UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)   
 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended March 31, 20182019
 
    
  or 
    
 
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the transition period from ____ to ____
 

Commission File Number 001-14785
 
GSE Systems, Inc.
(Exact name of registrant as specified in its charter)

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)

Registrant's telephone number, including area code:  (410) 970-7800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ]   No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes [ X ]   No [   ]

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.

Large accelerated filer 
Accelerated filer 
Non-accelerated filer
Smaller reporting company
 
Emerging growth company ☐
 (Do not check if a smaller reporting company) 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12(b)-2 of the Exchange Act).    Yes  [  ]  No [X]

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)
Name of each exchange on which registered
Common Stock, $.001 Par ValueGVPThe NASDAQ Capital Market


There were 19,636,97319,996,304 shares of common stock, with a par value of $0.01 per share outstanding as of April 30, 2018.
2019.


GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX

   PAGE
PART I. FINANCIAL INFORMATION23
Item 1. Financial Statements: 
  Consolidated Balance Sheets as of March 31, 20182019 (unaudited) and December 31, 2017201823
  Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2018,2019, and March 31, 2017201834
  Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018,2019, and March 31, 2017201845
  Unaudited Consolidated Statement of Changes in Stockholders'Stockholders’ Equity for the Three Months Ended March 31, 2019, and March 31, 201856
  Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 20182019 and March 31, 2017201867
  Notes to Consolidated Financial Statements78
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations2523
Item 3. Quantitative and Qualitative Disclosures About Market Risk3831
Item 4. Controls and Procedures3831
    
PART II. OTHER INFORMATION3932
Item 1. Legal Proceedings3932
Item 1A. Risk Factors3932
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds3932
Item 3. Defaults Upon Senior Securities3932
Item 4. Mine Safety Disclosures3932
Item 5. Other Information3932
Item 6. Exhibits3932
  SIGNATURES4033


12
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

March 31, 2018 December 31, 2017 March 31, 2019  December 31, 2018 
(unaudited)   (unaudited)    
ASSETSASSETSASSETS 
Current assets:           
Cash and cash equivalents$11,763 $19,111 $11,346  $12,123 
Restricted cash 647  960
Contract receivables, net 18,757  13,997  18,636   21,077 
Prepaid expenses and other current assets 2,680  2,795  1,953   1,800 
Total current assets 33,847  36,863  31,935   35,000 
             
Equipment, software, and leasehold improvements 5,102  4,782  5,516   5,293 
Accumulated depreciation (3,828)  (3,719)  (4,320)  (4,228)
Equipment, software, and leasehold improvements, net 1,274  1,063  1,196   1,065 
             
Software development costs, net 677  690  596   615 
Goodwill 8,431  8,431  16,709   13,170 
Intangible assets, net 2,456  2,604  8,999   6,080 
Deferred tax assets 6,336  7,167  7,589   5,461 
Operating lease - right of use assets, net  4,331   - 
Other assets 37  37  69   49 
Total assets$53,058 $56,855 $71,424  $61,440 
             
LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:             
Current portion of long-term debt, net of debt issuance costs and original issue discount $4,763  $1,902 
Accounts payable$557 $1,251  1,573   1,307 
Accrued expenses 3,523  2,276  1,577   2,646 
Accrued compensation 2,975  2,866  2,702   3,649 
Billings in excess of revenue earned 12,592  14,543  7,511   10,609 
Accrued warranty 1,186  1,433  1,123   981 
Contingent consideration -  1,701
Income taxes payable  1,382   1,176 
Other current liabilities 1,410  1,182  1,148   60 
Total current liabilities 22,243  25,252  21,779   22,330 
             
Long-term debt, less current portion, net of debt issuance costs and original issue discount  17,341   6,610 
Operating lease liabilities  3,703   - 
Other liabilities 1,453  1,931  1,333   1,371 
Total liabilities 23,696  27,183  44,156   30,311 
        
Commitments and contingencies             
             
Stockholders' equity:             
Preferred stock $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding -  -  -   - 
Common stock $0.01 par value, 30,000,000 shares authorized, 21,215,884 and 21,024,395 shares issued and 19,616,973 and 19,425,484 shares outstanding in 2018 and 2017 212  210
Common stock $0.01 par value; 60,000,000 shares authorized, 21,595,215 shares issued, 19,996,304 shares outstanding as of March 31, 2019; 60,000,000 shares authorized, 21,485,445 shares issued, 19,886,534 shares outstanding as of December 31, 2018  216   214 
Additional paid-in capital 77,376  76,802  78,578   78,118 
Accumulated deficit (43,711)  (42,870)  (46,805)  (42,569)
Accumulated other comprehensive loss (1,516)  (1,471)  
(1,722
)
  (1,635)
Treasury stock at cost, 1,598,911 shares in 2018 and 2017 (2,999)  (2,999)
Treasury stock at cost, 1,598,911 shares on March 31, 2019 and December 31, 2018  (2,999)  (2,999)
Total stockholders' equity 29,362  29,672  27,268   31,129 
Total liabilities and stockholders' equity$53,058 $56,855 $71,424  $61,440 

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


3
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)

  
Three months ended
March 31,
 
  2019  2018 
       
Revenue $22,194  $22,895 
Cost of revenue  
17,458
   17,997 
Gross profit  4,736   4,898 
         
Operating expenses:        
Selling, general and administrative  4,423   4,527 
Research and development  240   329 
Restructuring charges  -   917 
Loss on impairment  5,464   - 
Depreciation  91   103 
Amortization of definite-lived intangible assets  509   150 
Total operating expenses  10,727   6,026 
         
Operating loss  (5,991)  (1,128)
         
Interest (expense) income, net  (208)  22 
Gain (loss) on derivative instruments, net  93   (156)
Other income, net  22   25 
Loss before income taxes  (6,084)  (1,237)
         
(Benefit) provision for income taxes  (1,848)  259 
Net loss $(4,236) $(1,496)
         
         
Basic loss per common share $(0.21) $(0.08)
         
Diluted loss per common share $(0.21) $(0.08)
         
Weighted average shares outstanding - Basic  19,950,746   19,514,385 
         
Weighted average shares outstanding - Diluted  19,950,746   19,514,385 

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

24

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

 
Three months ended
March 31,
  2018 2017
      
Revenue$22,895 $16,342
Cost of revenue 17,997  12,220
Gross profit 4,898  4,122
      
Operating expenses:     
Selling, general and administrative 4,527  3,592
Research and development 329  402
Restructuring charges 917  45
Depreciation 103  76
Amortization of definite-lived intangible assets 150  64
Total operating expenses 6,026  4,179
      
Operating loss (1,128)  (57)
      
Interest income, net 22  27
Loss on derivative instruments, net (156)  (160)
Other income (expense), net 25  (3)
Loss before income taxes (1,237)  (193)
      
Provision for income taxes 259  73
Net loss$(1,496) $(266)
      
      
Basic loss per common share$(0.08) $(0.01)
      
Diluted loss per common share$(0.08) $(0.01)

The accompanying notes are an integral part of these consolidated financial statements.
3


GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)

Three months ended
March 31,
Three months ended
March 31,
 
2018 20172019 2018 
Net loss$(1,496) $(266) $(4,236) $(1,496)
Foreign currency translation adjustment (45)  93
Cumulative translation adjustment  (87)  (45)
Comprehensive loss$(1,541) $(173) $(4,323) $(1,541)

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


45


GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other Comprehensive
Loss
 
Treasury
Stock
 Total 
Common
Stock
         
Treasury
Stock
   
Shares  Amount Shares Amount  Shares  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated
Other Comprehensive
Loss
  Shares  Amount  Total 
Balance, January 1, 2018 21,024 $210 $76,802 $(42,870) $(1,471) (1,599) $(2,999) $29,672
Cumulative effect of adopting ASC 606 -  - - 655 - - - 655
Balance, January 1, 2019  21,485  $214  $78,118  $(42,569) $(1,635)  (1,599) $(2,999) $31,129 
                                
Stock-based compensation expense -  - 595 - - - - 595  -   -   570   -   -   -   -   570 
Common stock issued for options exercised 110  1 56 - - - - 57  2   1   41   -   -   -   -   42 
Common stock issued for RSUs vested 82  1 (1) - - - - -  108   1   (1)  -   -   -   -   - 
Vested RSU shares withheld to pay taxes -  - (76) - - - - (76)
Shares withheld to pay taxes  -   -   (150)  -   -   -   -   (150)
Foreign currency translation adjustment -  - - - (45) - - (45)  -   -   -   -   (87)  -   -   (87)
Net loss -  -  -  (1,496)  - -  -  (1,496)  -   -   -   (4,236)  -   -   -   (4,236)
Balance, March 31, 2018 21,216 $212 $77,376 $(43,711) $(1,516) (1,599) $(2,999) $29,362
Balance, March 31, 2019  21,595  $216  $78,578  $(46,805) $(1,722)  (1,599) $(2,999) $27,268 

 
Common
Stock
         
Treasury
Stock
   
  Shares  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated
Other Comprehensive
Loss
  Shares  Amount  Total 
Balance, January 1, 2018  21,024  $210  $76,802  $(42,870) $(1,471)  (1,599) $(2,999) $29,672 
                                 
Cumulative effect of adopting ASC 606  -   -   -   655   -   -   -   655 
Stock-based compensation expense  -   -   595   -   -   -   -   595 
Common stock issued for options exercised  110   1   56   -   -   -   -   57 
Common stock issued for RSUs vested  82   1   (1)  -   -   -   -   - 
Vested RSU shares withheld to pay taxes  -   -   (76)  -   -   -   -   (76)
Foreign currency translation adjustment  -   -   -   -   (45)  -   -   (45)
Net loss  -   -   -   (1,496)  -   -   -   (1,496)
Balance, March 31, 2018  21,216  $212  $77,376  $(43,711) $(1,516)  (1,599) $(2,999) $29,362 

