforceable right to payment for performance completed to date. Cost-to-cost input method best measures the progress toward complete satisfaction of the performance obligation. PCS revenue is recognized ratably over the service agreements.period, as PCS is deemed as a stand-ready obligation.

In accordance with Accounting Standards Codification (ASC) 605-35, Construction-Type and Production-Type Contracts (ASC 605),applying the Performance Improvement Solutions segment accounts for revenue under fixed-price contracts usingcost-to-cost input method, we use the percentage-of-completion method.  This methodology recognizes revenue and earnings as work progresses on the contract and is based onactual costs incurred to date comparedrelative to the total estimated costcosts to completemeasure the project.work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract earningscosts are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimateestimates is recognized in the period in which the change is identified. Estimated losses are charged against earningsrecognized in the period such losses are identified. We 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.

Revenue from the sale of standalone software licenses, without other elements in the contract and which do not require significant modificationsmodification or customization foris recognized upon its delivery to 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 utilize written contracts to establish the terms and conditions by which product support and services are sold to customers.customer. Delivery is considered to have occurred when titlethe customer receives a copy of the software and riskis able to use and benefit from the software.

A software license sale contract with multiple deliverables typically includes the following elements: license, installation and training services and PCS. The total transaction price of loss have been transferreda software license sale contract is typically fixed, and is allocated to the customer, which generally occurs after aidentified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license key has beenrevenue is recognized when the software license is delivered to the customer.

We recognizeThe contracts within the training and consulting services revenue understream are either 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.  (T&M) based or fixed-price based. Under a typical time-and-materials billing arrangement,T&M contract, the Company is compensated based on the number of hours of approved time provided by temporary workers and the bill rates which are fixed per type of work, as well as approved expenses incurred. The customers are billed on a regularly scheduledregular basis, such as weekly, biweekly or monthly. Any unbilled amounts are typically billedIn accordance with Accounting Standards Codification (ASC) 606-10-55-18, we elected to apply the following month."right to invoice" practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each temporary worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under cost-reimbursablea typical fixed-price contract, we recognize the revenue over the service period using the cost-to-cost input method as the Company's performance does not create an asset with an alternative use to the Company, and we have an enforceable right to payment for performance completed to date. Cost-to-cost input method best measures the progress toward complete satisfaction of the performance obligation.

For contracts which are subject to a contract ceiling amount, with multiple performance obligations, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.  However, if costs exceedallocate the contract ceiling or are not allowable underprice to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the provisions of the contract or applicable regulations, we may not be ableprices charged to obtain reimbursement for all such costs.customers.

In July 2015,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11,2014-09, SimplifyingRevenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. Subsequently, the MeasurementFASB issued a series of Inventoryupdates to the revenue recognition guidance in ASC 606, Revenue from Contracts with Customers (ASC 606). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, the new accounting standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2015-11)2014-09 is effective for the fiscal year ending December 31, 2018 and interim periods therein.

In November 2016, includingthe FASB issued ASU No. 2016-18, Restricted Cash (ASU 2016-18). The new guidance applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. This update is intended to reduce diversity in cash flow presentation of restricted cash and restricted cash equivalents and requires entities to include all cash and cash equivalents, both restricted and unrestricted, in the beginning-of-period and end-of-period totals presented on the statement of cash flows. We adopted ASU 2016-18 effective January 1, 2018, on a retrospective basis. As the result of the adoption of ASU 2016-18, we restated the statement of cash flows for the comparative period to include both restricted and unrestricted cash in the beginning-of-period and end-of-period totals, and eliminated the transfers between restricted and unrestricted cash in the statement of cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (ASU 2017-09). The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance on ASC 718, Compensation – Stock Compensation. Entities are required to apply modification accounting for any change to an award, except for a change that is deemed to be purely administrative in nature. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in ASC 718. The amendments in this update were effective for all entities and for annual periods, and interim periods within that reporting period.those annual periods, beginning after December 15, 2017. We adopted ASU 2015-112017-09 effective January 1, 2017.2018, on a prospective basis. The adoption of this standard did not have a significant impact onto our consolidated financial position, results of operationsstatements or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases. 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 with 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. We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.