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

56

GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Three months ended
March 31,
 
Three months ended
March 31,
 
2018 2017 2019  2018 
Cash flows from operating activities:           
Net loss$(1,496) $(266) $(4,236) $(1,496)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:     
Adjustments to reconcile net loss to net cash used in operating activities:        
Loss on impairment  5,464   - 
Depreciation 103  76  91   103 
Amortization of definite-lived intangible assets 150  64  509   150 
Amortization of capitalized software development costs 118  117  129   118 
Change in fair value of contingent consideration  (1,200)  - 
Stock-based compensation expense 627  596  597   627 
Loss on derivative instruments, net 156  160
(Gain) loss on derivative instruments, net  (93)  156 
Deferred income taxes (90)  -  (2,128)  (90)
Changes in assets and liabilities:             
Contract receivables, net (4,683)  4,937  5,388   (4,683)
Prepaid expenses and other assets (12)  (523)  439   (12)
Accounts payable, accrued compensation, and accrued expenses 647  (1,184)  (2,446)  647 
Billings in excess of revenue earned (1,127)  (3,279)  (3,185)  (1,127)
Accrued warranty (75)  67  62   (75)
Other liabilities 154  325  23   154 
Cash (used in) provided by operating activities (5,528)  1,090
Cash used in operating activities  (586)  (5,528)
             
Cash flows from investing activities:             
Capital expenditures (318)  (44)  (11)  (318)
Capitalized software development costs (105)  (29)  (110)  (105)
Acquisition of DP Engineering, net of cash acquired  (13,521)  - 
Cash used in investing activities (423)  (73)  (13,642)  (423)
             
Cash flows from financing activities:             
Proceeds from issuance of long-term debt  14,263   - 
Repayment of long-term debt  (671)  - 
Proceeds from issuance of common stock on the exercise of stock options 57  62  42   57 
Contingent consideration payments to Hyperspring, LLC (1,701)  (597)
RSUs withheld to pay taxes (76)  (672)
Cash used in financing activities (1,720)  (1,207)
Contingent consideration payments to former owners of Hyperspring, LLC  -   (1,701)
Shares withheld to pay taxes  (150)  (76)
Cash provided by (used in) financing activities  13,484   (1,720)
             
Effect of exchange rate changes on cash 10  68  (33)  10 
Net decrease in cash, cash equivalents and restricted cash (7,661)  (122)  (777)  (7,661)
Cash, cash equivalents, and restricted cash, beginning balance 20,071  22,887  12,123   20,071 
Cash, cash equivalents, and restricted cash, ending balance$12,410 $22,765 $11,346  $12,410 
             
             
Cash and cash equivalents, beginning balance$19,111 $21,747
Restricted cash, beginning balance 960  1,140
Cash, cash equivalents, and restricted cash, beginning balance$20,071 $22,887
     
Cash and cash equivalents, ending balance$11,763 $21,625
Restricted cash, ending balance 647  1,140
Cash, cash equivalents, and restricted cash, ending balance$12,410 $22,765


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

67

GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.Summary of Significant Accounting Policies

Basis of Presentation

GSE is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the power and process industries. References in this report to “GSE,” the “Company,” “we” and “our” are to GSE Systems and its subsidiaries, collectively.
The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the Company, GSE, we, us, or 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) have been condensed or omitted.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2018 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.
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, 2017,2018, filed with the Securities and Exchange Commission on March 16, 2018.

The Company has two reportable segments as follows:

●Performance Improvement Solutions (approximately 43% of revenue)

Our Performance Improvement Solutions segment primarily encompasses our technical engineering and power plant high-fidelity simulation 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 (approximately 57% of revenue)

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 Hyperspring 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. GSE and its predecessors have been providing these services since 1997.

Financial information about the two business segments is provided in Note 18 of the accompanying condensed consolidated financial statements.

27, 2019.
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'sCompany’s most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired including impairment test, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock basedstock-based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.

7
Revenue recognition

The Company derives its revenue through three 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 mainly through the Performance Improvement Solutions segment and the training and consulting service contracts through both the Performance Improvement Solutions ("Performance") segment and Nuclear Industry Training and Consulting ("NITC")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 period, as PCS is deemed as a stand-ready obligation.

In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. 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.

The SDB contracts generally provide a one to two-yearone-year base warranty on the systems. The base warranty will not be accounted for as a separate performance obligation under the contract because it does not provide the customer with a service in addition to the assurance that the completed project complies with agreed-upon specifications. Warranties extended beyond our typical two-yearone-year period will be evaluated on a case by case basis to determine if it provides more than just assurance that the product operates as intended, which requires carve-out as a separate performance obligation.

Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer.  Revenue from the sale of subscription-based standalone software licenses, which do not require significant modification or customization, is recognized upon itsratably over the term of such licenses following delivery to the customer.  Delivery is considered to have occurred when the customer receives a copy of the software and is 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 a software license sale contract is typically fixed, and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue is recognized when the installation and training is completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.

The contracts within the training and consulting services revenue stream are primarilyeither time and materials (T&M) based or fixed-price based. Under a typical 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 perby type of work, as well as approved expenses incurred. The customersCustomers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (ASC) 606-10-55-18,Revenue from contracts with customers, we elected to apply the "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 a typical fixed-price contract, we recognize the revenue using the completed contract method as we are not able to reasonably estimate costs to complete and contracts typically have a term of less than one month.

For contracts with multiple performance obligations, we allocate the contract price to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.

8
2.Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In May 2014,February 2016, the Financial Accounting Standards Board (FASB)("FASB") issued Accounting Standards Update (ASU)Updates ("ASU") No. 2014-09,2016-02, Leases (Topic 842), Revenue from Contracts with Customers (ASU 2014-09), which provides guidancea new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for revenue recognition. Subsequently,those leases classified as operating leases under current U.S. GAAP. Under the FASB issued a seriesstandard, disclosures are required to meet the objective of updatesenabling users of financial statements to assess 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 2014-09 is effective for the fiscal year ending December 31, 2018 and interim periods therein.

We adopted ASU 2014-09 and all the related updates (collectively, the new revenue standard) on January 1, 2018 using the modified retrospective transition method. The new revenue standard was applicable to (1) all new contracts entered into after January 1, 2018 and (ii) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment of $0.7 million to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

This adoption primarily affected our software license sales with multiple deliverables, which typically include the following elements: license, installation and training services and PCS. Under the legacy revenue recognition standard, due to the lack of vendor specific objective evidence (VSOE), revenue was recognized ratably over the PCS period. Under the new revenue standard, the total transaction price is allocated to the identified performance obligations based on their relative standalone selling prices, and revenue is recognized as the performance obligations are satisfied.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 is as follows (in thousands):

  
Balance at January 1, 2018
  As Reported Adoption of ASC 606 As Adjusted
Contract receivables, net $13,997 $(10) $13,987
Deferred tax assets  7,167  (241)  6,926
Billings in excess of revenue earned  14,543  (906)  13,637
Accumulated deficit  (42,870)  655  (42,215)

The impact of adoption on our consolidated statement of operations and balance sheet was as follows (in thousands):

Income Statement
  For the three months ended March 31, 2018
  As Reported Balance without adoption of ASC 606 Effect of Change
Revenue $22,895 $22,852 $43
Gross profit  4,898  4,855  43
Provision for income taxes  259  231  (28)
Net loss  (1,496)  (1,511)  15

Balance Sheet
  March 31, 2018
  As Reported Balance without adoption of ASC 606 Effect of Change
Contract receivables, net $18,757 $18,874 $(117)
Deferred tax assets  6,336  6,605  (269)
Billings in excess of revenue earned  12,592  13,648  (1,056)
Accumulated deficit  (43,711)  (44,381)  670
9

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash 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. ASU 2016-15 was effective for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. We adopted ASU 2016-15 on January 1, 2018, on a retrospective basis. Upon the adoption of ASU 2016-15, cash payments made to settle a contingent consideration liability from an acquisition in excess of the amount recognized at the acquisition date are classified as operating activities, which were previously presented as financing activities. The comparative statement of cash flows has been restated to include only the payments made to settle the contingent liability related to the original amount recognized at the acquisition date in the financing activities; previously, the payment of $254,000 related to fair value adjustment and interest accretion of the contingent liability was included in financing activities.

In November 2016, the 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 January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the definition of a Business, which amends the definition of a business. ASU 2017-01 was effective for acquisitions commencing on or after December 15, 2017, with early adoption permitted. We adopted ASU 2017-01 effective January 1, 2018. ASU 2017-01 will be applied prospectively to acquisitions commencing on or after the effective date.

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 those annual periods, beginning after December 15, 2017. We adopted ASU 2017-09 effective January 1, 2018, on a prospective basis. The adoption of this standard did not have a significant impact to our financial statements or financial statement disclosures.

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Accounting pronouncements not yet adopted

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.leases. 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 comparativeapplicable period presented in the consolidated financial statements, with certain practical expedients available. We are still evaluating the impact of the pending adoption of

The Company adopted the new standard using the modified retrospective approach effective on January 1, 2019. The Company's adoption included lease codification improvements that were issued by the FASB through March 2019.

The FASB made available several practical expedients in adopting the new lease accounting guidance. The Company elected the package of practical expedients permitted under the transition guidance within the amended guidance, which among other things, allowed registrants to carry forward historical lease classification. The Company elected the practical expedient that allows the combination of both lease and non-lease components as a single component and account for it as a lease for all classes of underlying assets. The Company elected not to apply the new guidance to short term leases with an initial term of twelve months or less. The Company recognizes those lease payments in the consolidated financial statements and we expect that, upon adoption,of operations on a straight-line basis over the lease term. The Company elected to use a single discount rate for a portfolio of leases with reasonably similar characteristics.

The most significant impact was the recognition of ROU assets and related lease liabilities could be material.for operating leases on the consolidated balance sheets. The Company recognized ROU assets and related lease liabilities of $2.7 million and $3.0 million respectively, related to operating lease commitments, as of January 1, 2019. The operating lease ROU asset represents the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The new guidance did not have a material impact on the Company's cash flows or results of operations. See Note 17 of the consolidated financial statements.

Accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other 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 may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Company's consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (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.

3.Basic and Diluted Loss per Common Share

Basic loss per share is based on thecomputed by dividing net loss by weighted average number of outstanding shares of common sharesstocks outstanding for the period. Diluted net loss per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised.exercised and restricted stock units ("RSU") were vested, unless the impact of potential dilutive common shares outstanding has an anti-dilutive impact on diluted net loss per share. Since we experienced a net loss for both periods presented, basic and diluted net loss per share are the same. As such, diluted loss per share for the three months ended March 31, 2019 and 2018 excludes the impact of potentially dilutive common shares related to the exercise of outstanding stock options and the vesting of RSUs since those shares would have an anti-dilutive effect on loss per share.

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

(in thousands, except for share amounts) Three months ended Three months ended 
 March 31, March 31, 
 2018 2017 2019  2018 
Numerator:            
Net loss $(1,496) $(266) $(4,236) $(1,496)
              
Denominator:              
Weighted-average shares outstanding for basic loss per share  19,514,385  19,094,382  19,950,746   19,514,385 
              
Effect of dilutive securities:              
Stock options and restricted stock units  -  -  -   - 
              
Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share  19,514,385  19,094,382  19,950,746   19,514,385 
              
Shares related to dilutive securities excluded because inclusion would be anti-dilutive  763,200  564,833  237,834   763,200 

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4.Acquisitions
2019 Acquisition

DP Engineering
On September 20, 2017, GSE,February 15, 2019, through its wholly-owned subsidiary GSE Performance Solutions, Inc. (Performance Solutions)the Company entered into a membership interest purchase agreement with Steven L. Pellerin, Christopher A. Davenport, and DP Engineering (the “DP Engineering Purchase Agreement”), acquiredto purchase 100% of the capital stock of Absolute Consulting, Inc. (Absolute)membership interests in DP Engineering for $8.8 million pursuant to the Stock Purchase Agreement by and among Performance Solutions and the sellers of Absolute.$13.5 million. The purchase price wasis subject to a customary pre- and post-closing working capital adjustment resultingadjustments plus an additional earn-out amount not to exceed $5 million, potentially payable in total consideration2020 and 2021 depending on DP Engineering’s satisfaction of $9.5 million. certain targets for adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") in calendar years 2019 and 2020, respectively.  The acquisition was completed through the drawdown of $14.3 million (including transaction costs) of the term loan. An indemnification escrow of $1.0approximately $1.7 million was funded fromat the cash paid to the sellersclosing and is available to GSE and Performance Solutions to satisfy indemnification claims until September 20, 2019. The acquisition of Absolute was completed on an all-cash transaction basis.for 18 months after the closing.

AbsoluteDP Engineering is a provider of value-added technical engineering solutions and consulting and staffing solutionsservices to the global nuclear power industry.plants with an emphasis on preparation and implementation of design modifications during plant outages, which is in line with our Performance  segment.  Located in Navarre, Florida, Absolute has established long-term relationships with blue-chip customers primarily inFort Worth, Texas, DP Engineering is well-regarded as a leading service provider to the nuclear power industry.industry, having been designated an “engineer of choice” by two large power generation companies.  The Company's allocation of the purchase price remains preliminary and the net assets are subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.
Based on preliminary forecasted adjusted EBITDA of Absolute is expected to strengthenDP Engineering for year 2019 and 2020, as of the Company's global leadership in nuclear training and consulting solutions, add new capacities to our technical consulting and staffing solutions offerings and bring highly complementary customers, while deepening relationships with existing clients.acquisition date, the estimated fair value of the total earn-out amount was $1.2 million.
The following table summarizes the calculation of adjusted purchase price as of the acquisition date (in thousands):
Base purchase price per agreement $13,500 
Pre closing working capital adjustment  155 
Fair value of contingent consideration  1,200 
Total purchase price $14,855 

The following table summarizes the consideration paid to acquire AbsoluteDP Engineering and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction.

(in thousands) 
   
Total purchase price$9,521
   
Purchase price allocation:  
Cash$455
Contract receivables 5,121
Prepaid expenses and other current assets 68
Property, and equipment, net 184
Intangible assets 2,569
Accounts payable, accrued expenses, and other liabilities (78)
Accrued compensation (1,617)
Total identifiable net assets 6,702
Goodwill 2,819
Net assets acquired$9,521


The goodwill is primarily attributable Due to the additional capacitiesrecent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to offer broader solutionsvarious assets and liabilities, including, but not limited to, newcontract receivables, prepaid expenses and existing customersother current assets, intangible assets, accounts payable, accrued expenses, contingent consideration, accrued compensation and the expected enhanced cost and growth synergies as a resultresidual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the acquisition. The total amount"Acquisition of goodwill that is expected to be tax deductible is $2.8 million. AllDP Engineering, net of the $2.8 million of goodwill was assigned to our Nuclear Industry Training and Consulting segment.cash acquired" line caption.
(in thousands)
Total purchase price $14,855 
 Purchase price allocation:    
Cash  134 
Contract receivables  2,934 
Prepaid expenses and other current assets  209 
Property, and equipment, net  210 
Intangible assets  6,798 
Other assets  1,806 
Accounts payable and accrued expenses  (1,375)
Other liabilities  (1,494)
 Total identifiable net assets  9,222 
 Goodwill  5,633 
 Net assets acquired $14,855 

The fair value of the assets acquired includes gross trade receivables of $5.1$2.9 million, of which was collectedthe Company expects to collect in full after acquisition.full. GSE did not acquire any other class of receivable as a result of the acquisition of Absolute.DP Engineering.
DP Engineering contributed revenue of $1.6 million to GSE for the period from February 15, 2019 to March 31, 2019.
The goodwill is primarily attributable to value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modification during plant outages, and the workforce of the acquired business and the significant synergies expected to arise after the acquisition of DP Engineering. The total amount of goodwill is expected to be tax deductible. All of the $5.6 million of goodwill was assigned to our Performance segment. As discussed above, the goodwill amount is provisional pending receipt of the final valuations of various assets and liabilities and is subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.
The Company identified other intangible assets of $6.8 million, including customer contracts and relationships, tradename, and non-compete agreements, with amortization periods of five to fifteen years. Please see Note 9 for further analysis on the carrying amount change due to impairment on goodwill and definite-lived intangible assets at March 31, 2019.
The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related weighted average amortization period:
Intangible Assets Weighted average amortization period  Fair Value 
  (in years)  (in thousands) 
Customer relationships  15  $4,898 
Tradename  10   1,172 
Non-compete agreements  5   728 
Total     $6,798 

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2018 Acquisition
True North
On May 11, 2018, GSE, through its wholly-owned subsidiary Performance Solutions, entered into a membership interest purchase agreement with Donald R. Horn, Jenny C. Horn, and True North Consulting LLC (the "True North Purchase Agreement") to purchase 100% of the membership interests in True North Consulting LLC (True North) for $9.75 million. The purchase price was subject to customary pre- and post-closing working capital adjustments, resulting in total consideration of $9.9 million. The True North Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions subject to certain limitations. An escrow of $1.5 million was funded from the cash paid to the sellers of True North at the closing and is available to GSE to promote retention of key personnel and satisfy indemnification claims for 18 months after the closing. The acquisition of True North was completed on an all-cash transaction basis. In connection with the acquisition, we issued a $10.3 million term loan to finance the transaction (including the transaction costs). See note 14, for further details of the loan.
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. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complementary talent pool to our employee base.
The following table summarizes the consideration paid to acquire True North and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. The Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, accrued compensation and the residual amount allocated to goodwill.

(in thousands)

Total purchase price $9,915 
     
 Purchase price allocation:    
Cash  306 
Contract receivables  1,870 
Prepaid expenses and other current assets  8 
Property, and equipment, net  1 
Intangible assets  5,088 
Accounts payable, accrued expenses  (1,744)
Accrued compensation  (353)
 Total identifiable net assets  5,176 
 Goodwill  4,739 
 Net assets acquired $9,915 

The fair value of the assets acquired includes gross trade receivables of $1.9 million, of which the Company has collected in full as of March 31, 2019. GSE did not acquire any other class of receivable as a result of the acquisition of True North.

The goodwill is primarily attributable to a broader engineering service offering to new and existing customers, the workforce of the acquired business and the significant synergies expected to arise after the acquisition of True North. The total amount of goodwill is expected to be tax deductible. All of the $4.7 million of goodwill was assigned to our Performance segment. The Company is still evaluating the impact of the True North acquisition on our reporting units. As discussed above, the goodwill amount is provisional pending receipt of the final valuations of various assets and liabilities.

The Company identified $2.6 million of other intangible assets of $5.1 million, including customer relationships, tradename, non-compete agreements, and trademarks/names,alliance agreements, with amortization periods of threefour to 10fifteen years. The fair value of the intangible assets is provisional pending receipt of the final valuations for these assets.