In AugustJune 2016, the FASB issued ASU No. 2016-15,2016-13, Classification of Certain Cash Receipts and Cash Payments Financial Instruments - Credit Losses(ASU 2016-15)., which introduces new guidance for credit losses on instruments within its scope. The new guidance addresses eight specific cash flow issuesintroduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and appliesother receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities that are required to presentmay not use the length of time a statement of cash flows.  Adoption ofsecurity has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU 2016-15 is requiredeffective for public companies for fiscal reporting periodsyears beginning after December 15, 2017, including2019, and interim reporting periods within those fiscal years. We are currently evaluating the potential impact of theEarly adoption of ASU 2016-15 on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment(ASU (ASU 2017-04).  ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. We are currently evaluating the potential impact of the adoption of ASU 2017-04 on our consolidated financial statements.

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

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

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, "Business Combination"Combinations, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our 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 December 31, 2017, the remaining contingent consideration, related to our acquisition of Hyperspring in 2014 was $1.7 million, all of which was paid in January 2018. There was no contingent liability as of June 30, 2017 and December 31, 2016, contingent consideration included in current liabilities totaled $1.6 million and $2.1 million, respectively. The Company made a payment of $0.9 million and $1.4 million during the first quarter of 2017 and 2016, respectively, related to the liability-classified contingent consideration arrangements.2018.

Contract receivables represent balancesthe Company's unconditional rights to considerations 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 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:

During July 2017,2018, the Company invoiced $3.2$3.8 million of the unbilled amounts related to the balance at June 30, 2017.2018.

As of June 30, 2018 and December 31, 2017, the Company had one customer that accounted for 13.9%26.6% and 26.7%, respectively, of the Company's consolidated contract receivables.  As of December 31, 2016, the Company did not have any customers that accounted for more than 10% of the Company'sits consolidated contract receivables.

At June 30, 2018 and December 31, 2017, prepaid expenses and other current assets are comprised primarily of inventory thatand other current assets. Inventory is being purchased to support the construction of three major nuclear simulation projects related to a significant contract that was executed during the first quarter of 2016. Inventory is recorded at the lower of cost or marketnet realizable value in accordance with ASC 330, Inventory. At December 31, 2016, inventory related to the simulation projects was classified asOther current assets primarily includes value-added tax receivables and cash deposited in a long-term asset within other assets on the consolidated balance sheets. The earliest completion date of these projects is expected to occur in the second quarter of 2018.Swedish tax account.

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 carrying amount of such asset to its estimated fair value based on the future discounted cash flows. The excess of any unamortized computer software costs over the related fair value is written down and charged to operations.

Software development costs capitalized were $167,000 and $272,000 for the three and six months ended June 30, 2018, respectively, and $59,000 and $88,000 for the three and six months ended June 30, 2017, respectively,respectively. Total amortization expense was $85,000 and $55,000 and $186,000$203,000 for the three and six months ended June 30, 2016, respectively.  Total amortization expense was2018, respectively, and $117,000 and $234,000 for the three and six months ended June 30, 2017, respectively, and $104,000 and $185,000 for the three and six months ended June 30, 2016, respectively.

The Company's intangible assets include amounts recognized in connection with business acquisitions, including customer relationships, contract backlog,trade names, non-compete agreements and software.alliance agreements.

The Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill 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. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, which are the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includes Hyperspring)Hyperspring and Absolute). AsThe change in the net carrying amount of goodwill from December 31, 2017 through June 30, 2017, and December 31, 2016, goodwill2018 was comprised of $5.6 million related to the Nuclear Industry Training and Consulting segment.  following items:

No events or circumstances occurred during the current reporting period that would indicate impairment of such goodwill.

Amortization of intangible assets other than goodwill 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. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. The Company does not have any intangible assets with indefinite useful lives, other than goodwill. There were no indications of impairment of intangible assets during the current reporting period. The increase in intangible assets during the period three and six months ended June 30, 2018 was due to the acquisition of True North. See Note 4, Acquisitions for details.

ASC 820, Fair Value Measurement ("ASC 820")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.

TheAt June 30, 2018, and December 31, 2017, 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 fair value based upon their short-term nature.

As discussed in Note 14, Debt, we issued new term loan to finance the fairacquisition of True North. As of June 30, 2018, the carrying amount of the long-term debt was $9.5 million. The carrying value of the respective assets and liabilities at June 30, 2017, and December 31, 2016, Company's long-term debt approximated its fair value based uponon Level 2 inputs since the short-term nature ofdebt carries a variable interest rate that is tied to the assets and liabilities.current LIBOR rate plus an applicable spread.