The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related weighted average amortization period:

Intangible Assets  Weighted average amortization period  Fair Value Weighted average amortization period  Fair Value 
  (in years)  (in thousands) (in years)  (in thousands) 
Customer relationships 10 $1,856  15  $3,758 
Trademarks/Names 3  713
Tradename  10   582 
Non-compete agreements  4   221 
Alliance agreements  5   527 
Total   $2,569     $5,088 

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for GSE, True North, and DP Engineering as if the business combinations had occurred on January 1, 2018.

 Three months ended March 31, 
 2019 2018 
Revenue $25,178  $29,889 
Net loss  (3,451)  (3,629)

The pro forma financial information for all periods presented has been calculated after applying GSE's accounting policies and has also included pro forma adjustments resulting from these acquisitions, including amortization charges of the intangible assets identified from these acquisitions, interest expenses related to the financing transaction in connection with the acquisition of DP Engineering, and the related tax effects as if aforementioned companies were combined as of January 1, 2018.

For the three months ended March 31, 2019, the Company has incurred $0.6 million of transaction costs related to the acquisition of DP Engineering. Due to a triggering event occurred after the acquisition as depicted in Note 9, an impairment test was conducted, which resulted in substantially writing down the estimated fair value of goodwill and definite-lived intangible assets initially recognized upon the acquisition. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma loss for the three months ended March 31, 2019, in the table above.
The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 1, 2018, nor is it intended to be an indication of future operating results.

1211
5.
5.Restructuring Activities

On December 27, 2017, the board of GSE Systems Inc. approved an international restructuring plan to streamline and optimize the Company's global operations. Beginning in December 2017, GSE has been in the process of consolidating its engineering services and R&D activities to Maryland and ceasing an unprofitable non-core business in the U.K.United Kingdom (UK). As a result, the Company will be closingclosed its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improve Company productivity by eliminating duplicate employee functions, and increasing GSE's focus on its core business, improving efficiency and maintaining the full range of engineering capabilities while reducing costs and organizational complexity.
GSE expects to eliminateeliminated approximately 40 positions since 2017 due to these changes, primarily in Europe and India, and will undertake other cost-savings measures. The restructuring plan is expected to be completed in 2018.by the end of 2019. As a result of these efforts, GSE expects to record a total restructuring charge of approximately $1.8$2.2 million, primarily related to workforce reductions, contract termination costs and asset write-offs due to the exit activities. As of March 31, 2018,2019, we had recorded atotal restructuring chargecharges totaling $2.0 million since 2017. We incurred no costs during the three months ended March 31, 2019. We recognized $1.3 million of restructuring cost for the year ended December 31, 2018. In addition to the total recognized restructuring costs, the Company has an estimated $1.7 million. The amounts to be transferred frommillion of cumulative translation adjustments that will be charged against net loss and included in determining net income for the period, in which thean estimated $1.0 million of tax benefits that will be realized upon liquidation of these foreign entities are completed, are not included in the estimated total amount of restructuring charge. We expectentities. GSE expects to recordrecognize the remaining chargesrestructuring costs, currency translation adjustments and the translation adjustmentstax benefits by the end of 2018.2019.

The following tables summarizeFor the restructuring costs and restructuring liabilities:

(in thousands)
  March 31, 2018
  Total Expected Costs Costs Incurred to Date Expected Costs Remaining
Employee termination benefits $736 $729 $7
Lease termination costs  555  519  36
Assets write-offs/impairment  222  222  -
Other restructuring costs  272  180  92
Total Restructuring costs $1,785 $1,650 $135

The restructuring coststhree months ended March 31, 2019,  we made payments related to our Performance Improvement Solutions segment and are included inrestructuring for employee termination benefits for the consolidated statementamount of operations within the "Restructuring charges" line caption.

  Employee termination benefits Lease termination costs Other Restructuring costs Total
Balance as of January 1, 2018 $465 $- $33 $498
Accruals  264  519  134  917
Payments  (406)  -  (5)  (411)
Currency translation and other adjustments  1  119  -  120
Balance as of March 31, 2018 $324 $638 $162 $1,124

$52,000 that have been previously accrued. The accrued employee termination benefits were included in "accrued compensation" line,, and the accrued lease termination costs and other restructuring costs were included in "accrued expenses" in the consolidated balance sheets.
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6.Contingent Consideration

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, Business 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.

AsUpon the acquisition of DecemberDP Engineering on February 15, 2019, the Company recognized the estimated fair value of contingent consideration for $1.2 million. At March 31, 2017,2019, due to a triggering event as depicted in Note 9, an impairment test was conducted on DP Engineering's goodwill and definite-lived intangible assets and determined $1.2 million of fair value of contingent consideration recognized upon acquisition of DP Engineering has reduced to zero due to the triggering event as depicted in Note 9. There was no contingent liability outstanding as of March 31, 2019.

During the three months ended March 31, 2018, the Company made payment of $1.7 million to pay off the remaining contingent consideration, related to ourthe acquisition of Hyperspring in 2014 was $1.7 million, all of which was paid in January 2018.2014. There was no contingent liability as of March 31, 2018.

7.Contract Receivables

Contract receivables represent the Company's unconditional rights to considerationsconsideration due from a broad base of both domestic and international customers. All contract receivables are considered to be collectible within twelve months.

The components of contract receivables are as follows:

(in thousands)March 31, December 31, March 31,  December 31, 
2018 2017 2019  2018 
           
Billed receivables$10,823 $8,154 $10,205  $15,998 
Unbilled receivables 8,071  5,980  8,859   5,506 
Allowance for doubtful accounts (137)  (137)  (428)  (427)
Total contract receivables, net$18,757 $13,997 $18,636  $21,077 

Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce our receivables to their net realizable value when it is probable that the Company will not be able to collect all amounts according to the contractual terms of the receivable. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, specific identification and review of customer accounts. During the three months ended March 31, 2019 and 2018, the Company did not record any allowances for doubtful accounts. The minor fluctuation on the balance of allowances for doubtful accounts was due to foreign currency exchange rate.

During April 2018,2019, the Company invoiced $2.8$6.2 million of the unbilled amounts related to the balance at March 31, 2018.2019.

As of March 31, 20182019, the Company had two customers that accounted for 18.7% and 20.2% of its consolidated contract receivables, respectively. As of December 31, 2017,2018, the Company had one customer that accounted for 25.8% and 26.7%, respectively,16.8% of its consolidated contract receivables.
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8.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(in thousands)March 31, December 31,
 2018 2017
      
Inventory$733 $755
Income taxes receivable 363  418
Prepaid expenses 628  549
Other current assets 956  1,073
Total prepaid expenses and other current assets$2,680 $2,795

At March 31, 2018 and December 31, 2017, prepaid expenses and other current assets are comprised primarily of inventory and 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 net realizable value in accordance with ASC 330, Inventory. Other current assets primarily includes value-added tax receivables and cash deposited in a Swedish tax account.
9.Software Development Costs, Net

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 approximately $105,000$110,000 and $29,000$105,000 for the three months ended March 31, 20182019 and 2017,2018, respectively.  Total amortization expense was approximately $118,000$129,000 and $117,000$118,000 for the three months ended March 31, 20182019 and 2017,2018, respectively.

12
10.9.Goodwill and Intangible Assets

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

Goodwill
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 and Absolute).

On February 15, 2019, we acquired DP Engineering (as depicted in Note 4) and preliminarily recorded goodwill and identified intangible assets as part of the acquisition. On February 23, 2019, an unexpected event occurred at one of DP Engineering's significant customers and all pending work for that customer was suspended pending a root cause analysis on February 28, 2019. While that analysis is now complete, and virtually all of the suspended projects have been restarted, the customer has indicated that DP Engineering will be suspended from obtaining new projects for up to six months from the date of original notice of suspension or approximately September 2019. While the Company and DP Engineering are working to rehabilitate the customer relationship, the Company determined that the notice of suspension was a triggering event necessitating an interim goodwill impairment test.
On May 10, 2019, the Company determined that a material impairment had occurred, requiring an interim assessment for impairment to be completed related to both $5.6 million of goodwill recorded and $6.8 million of definite-lived intangible assets in the acquisition.
The impairment test was based on income based approach with discounted cash flow method and market based approach with guideline public company method and merger and acquisition method.
The preliminary result of the interim impairment testing indicated that the current estimated fair value of goodwill recorded from the acquisition of DP Engineering had declined below its initial estimated fair value at the acquisition date. As a result, the Company recognized an impairment charge of $2.1 million to write down the goodwill on DP Engineering. The fair value of goodwill recognized from the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment based upon the preliminary purchase price allocation. The Company determined that the impact of the suspension of obtaining new contracts from that customer resulted in a material downward revision to DP Engineering's revenue and profitability forecasts when compared to the acquisition date valuation. The impairment charge on goodwill was recorded within "Loss on impairment" in our consolidated statements of operations.
Changes in the net carrying amount of goodwill from December 31, 2018 through March 31, 2018, and December 31, 2017, goodwill of $8.4 million related2019 were due to the Nuclear Industry Trainingacquisition of DP Engineering, and Consulting segment. No events or circumstances occurred duringwere comprised of the current reporting period that would indicate impairment of such goodwill.following items:
(in thousands)
  Performance Improvement Solutions  Nuclear Industry Training and Consulting  Total 
Balance, January 1, 2019 $4,739  $8,431  $13,170 
Acquisition  5,633   -   5,633 
Dispositions  -   -   - 
Goodwill impairment loss  (2,094)  -   (2,094)
Balance, March 31, 2019 $8,278  $8,431  $16,709 

Intangible Assets Subject to Amortization
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 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

As discussed in Note 4, Acquisitions, we recognized definite-lived intangible assets of $6.8 million upon acquisition of DP Engineering on February 15, 2019, including customer contracts and relationships, trademarks and non-compete agreements, with amortization periods of five to fifteen years. Amortization of our definite-lived intangible assets is recognized on a straight-line basis over the estimate useful life of the associated assets.
As described above, following a February 23, 2019 event occurred at a customer location and subsequent receipt of a suspension notice on February 28, 2019, the Company has concluded that DP Engineering's relationship with a significant customer has been adversely impacted. The DP Engineering customer contracts and relationships were no indicationsthe major definite-lived intangible assets that were recognized upon the acquisition of DP Engineering. Accordingly, the Company determined that, in addition to the above describe testing of a potential impairment of goodwill, an interim definite-lived intangible asset impairment test was also necessary.
Therefore, the impairment test of the definite-lived intangible assets duringrecognized upon the acquisition of DP Engineering was also conducted.
The interim impairment test was based on the present value of revised cash flow projected for five to fifteen years. The result of the impairment test indicated that the current reporting period.estimated fair value of noted definite-lived intangible assets had declined below their initial estimated fair value. As a result, the Company recognized an impairment charge of $3.4 million. The fair value of definite-lived intangible assets recognized upon the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment according to purchase price allocation. The impairment charge of $3.4 million on definite-lived intangible assets were recorded within "Loss on impairment" in our consolidated statements of operations.

1513
Changes in the gross carrying amount, accumulated amortization, addition and impairment of definite-lived intangible assets from December 31, 2018 through March 31, 2019 was comprised of the following items:

(in thousands)
  For the Three Months Ended March 31, 2019 
  Beginning Gross  Accumulated  Addition  Impairment  Net 
  Carrying Amount  Amortization          
Amortized intangible assets:               
Customer relationships $6,831  $(2,745) $4,898  $(3,370) $5,614 
Trade names  1,295   (405)  1,172   -   2,062 
Developed technology  471   (471)          - 
Non-contractual customer relationships  433   (433)          - 
Noncompete agreement  221   (61)  728   -   888 
Alliance agreement  527   (92)          435 
Others  167   (167)          - 
Total $9,945  $(4,374) $6,798  $(3,370) $8,999 

(in thousands) As of December 31, 2018 
  Gross Carrying Amount  Accumulated Amortization  
Net
 
Amortized intangible assets:
         
Customer relationships $6,831  $(2,375) $4,456 
Trade names  1,295   (318)  977 
Developed technology  471   (471)  - 
Non-contractual customer relationships  433   (433)  - 
Noncompete agreement  221   (35)  186 
Alliance agreement  527   (66)  461 
Others  167   (167)  - 
Total $9,945  $(3,865) $6,080 

Amortization expense related to definite-lived intangible assets totaled $0.5 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years:
(in thousands)   
Years ended December 31:   
2019 (remainder) $1,536 
2020  1,973 
2021  1,470 
2022  1,152 
2023  868 
Thereafter  2,000 
Total $8,999 

14
11.10.Fair Value of Financial Instruments

ASC 820, Fair Value 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.

The Monte Carlo model was used to calculate the fair value of level 2 instrument liability award. The inputs used are current stock price, expected term, risk-free rate, number of trials, volatility and interest rates.
Level 3:  inputs are unobservable and reflect the reporting entity'sentity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The contingent consideration was based on EBITDA.
At March 31, 2018,2019, and December 31, 2017,2018, 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 of March 31, 2019, the Company had four standby letters of credit totaling $1.9 million which represent performance bonds on three contracts.
For the three months ended March 31, 2018,2019, 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 March 31, 2018.2019.

The following table presents assets and liabilities measured at fair value at March 31, 2018:2019:

(in thousands)
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
                       
Money market funds$2,780 $- $- $2,780 $825  $-  $-  $825 
Foreign exchange contracts -  83  -  83  -   145   -   145 
Total assets$2,780 $83 $- $2,863 $825  $145  $-  $970 
                           
Liability awards -  (272)  -  (272) $-  $(232) $-  $(232)
Interest rate swap contract  -   (128)  -   (128)
Total liabilities$- $(272) $- $(272) $-  $(360) $-  $(360)
                

Money market funds at both March 31, 20182019 and December 31, 20172018 are included in cash and cash equivalents in the respective consolidated balance sheets.
16

The following table presents assets and liabilities measured at fair value at December 31, 2017:2018:

(in thousands)
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
                   
Money market funds$3,240 $- $- $3,240 $824  $-  $-  $824 
Foreign exchange contracts -  201  -  201  -   43   -   43 
Total assets$3,240 $201 $- $3,441 $824  $43  $-  $867 
                           
Liability awards -  (242)  -  (242) $-  $(118) $-  $(118)
Contingent consideration -  -  (1,701)  (1,701)
Interest rate swap contract  -   (103)  0   (103)
Total liabilities$- $(242) $(1,701) $(1,943) $-  $(221) $0  $(221)
                

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the three months ended March 31, 2018:2019:

(in thousands) 
   
Balance, January 1, 2018$1,701
Payments made on contingent liabilities (1,701)
Change in fair value -
Balance, March 31, 2018$-
(in thousands)
Balance, January 1, 2019$-
Issuance of contingent consideration in connection with acquisitions1,200
Change in fair value(1,200)
Balance, March 31, 2019$-

1715

12.11.Derivative Instruments

In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We may seek to control a portion of these risks through a risk management program that includes the use of derivative instruments.

Foreign Currency Risk Management

The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates and minimize credit exposure by limiting counterparties to nationally recognized financial institutions.

As of March 31, 2018,2019, the Company had foreign exchange contracts outstanding of approximately 162.53.2 million Japanese Yen and 0.2 million Australian Dollars at fixed rates.Euro. The contracts expire on various dates through December 2018.2020. At December 31, 2017,2018, the Company had contracts outstanding of approximately 162.53.2 million Japanese Yen, 24,000 Euro and 0.2 million Australian Dollars at fixed rates.

Interest Rate Risk Management

As discussed in Note 13, the Company entered into a term loan to finance the acquisition of True North in May 2018. The loan 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. As part of our overall risk management policies, in June 2018, the Company entered into a pay-fixed, receive-floating interest rate swap contract with a notional amount of $9.0 million to reduce the impact associated with interest rate fluctuations. The notional value amortizes monthly in equal amounts based on the five-year principal repayment terms. The terms of the swap require the Company to pay interest on the basis of a fixed rate of 3.02%, and the Company will receive interest on the basis of one-month USD-LIBOR-BBA-Bloomberg.

The Company reports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the derivative’s fair value. The estimated net fair values of the derivative contracts on the consolidated balance sheets are as follows:

  March 31,  December 31, 
(in thousands) 2019  2018 
Prepaid expenses and other current assets      
Foreign exchange contracts $145  $43 
Total asset derivatives  145   43 
         
Other liabilities        
Interest rate swaps  (128)  (103)
Total liability derivatives  (128)  (103)
         
Net fair value $17  $(60)

The Company has not designated the foreign exchangederivative contracts as hedges and recorded the estimated net fair values of the contracts on the consolidated balance sheets as follows:

 March 31, December 31,
(in thousands)2018 2017
      
Asset derivatives     
Prepaid expenses and other current assets$83 $201
Net fair value$83 $201

hedges. The changes in the fair value of the foreign exchangederivative contracts are included in lossgain (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 months ended March 31, 20182019 and 2017,2018, the Company recognized a net lossgain (loss) on its derivative instruments as outlined below:

 
Three months ended
March 31,
 
Three months ended
March 31,
 
(in thousands) 2018 2017 2019  2018 
      
Interest rate swap - change in fair value $(26) $- 
Foreign exchange contracts - change in fair value $(118) $(86)  102   (118)
Remeasurement of related contract receivables,
and billings in excess of revenue earned
  (38)  (74)  17   (38)
Loss on derivative instruments, net $(156) $(160)
Gain (loss) on derivative instruments, net $93  $(156)

1816


13.12.Stock-Based Compensation

The Company recognizes stock-based compensation expense for all equity-based awards issued to employees, directors and non-employees that are expected to vest. Stock-based compensation expense is based on the fair value of awards as of the grant date.  The Company recognized $595,000$570,000 and $614,000$595,000 of stock-based compensation expense related to equity awards for the three months ended March 31, 20182019 and 2017,2018, respectively, under the fair value method. In addition to the stock-based compensation expense recognized, the Company also recognized $32,000$27,000 and $(18,000)$32,000 of expense related to the change in the fair value of cash-settled restricted stock units (RSUs) during the three months ended March 31, 20182019 and 2017,2018, respectively.

During the three months ended March 31, 2019, the Company granted approximately three hundred thousand time-vesting RSUs to employees with an aggregate fair value of $0.8 million. During the three months ended March 31, 2018, the Company granted 210,092 time-basedapproximately two hundred thousand time-vesting RSUs to employees with an aggregate fair value of $682,799. During the three months ended March 31, 2017, the Company granted 223,802 time-based RSUs to employees with an aggregate fair value of $783,000.$0.7 million. A portion of the time-basedtime-vesting RSUs vest quarterly in equal amounts over the course of eight quarters and the remainder vest annually in equal amounts over the course of three years. The fair value of the time-basedtime-vesting RSUs is expensed ratably over the requisite service period, which ranges from one to three years.

The Company's 1995 long-term incentive program (LTIP) provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and other Company employees. Vesting of the performance-vesting restricted stock units (PRSU's) is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during designated performance period as established by the Compensation Committee of the Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are  expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.
During the three months ended March 31, 2019, the Company granted approximately three hundred fifty thousand performance-vesting RSUs to employees with an aggregate fair value of $0.9 million. During three months ended March 31, 2018, and 2017, the Company did not grant performance-based RSUs orany performance-vesting RSUs. The Company did not any grant stock options.options for the three months ended March 31, 2019 and 2018.