For the three and six months ended June 30, 2017,2018, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at June 30, 2017.2018.

The following table presents assets and liabilities measured at fair value at June 30, 2017:2018:

Money market funds at both June 30, 20172018 and December 31, 20162017 are included in cash and cash equivalents in the respective consolidated balance sheets.

The following table presents assets and liabilities measured at fair value at December 31, 2016:2017:

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the six months ended June 30, 2017:2018:

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 to reduce the impact of these exposures.  The Company minimizesrates and minimize credit exposure by limiting counterparties to nationally recognized financial institutions.

As of June 30, 2017,2018, the Company had foreign exchange contracts outstanding of approximately 212.5112.5 million Japanese Yen 0.2 million Euro, and 0.40.2 million Australian Dollars at fixed rates. The contracts expire on various dates through December 2018. At December 31, 2016,2017, the Company had contracts outstanding of approximately 281.4162.5 million Japanese Yen, 0.124,000 Euro, and 0.2 million Euro, 0.6 million Australian Dollars, and 0.5 million Canadian Dollars at fixed rates.

The Company had not designatedreports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the foreign exchange contracts as hedges and recorded thederivative's fair value. The estimated net fair values of the derivative contracts on the consolidated balance sheets are as follows:

The Company has not designated the derivative contracts as hedges. The changes in the fair value of the foreign exchangederivative 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 loss(loss) gain on derivative instruments, net, in the consolidated statements of operations.

For the three and six months ended June 30, 20172018 and 2016,2017, the Company recognized a net (loss) gain (loss) 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 $0.6$0.4 million and $0.2$0.6 million of stock-based compensation expense related to equity awards for the three months ended June 30, 20172018 and 2016,2017, respectively, and recognized $1.3$1.0 million and $0.5$1.3 million of stock-based compensation expense related to equity awards for the six months ended June 30, 2018 and 2017, and 2016, respectively.respectively, under the fair value method. In addition to the equity-based compensation expense recognized, the Company also recognized $28,000 and $6,000 of stock-based compensation related to the change in the fair value of cash-settled restricted stock units ("RSUs")(RSUs) during the three months ended June 30, 2017.2018 and 2017, respectively. During the six months ended June 30, 2018 and 2017, the Company recorded an expense of $60,000 and a net reduction of $12,000 in the fair value of cash-settled RSUs, of approximately $12,000.respectively.

ForDuring the three and six months ended June 30, 2017, the Company did not grant performance-based RSUs. For the six months ended June 30, 2016,2018, the Company granted 160,000 performance-based178,434 and 388,526 time-based RSUs with an aggregate fair value of $282,000. There were no performance based RSUs granted during the three months ended June 30, 2016. 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$0.6 million and five years.

The Company did not grant stock options during the three or six month periods ended June 30, 2017. The Company did not grant any options during the three month period ended June 30, 2016, and granted 40,000 stock options during the six month period ended June 30, 2016. The fair value of the options granted duringDuring the six months ended June 30, 2016 was $46,000.2018 and 2017, the Company did not grant performance-based RSUs or stock options.

The Company entered into a new three-year, $5.0 million revolving line of credit facility ("RLOC")(RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs, including acquisitions.  Working capital advances bear interest of one-month LIBOR plus 2.25% per annumneeds. On May 11, 2018, GSE and letter ofPerformance Solutions (collectively, the Borrower) entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) with the Bank, amending and restating the Company's existing Credit and Security Agreement with the Bank, which included a $5.0 million asset-based revolving credit fees are 1.25% per annum.  The Company isfacility between the Borrower and the Bank, to now include (a) a $5.0 million revolving credit facility not required to maintain a restricted cash collateral account at Citizens Bank for outstanding letters of credit and working capital advances. 

We intend to continue using the RLOC for any issuedshort-term working capital needs and outstandingthe issuance of letters of credit in connection with business operations. Letter of credit issuance fees range between 1.25% and working capital advances.  2% depending on the Company's overall leverage ratio, and the Company pays an unused RLOC fee quarterly based on the average daily unused balance.