14.13.Debt

Line of Credit

Citizens Bank

The Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs. Working capital advances bear interest of one-month LIBOR plus 2.25% per annumneeds, including acquisitions. On May 11, 2018, GSE  entered into an Amended and letter ofRestated 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. Thefacility between the Company isand 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.

The maximum availability under the RLOC is subject to a borrowing base, equalincluding a letter of credit sub-facility, and (b) a $25.0 million delayed draw term loan facility available to 80%be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Company. The credit facilities mature in five years and bear interest at one-month LIBOR plus a margin that varies depending on the overall leverage ratio of eligible accounts receivable,the Company and is reducedits subsidiaries. Revolving loans are interest-only with principal due at maturity, while term loans require monthly payments of principal and interest based on an amortization schedule. The Company's obligations under the Credit Agreement are guaranteed by the Company's wholly-owned subsidiaries. The credit facilities are secured by liens on all assets of the Company. Attendant to the Company's acquisition of DP Engineering, the Company and the Bank entered into a Third Amendment and Reaffirmation Agreement and a Fourth Amendment and Reaffirmation Agreement on February 15, 2019 and March 20, 2019, respectively.

RLOC

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 March 31, 2018,2019, there were no outstanding borrowings onunder the RLOC and twofour letters of credit totaling $0.7$1.9 million. The amount available at March 31, 2018,2019, after consideration of the borrowing base, letters of credit and working capital advances was approximately $4.3$3.1 million.

Term Loan

As discussed in Note 4, we acquired DP Engineering on February 15, 2019 for approximately $13.5 million in cash. The credit facility agreement ispurchase price was subject to standardcustomary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5.0 million potentially payable in 2020 and 2021. We drew down $14.3 million to finance the acquisition of DP Engineering. The loan bears interest at the 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.

As discussed in Note 4, we also acquired True North on May 11, 2018 for approximately $9.75 million in cash.  The purchase price was subject to customary pre and post-closing working capital adjustments. 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 loan bears interest at the 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.

The outstanding long-term debt under the delayed draw term loan facility was as follows:

(in thousands) March 31, 2019  December 31, 2018 
Long-term debt, net of discount $22,104  $8,512 
Less: current portion of long-term debt  (4,763)  1,902 
Long-term debt, less current portion $17,341  $6,610 

The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and reporting requirements.restrict the Company's 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 March 31, 2018,2019, the Company was in compliance with its financial covenants.

BB&T Bank

At March 31, 2018, the Company had two letters of credit with BB&T totaling $0.6 million, which have expired and are pending release by the bank and customer.  At March 31, 2018 and December 31, 2017, the cash collateral account with BB&T totaled $0.6 million and $1.0 million, respectively. The balances were classified as restricted cash on the consolidated balance sheets.
1917

15.14.Product Warranty

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 SDB contracts generally provide a one to two-yearone-year base warranty on 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$1.1 million, while the remaining $0.7$0.6 million is classified as long-term within other liabilities. The activity in the accrued warranty accounts is as follows:

(in thousands)    
    
Balance, January 1, 2018$1,953
Balance, January 1, 2019 $1,621 
Current period provision 28  89 
Current period claims (103)  (27)
Currency adjustment 5  2 
Balance at March 31, 2018$1,883
Balance at March 31, 2019 $1,685 

16.15.Revenue

We generate revenue primarily through three broad revenue streams: 1) SDB, 2) Software, and 3) Training and Consulting Services. We recognize revenue from SDB and software contracts mainly through the Performance Improvement Solutions segment and the training and consulting service contracts through both the Performance Improvement Solutions segment and Nuclear Industry Training and Consulting segment.

The following table represents a disaggregation of revenue by type of goods or services for the three months ended March 31, 20182019 and 2017,2018, along with the reportable segment for each category:

(in thousands)
 Three Months Ended March 31,
  2018 
2017(1)
Performance Improvement Solutions      
System Design and Build $7,495 $7,319
Software  869  456
Training and Consulting Services  1,537  1,895
       
Nuclear Industry Training and Consulting      
Training and Consulting Services  12,994  6,672
       
Total revenue $22,895 $16,342
(in thousands)
  Three months ended March 31, 
  2019  2018 
Performance Improvement Solutions segment      
System Design and Build $6,442  $7,495 
Software  749   869 
Training and Consulting Services  4,999   1,537 
         
Nuclear Industry Training and Consulting segment        
Training and Consulting Services  10,004   12,994 
Total revenue $22,194  $22,895 

(1) Prior period amounts have not been adjusted under the modified retrospective transition method for the adoption of ASC 606.
SDB contracts are typically fixed-priced, and we receive payments based on a billing schedule as established in our contracts. The transaction price for software contracts is generally fixed. Fees for software are normally due in advance of or shortly after delivery of the software. Fees for PCS are normally paid in advance of the service period. For Training and Consulting Services, the customers are generally billed on a regular basis, such as weekly, biweekly or monthly, for services provided. Contract liability, which we classify as billing in excess of revenue earned, relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied.

The following table reflects the balance of contract liabilities and the revenue recognized in the reporting period that was included in the contract liabilities from contracts with customers:

(in thousands)
 March 31, 2018 December 31, 2017 March 31, 2019  December 31, 2018 
Billings in excess of revenue earned (BIE) $12,592 $14,543 $7,511  $10,609 
Revenue recognized in the period from amounts included in BIE at the beginning of the period $5,115  N/A $5,040   11,275 

20

For an SDB contract, we generally have two main performance obligations: the training simulator build and PCS. The training simulator build generally includes hardware, software, and labor. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method. In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. 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.

For the three months ended March 31, 2018,2019, the Company did not recognize significantrecognized revenue of $0.8 million related to performance obligations satisfied in previous periods.

As of March 31, 2018,2019, the aggregate amount of transaction price allocated to the remaining performance obligations of SDB, software and Softwarefixed-price training and consulting services contracts is $35.6$33.7 million. The Company will recognize the revenue as the performance obligations are satisfied, which is expected to occur over the next 12 months.

Training and consulting services contracts are primarily T&M based. Under a typical 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. As part of our adoption of ASU 2014-09, we have elected to use the optional exemption under ASC 606-10-50-14(b), pursuant to which we have excluded disclosures of transaction prices allocated to remaining performance obligations under such contracts and when we expect to recognize the revenue.
18

17.16.Income Taxes

The following table presents the (benefit) provision for income taxes and the effective tax rates:

  
Three months ended
March 31,
($ in thousands) 2018 2017
       
Provision for income taxes $259 $73
Effective tax rate  (20.9%)  (37.8%)
(in thousands) Three months ended March 31, 
  2019 2018 
(Benefit) provision for income taxes $(1,848) $259 
Effective tax rate  30.4%  (20.9)%

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 2019 is comprised mainly of the tax impact of the loss for impairment, federal income tax expense, foreign income tax expense, and state tax expense. Tax expense in 2018 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.expense.

21
Our effective tax rate was (20.9%)30.4% for the three months ended March 31, 2018. The2019. For the three months ended March 31, 2019, the difference inbetween our effective tax rate of 30.4% and the U.S. statutory federal income tax rate of 21% was primarily due to permanent differences, accruals related to uncertain tax positions for certain U.S. and foreign tax contingencies, a change in valuation allowance in our China subsidiary, discrete item adjustments for the U.S. and foreign taxes, including the tax impact of the loss for impairment, and the excess book deduction related to stock options and restricted stock units that were exercised or vested during the quarter. For the three months ended March 31, 2018, the difference between the effective tax rate of (20.9)% and the U.S. statutory federal income tax rate of 21% was primarily due to our China subsidiary which had a taxable income for the three months ended March 31, 2018 and the accruals related to uncertain tax positions for certain foreign tax contingencies.

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 19972000 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 20142015 forward for China, and 2015 forward for both India, and 2016 forward for 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 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 India, Swedish and U.K. net deferred assets as of March 31, 2018.2019.  The Company has determined that it will continue to assess a valuation allowance on its China deferred tax asset related to transfer pricing. 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, China, and India.U.S.

17.Leases

The Company maintains leases of office facilities and equipment. Leases generally have remaining terms of one year to six years, whereas leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The Company recognizes lease expense for minimum lease payments on a straight-line basis over the taxterm of the lease. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on GILTIthe nature of each lease, with renewal periods generally ranging from one year to five years. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disruption to operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease.
Upon the adoption of the new lease standard ASU 2016-02, on January 1, 2019, the Company elected the package of practical expedients permitted under the transition guidance within the amended guidance, which among other things, allowed registrants to carry forward historical lease classification. Accordingly, all existing leases that were classified as operating leases by the Company historically, were classified as operating leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets represent the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The Company's real estate leases, which are comprised primarily of office spaces, represent a period costmajority of the lease liability. The majority of our lease payments are fixed, although an immaterial portion of payments are variable in the period the tax is incurred. Under this policy, we have not provided deferred taxesnature. Variable lease payments vary based on changes in facts and circumstances related to temporary differences that upon their reversal will affect the amountuse of income subject to GILTIthe ROU and are recorded as incurred. The Company uses an incremental borrowing rate based on rates available at commencement in determining the period.

present value of future payments.
The Company has made an entity classification (CTB) election to treat GSE UKlease agreements with lease and non-lease components, which are accounted for as a disregarded entity effective Januarysingle lease component. The Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Lease contracts are evaluated at inception to determine whether they contain a lease, where the Company obtains the right to control an identified asset. The following table summarizes the classification of operating ROU assets and lease liabilities on the consolidated balance sheets (in thousands):

Operating LeasesClassification March 31, 2019 
Leased Assets    
Operating lease - right of use assetsLong term assets $4,331 
      
Lease Liabilities     
Operating lease liabilities - CurrentOther current liabilities  1,088 
Operating lease liabilitiesLong term liabilities  3,703 
    $4,791 

The Company has entered into a sublease with a tenant to rent out 3,822 of square feet from the lease at its Sykesville office on April 1, 2018. Therefore,2017, with the exact same consideration as on the head lease. The sublease does not relieve the Company of January 1, 2018, GSE UK is treatedits primary lease obligation. The lessor agreement was an operating lease historically. The Company does not recognize underlying assets for the sublease as a branchlessor of the US for tax purposes. Accordingly, GSE UK's 2018 first quarter activity has been includedoperating lease. The net amount received from the sublease is recorded within selling, general and administrative expenses.

The table below summarizes the lease income and expenses recorded in the US Company's income tax provision.consolidated statement of operations incurred during the three months ended March 31, 2019, (in thousands):

Lease CostClassification Three Months Ended March 31, 2019 
Operating lease cost (1)
Selling, general and administrative expenses $228 
Short-term leases costs (2)
Selling, general and administrative expenses  38 
Sublease income (3)
Selling, general and administrative expenses  (16)
Net lease cost  $250 

(1) Includes variable lease costs which are immaterial.
(2) Include leases maturity less than twelve months from the report date.
(3)Sublease portfolio consists of the sublease part of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

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The future minimum lease payments under non-cancellable operating leases are reflected below. This table also reflects the reconciliation of the undiscounted cash flows to the discounted operating lease liabilities as recognized at March 31, 2019 consolidated balance sheets (in thousands):

  Operating Leases 
2019 $986 
2020  1,246 
2021  1,216 
2022  1,157 
2023  622 
After 2023  107 
Total lease payments $5,334 
Less: Interest  543 
Present value of lease payments $4,791 

The Company has calculated the weighted-average remaining lease term, presented in years below, and the weighted-average discount rate for our operating leases. As noted in our lease accounting policy, the Company uses the incremental borrowing rate as the lease discount rate.

Lease Term and Discount RateThree Months Ended March 31, 2019
Weighted-average remaining lease term (years)
         Operating leases4.44
Weighted-average discount rate
         Operating leases5%

The table below sets out the classification of lease payments in the consolidated statement of cash flows. The right-of-use assets obtained in exchange for operating lease liabilities represent new operating  leases obtained through business combination during the three months ended March 31, 2019.

(in thousands)

Other Information Three Months Ended March 31, 2019 
 - Operating cash flows used in operating leases $235 
Cash paid for amounts included in measurement of liabilities  235 
     
Right-of-use assets obtained in exchange for new operating liabilities $1,777 

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18.Segment Information

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 engineering services include, but not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for ASME code and ASME Section XI. The Company provides these services through GSE, True North and DP Engineering across all market segments. 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.services. Contract terms are typically less than two years.

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

On February 15, 2019, through our wholly-owned subsidiary GSE Performance Solutions, Inc., the Company entered into the DP Engineering Purchase Agreement, to purchase 100% of the membership interests in DP Engineering. DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages.  Located in Fort Worth, Texas, DP Engineering is well-regarded as a leading service provider to the nuclear power industry, having been designated an “engineer of choice” by two large power generation companies.   For reporting purposes, DP Engineering is included in our Performance segment due to similarities in services provided including engineering solutions and implementation of design modifications to nuclear power sector.

On May 11, 2018, GSE, through our wholly-owned subsidiary GSE Performance Solutions, Inc., 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 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 segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector.
Due to the impairment described in Note 9 related to DP Engineering, we recognized charges totaling $5.5 million related to the impairment of certain definite-lived intangible assets and goodwill in our Performance segment.
Our primary measure of segment performance as shown in the table below excluded loss on impairment of intangible and goodwill, and the change in fair value of contingent consideration, net, which we do not believe are representative of the ongoing operations of the Performance segment. Excluding this discrete item from our segment measure of performance allows for better period over period comparison.

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 before income taxes:taxes. Inter-segment revenue is eliminated in consolidation and is not significant:

(in thousands)Three months ended Three months ended 
March 31, March 31, 
2018 2017 2019  2018 
Revenue:           
Performance Improvement Solutions$9,901 $9,670 $12,190  $9,901 
Nuclear Industry Training and Consulting 12,994  6,672  
10,004
   12,994 
$22,895 $16,342 $22,194  $22,895 
             
Operating income:     
Operating loss:        
Performance Improvement Solutions$(790) $(110) $(802) $(790)
Nuclear Industry Training and Consulting (338)  307  (925)  (338)
Loss on impairment  (5,464)  - 
Change in fair value of contingent consideration, net -  (254)  1,200   - 
Operating loss (1,128)  (57)  (5,991)  (1,128)
             
Interest income, net 22  27
Loss on derivative instruments, net (156)  (160)
Other income (expense), net 25  (3)
Interest (expense) income, net  (208)  22 
Gain (loss) on derivative instruments, net  93   (156)
Other income, net  22   25 
Loss before income taxes$(1,237) $(193) $(6,084) $(1,237)
        

Effective January 2018, and due to
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19.Non-consolidated Variable Interest Entity
The Company, through its wholly owned subsidiary DP Engineering, effectively holds 48% membership interest in DP-NXA Consultants LLC (DP-NXA) upon the acquisition of Absolute,DP Engineering on February 15, 2019.
DP-NXA was established to provide in industrial services that include civil, structural, architectural, electrical, fire protection, plumbing, mechanical consulting engineering services to customers. DP-NXA sub-contracts their work to its two owners, NXA Consultants LLC (NXA), which owns 52% of the Performance Improvement Solutions allocated corporate overheadentity, and DP Engineering. DP Engineering and NXA contributed $48 and $52, respectively, for 48% and 52% interest in DP-NXA. DP Engineering recorded the contributed cash as an equity investment.
Upon the acquisition of DP Engineering, the Company evaluated the nature of DP Engineering's investment in DP-NXA and determined that DP-NXA is a variable interest entity (“VIE”). The Company does not have the power to direct activities that most significantly impact DP-NXA, and therefore, cannot be DP-NXA’s primary beneficiary. Furthermore, the Company concluded that it did not hold a controlling financial interest in DP-NXA since NXA, the VIE's majority owner, makes all operation and business decisions. As a result, the Company did not consolidate the assets and liabilities of the VIE in our financial statements.
The Company's maximum exposure to loss is limited to the Nuclear Industry Training and Consulting segment. Forinvestment in the three months endedVIE. As of March 31, 20182019, the Company has not made any additional contributions to DP-NXA and 2017,its maximum exposure to loss relating to this unconsolidated VIE was immaterial. As of March 31, 2019, the Company does not have existing guarantee in relation to DP-NXA and any third-party it contracted with.
The Company will reevaluate if DP-NXA meets the definition of a totalVIE upon specific reconsideration of $1.2 millionevents.
The following table presents the carrying amount and $0.6 millionclassification of corporate overhead, respectively, was allocatedthe assets related to Nuclear Industry Trainingthe Company’s variable interests in non-consolidated VIE and Consulting segment. Prior period amounts were reclassifiedthe maximum exposure to reflect the change.loss at March 31, 2019.
(In thousands)
 March 31, 2019 
Assets   
Cash:   
Checking account $155 
Total assets  155 
Liabilities    
Credit card and other payables  1 
Total liabilities  1 
Total net assets  154 
Maximum exposure to loss $154 

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19.Subsequent Events

On May 14, 2018, we announced that the Company acquired True North Consulting, LLC (True North) on May 11, 2018, a leading provider of specialty engineering solutions to the nuclear power industry. Founded in 1999 in Montrose, Colorado, True North generated revenue of approximately $11 million for the year ended December 31, 2017, of which over 85% came from the nuclear power industry. True North employs roughly 60 full-time and part-time professionals with expertise in areas such as in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, thermal performance, in-service inspection for specialty engineering including ASME Section XI and software solutions.

The Company acquired True North for approximately $9.8 million in cash, consisting of approximately $8.3 million paid at close and approximately $1.5 million held in escrow for indemnity and leadership retention purposes. The transaction closed on May 11, 2018. Due to the timing and complexity of the acquisition, the Company had not completed the purchase accounting for the acquisition on the report issuance date.

On May 11, 2018, the Company entered into an amended and restated credit agreement with Citizen's Bank, consisting of a five-year $5 million revolving line of credit and a five-year $25 million delayed draw term loan facility to fund acquisitions approved by the Lender. We drew down approximately $10.3 million to fund the acquisition of True North. Interest is based on a LIBOR spread of 200 to 275 basis points, depending on pre-defined leverage thresholds defined in the agreement.
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Item 2.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

GSE is a world leaderleading provider of professional and technical engineering, staffing services, and simulation software to clients in real-time high-fidelity simulation, and provides a wide range of simulation, consulting, 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 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.