At June 30, 2017,2018, there were no outstanding borrowings onunder the RLOC and sixthree letters of credit totaling $1.7$1.2 million. We have one letter of credit with Citizen Bank totaling $0.3 million, which has expired and is pending release by the bank and customer. The amount available at June 30, 2017,2018, after consideration of the borrowing base, letters of credit and working capital advances was approximately $2.7$3.8 million.

As discussed in Note 4, Acquisitions, we acquired True North on May 11, 2018 for total consideration of approximately $9.9 million in cash. We drew down $10.3 million to finance the acquisition of True North, $0.5 million of which was repaid to the Bank on the same day. The creditloan bears interest at adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. We also incurred $70,000 debt issuance costs and $75,000 loan origination fees related to the Credit Agreement. Debt issuance costs and loan origination fees are reported as a direct deduction from the carrying amount of the loan and are amortized over the term of the loan using the effective interest method.

At June 30, 2018, the outstanding long-term debt under the delayed draw term loan facility agreement is subjectwas as follows:

The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the Borrower to standardsatisfy certain financial covenants and reporting requirements.restrict the Borrower's and Guarantors' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions after any applicable grace period could result in the obligations under the Credit Agreement becoming immediately due and payable and termination of the credit facilities. In addition to non-compliance with covenants and restrictions, the Credit Agreement also contains other customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the Bank may declare the obligations under the Credit Agreement to be immediately due and payable and may terminate the credit facilities. At June 30, 2017,2018, the Company was in compliance with its financial covenants.

At June 30, 2017,2018, the Company had three lettersone letter of credit with BB&T totaling $0.9$0.5 million, which have expired and areis pending release by the bank and customer. At June 30, 20172018 and December 31, 2016,2017, the cash collateral account with BB&T totaled $0.9$0.5 million and $1.1$1.0 million, respectively. The balances were classified as restricted cash on the consolidated balance sheets.

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-termSDB contracts generally provide for a one-year base 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 $1.2$1.0 million, while the remaining $0.5$0.7 million is classified as long-term within other liabilities. The activity in the accrued warranty accounts is as follows:

The Company's decrease in effectiveincome tax rate for 2017 as compared to 2016 resulted mainly from the use of the net operating loss carryforwards in the U.S.  The Company's income tax(benefit) 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 periods2018 is comprised mainly of federal income tax expense, foreign income tax expense, and state taxes. Tax expense in 2017 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 and 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.,Chinese, Swedish U.K., and ChineseU.K. net deferred assets as of June 30, 2017.2018. The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in the U.S. and India.  In 2016,

During the quarter ended June 30, 2018, the Company paididentified an immaterial error of $1.2 million, or $0.06 per share, in the December 31, 2017 financial statements related to the release of the valuation allowance against deferred tax assets attributable to windfall tax benefits recognized upon the adoption of ASU 2016-09. The portion relating to ASU 2016-09 should have been recorded to the consolidated statement of operations as an increase to our benefit for income taxes with a resulting increase to net income during the year ended December 31, 2017, however, the adjustment was recorded to accumulated deficit in Indiathe consolidated statement of changes in stockholders' equity. This had no impact to the ending accumulated deficit balance at December 31, 2017.

Additionally, the Company identified a $0.7 million classification error between deferred tax asset and expectsdeferred tax liability at December 31, 2017 due to do so againimproper netting of deferred taxes by jurisdiction. Accordingly, we reclassified $0.7 million of deferred tax liabilities, which was included in 2017.other liabilities to deferred tax assets in our December 31, 2017 consolidated balance sheet.

The Company has two reportable business segments. The Performance Improvement Solutions segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example training applications include turnkey and custom training services, while engineering services include plant design verification and validation. The Company provides these services across all market segments. ContractsContract terms are typically range from nine months to 24 months.  The Company and its predecessors have been providing these services since 1976.less than two years.

The Nuclear Industry Training and Consulting segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities. This business is managed through our Hyperspring subsidiary.and Absolute subsidiaries. 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

As discussed in Note 4, Acquisitions, on May 11, 2018, GSE, through Performance Solutions, entered into the True North Purchase Agreement to purchase 100% of the membership interests in True North. True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. The acquisition of True North is expected to broaden our engineering services since 2005.offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complimentary talent pool to our employee base. For reporting purposes, True North is included in our Performance Improvement Solutions segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector. As of the report date, the Company is still evaluating the impact of the True North acquisition on our reporting units.

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 income before income taxes:

GSE is a world leaderleading provider of professional and technical engineering, staffing services, and simulation software to clients in real-time high-fidelity simulation, providing a wide range of simulation, training, and engineering solutions to the global power and process industries. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that systematically help clients fill key vacancies in the organization on a short-term basis, primarily in procedures, engineering, technical support, and training professionals focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries.

This report and the documents incorporated by reference herein contain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on management's assumptions, expectations and projections about us, and the industry within which we operate, and that have been made pursuant to the Private Securities Litigation Reform Act of 1995 reflecting our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate", "believe", "continue", "estimate", "intend", "may", "plan", "potential", "predict", "expect", "should", "will" and similar expressions, or the negative of these terms or other comparable terminology, have been used to identify these forward-looking statements. These forward-looking statements may also use different phrases. These statements regarding our expectations reflect our current beliefs and are based on information currently available to us. Accordingly, these statements by their nature are subject to risks and uncertainties, including those listed under Item 1A - Risk Factors in our most recent annual report on Form 10-K, which could cause our actual growth, results, performance and business prospects and opportunities to differ from those expressed in, or implied by, these forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Except as otherwise required by federal securities law, we are not obligated to update or revise these forward looking statements to reflect new events or circumstances. We caution you that a variety of factors, including but not limited to the factors described under Item 1A - Risk Factors in our most recent annual report on Form 10-K, could cause our business conditions and results to differ materially from what is contained in forward-looking statements.

Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected.  Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in Item 1A - Risk Factors in our most recent annual report on Form 10-K in connection with any forward-looking statements that may be made by us. You should not place undue reliance on any forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.

We operate through two reportable business segments: Performance Improvement Solutions and Nuclear Industry Training and Consulting. Each segment focuses on delivering solutions to customers within our targeted 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.  The following is a description of our business segments:

Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, as well as engineering 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 we serve: primarily nuclear and fossil fuel power generation, as well as the process industries. Our 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.

Our objective is to provide a powerful technology-enabled engineering software and trainingtraining/consulting services platform forfocused primarily on the nuclear power industry. We offer our differentiated suite of products and services to adjacent markets such as fossil power and the 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) seek acquisitions to accelerate our overall growth in a manner that is complementary to our core business and (2) 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.services. To accomplish this, we will pursue the following activities:

Initiatives such as these will broaden our scope and enable us to engage more deeply with the segments we serve. Recently, weWe 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 EnVisionEnVision™ 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.industry including launching a new cloud-based training platform, EnVision™ Learning On-Demand, that significantly extends the capabilities of its industry leading EnVision™ tutorials and simulations. 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.

We intend to continue to make prudentpragmatic and measured 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, at lower cost of ownership than any alternative available to customers. 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.

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 effectivecost-effective manner. For example, we believe partnerships with Value Added Resellers (VAR) could significantly expand our sales pipeline for the EnVisionEnVision™ software suite. In 2016, we entered into a reseller agreement with an entity in the Middle East that has an established track record of success selling simulation and workforce development solutions to the process industries throughout the region. Such VARs may yield positive results for our pursuit of international nuclear opportunities globally (see industry trends below). We may explore the creation of appropriate joint ventures to target nuclear new-build and maintenance programs in key growth regions.

Employees.  As of June 30, 2017,2018, we had approximately 278467 employees, which includes approximately 187195 in our Performance Improvement segment and 91272 in our Nuclear Industry Training and Consulting segment.  In addition, we have approximately 100 licensed engineers and other advanced degreed professionals. 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 June 30, 2017,2018, we had approximately $68.6$68.1 million of total gross revenue backlog, which included $57.4$43.6 million of Performance Improvement Solutions backlog and $11.2$24.5 million of Nuclear Industry Training and Consulting backlog. Most of our contracts range from nine 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.

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 first time, a high-fidelity simulator allows designers to see the interaction between systems for the very first time. With our combination of simulation technology and expert engineering, GSE was chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale, and mPower.NuScale.

Examples of the types of simulators we sell include, but are not limited to, the following:

We bring together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high fidelityhigh-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 Absolute and Hyperspring.

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