On February 15, 2019, GSE acquired DP Engineering for $13.5 million (subject to pre- and post-closing working capital adjustments). DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages.  Located in Fort Worth, Texas, DP Engineering is well-regarded as a leading service provider to the nuclear power industry, having been designated an “engineer of choice” by two large power generation companies. The Company's allocation of the purchase price remains incomplete and the net assets are subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date. For reporting purposes, DP Engineering is included in our Performance segment due to similarities in services provided including engineering solutions and implementation of design modifications to the nuclear power sector.
Approximately one week following our acquisition of DP Engineering, an adverse event occurred at one of DP Engineering’s major customer's location that affected plant operations. In its initial analysis of the causes of that event, the customer identified a prior plant modification by DP Engineering as meriting further analysis. As is customary in the industry, pursuant to an Engineer of Choice agreement, the customer issued DP Engineering a Notice of Suspension while a root cause analysis was completed. We completed our root cause analysis and presented it to the customer on April 25, 2019. Following the initial analysis, the customer had DP Engineering restarted all existing work with the Company, however, the customer also informed DP Engineering that it was suspended from bidding new contracts for new work for up to six months. We believe this incident adversely impacted our relationship with the customer and the Company. As a result, DP Engineering has experienced a significant decline in new orders from this customer and are not able or permitted to bid on new work.  The Company determined this represented a triggering event requiring an interim assessment for impairment. As the result of impairment, we recognized the impairment charges of $2.1 million on goodwill and $3.4 million on definite-lived intangible assets related to the acquisition of DP Engineering. Due to the recentness of this acquisition, we have not finalized the allocation of our purchase price to the tangible and intangible assets of DP Engineering we purchased. As such, we may need to record additional expense once the purchase price allocation is final. As a result, on May 10, 2019, the Company determined that a material impairment had occurred, requiring an interim assessment for impairment to be completed.
On May 11, 2018, GSE acquired True North Consulting, LLC, now a wholly-owned subsidiary of GSE Performance Solutions, Inc., for $9.75 million (subject to customary pre- and post-closing working capital adjustments). 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. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services 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.

Cautionary Statement Regarding Forward-Looking Statements

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 lookingforward-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.


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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 customers within our targeted markets - primarily the power and process industries. Marketing and communications, accounting, finance, legal, human resources, corporate development, 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 business units collaborate to facilitate cross-selling and the development of new solutions. The following is a description of our business segments:

Performance Improvement Solutions (approximately 43%55% of revenue)

Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, engineering services for ASME programs, thermal performance optimization and plan design modifications, and interactive computer basedcomputer-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: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 engineering solutions include the following: (1) in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, and thermal performance; (2) in-service inspection for specialty engineering including ASME Section XI; (3) software solutions; and (4) mechanical design, civil/structural design, electrical, instrumentation and controls design, digital controls/cyber security, and fire protection for nuclear power plant design modifications.  Our True North and DP Engineering businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements.  GSE and its predecessors have been providing these engineering solutions and services since 1995.
On February 15, 2019, through its wholly-owned subsidiary GSE Performance Solutions, Inc., the Company entered into the DP Engineering Purchase Agreement, to purchase 100% of the membership interests in DP Engineering. For reporting purposes, DP Engineering is included in our Performance segment due to similarities in services provided including engineering solutions and implementation of design modifications to nuclear power sector.
On May 11, 2018, GSE, through GSE Performance Solutions, Inc., entered into the True North Purchase Agreement to purchase 100% of the membership interests in True North. 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.
Nuclear Industry Training and Consulting (approximately 57%45% of revenue)

Nuclear Industry Training and Consulting provides highly specialized, and skilled nuclear operations instructors, procedure writers, technical engineers, and other consultantsexpert-professionals 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 Hyperspring and the newly acquired Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate thisthe business line from the rest of the Company's product and service portfolio. GSE and its predecessors have been providing these training and consulting services since 1997.
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Business Strategy

Our objective is to providecreate a powerful technology-enabledleading specialty engineering, expert staffing and training/consulting servicestechnology delivery platform focused primarily on the nuclear power industry. We offer our differentiated suite of products and services to adjacent markets such as the fossil power and the process industries where our offerings are a natural fit, withdelivering a clear and compelling value proposition forto 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. To accomplish this objective, we will pursue the following activities:

Pursue roll-up acquisition strategy. We intend to complementhave complemented our organic growth strategy through selective acquisitions including, but not limited to, the following: technical engineering; training, staffing and consulting service businesses focused onfor the power industry, with a particular nuclear; value added components forfocus on nuclear power plants;power; and software utilized in the power industry, both domestic and international. We arehave been focusing our efforts on acquisitions that would enhance our existing portfolio of products and services, strengthen our relationships with our existing customers, and potentially expand our footprint to include new customers in our core served industries. We have made severalthree acquisitions since 20112017 and believe the opportunity exists to acquire more businesses that are complementary to ours, allowing us to accelerate our growth strategy.

In January 2011,February 2019, we acquired DP Engineering, a software company called EnVision Systems Inc., which provided interactive multi-media tutorialsspecialized provider of high-value engineering services and simulation models, primarilysolutions 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.nuclear power industry. In November 2014,May 2018, we acquired Hyperspring, which enabled GSETrue North, a leading provider of specialty engineering solutions to offer highly skilled nuclear operations and consulting personnel with unique know-how to our client base ofthe nuclear power plants. This deepened our relationship with existing clientsindustry and won business for us at new client sites in the nuclear industry. This acquisition has proven to be synergistic, enabling cross selling domestically, and in 2015, the expansion of these offerings to international customers for the first time. In September 2017, we acquired Absolute, a provider of technical consulting and staffing solutions to the global nuclear power industry, located in Navarre, Florida and on May 11, we acquired True North Consulting, LLC, a leading provider of specialty engineering solutions to the nuclear power industry, located in Montrose, Colorado.industry. The acquisitions of Absolute, and True North and DP Engineering are expected to strengthen the Company's global leadership in the nuclear services area. The acquisitions addadded new capabilities to the GSE solution offering and bring new highly complementary customers to GSE, while at the same time deepening GSE relationships with existing clients. TheThese acquisitions, together with our earlier acquisition of Absolute and True NorthHyperspring in November 2014, are a significant proof point of the thesis that GSE is a compelling platform for consolidating a fragmented vendor ecosystem for nuclear power. TheWe believe the acquisitions addsadd significant scale and focus to the business, while positioning GSE as a "go to" provider of technical and consulting solutions to the power industry, in particular nuclear power.

Expand our total addressable market. Our focus on growth means introducing product capabilities or new product and service 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 of our business segments whichthat may include, but not be limited to, the following: expanding our software product portfolio to the industries we serve withinclude 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; tailoring operational reporting and business intelligence solutions to address the unique need of our end user markets; and adding new services to broaden our market reach.

Initiatives such as these will broaden our scope and enable us to engage more deeply with the segments we serve.serve and adjacent segments. We have delivered a compelling solution, the GSE GPWRTM Generic Pressurized Water Reactor simulation technology, proving that our modeling technology can be sold in generic form 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 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 tothat meet the specific needs of customers such as U.S. government laboratories.

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Research and development (R&D). We invest in R&D 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 JADETM suite of simulation software, including industry leading JTOPMERET® and JElectricTM 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 OpenSimTM platforms enables customers to be more efficient in the daily operation of their simulators. We are bringing SimExec® and OpenSimTM together 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 pragmatic and measured investments in R&D that first and foremost are driven by the market and are complementary to advancingcomplement 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 anthat is easier to use, fashion, at lower total cost of ownership than any alternative available to customers. GSE has pioneered a number of industry standards over our lifetime and willintends to continue to be one of the most innovative companies in our industry.

Strengthen and develop our talent while delivering high-quality solutions. Our experienced employees and management team are our most valuable resources. Attracting, training, and retaining top talent is critical to our success. To achieve our talent goals, we intend to remain focused on providing our employees with entrepreneurial opportunities to increase client contact within their areas of expertise and to expand our business withinand deepen our service offerings. We will also continue to provide our employees with training, personal and professional growth opportunities, performance-based incentives including opportunities for stock ownership, bonuses and competitive benefits as benchmarked to our industry and locations.

Continue to deliver industry-recognized high-quality services. 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 exceptional expertise across multiple service sectors. We have received numerous industry certificates and awards including being recognizedover the years for outstanding workservice.
Cyber security. Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems, and maintenance of backup and protective systems), cyber security incidents, depending 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 softwaretheir nature and services to the nuclear industry, as evidenced by our marquee client base and significant market wins over the past years. A recently conducted survey of clients with projects underway and/or just delivered validates our brand with a Net Promoter Score of +72, 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)scope, could significantly expand our sales pipeline for the EnVision™ software suite. In 2016, we entered into a reseller agreement with an entitypotentially result in the Middle Eastmisappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that has an established track record of success selling simulationthird parties) and workforcethe disruption of business operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third parties, civil or regulatory liability for loss of sensitive or protected information such as personal data, incident response costs, diminution in the value of our investment in research, development solutions to the process industries throughout the region. Such VARs may yield positiveand engineering, loss of intellectual property, and increased cyber security protection and remediation costs, which in turn could adversely affect our competitiveness and 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 regions.operations.

Employees.  As of March 31, 2018,2019, we had approximately 447521 employees, which includes approximately 160286 in our Performance Improvement segment and 287approximately 235 in our Nuclear Industry Training and Consulting segment. 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 March 31, 2018,2019, we had approximately $72.4$68.9 million of total gross revenue backlog, which included $41.5$47.9 million of Performance Improvement Solutions backlog and $30.9$21.0 million of Nuclear Industry Training and Consulting backlog. 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.

2824
Products and Services

Performance Improvement Solutions

To assist our clients in creating world-class internal training and engineering improvement processes, we offer a set of integrated and scalable products and services whichthat provide a structured program focused on continuous skills improvement for experienced employees to engineering services, which includeincluding plant design verification and validation.validation, ASME code compliance, and design plant modification work. We provide the right solutions to solve our clients' most pressing needs.

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 achieveearn this confidence, 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 byfor 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 deployment of new technology, being deployed, often involving the integration of disparate technologies for the first time, a high-fidelity simulator allowsenables designers to seemodel the interaction between systems for the very first time.in advance of construction. 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.

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

●
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 360 such simulation models to clients consisting of major oil companies and educational institutions.

●
Part-Task Training Simulators: Like theour Universal Simulators, we provide other unique training solutions such as a generic nuclear plant simulator and VPanel® 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 available, and allow users to practice their own plant-specific procedures. Clients can safely practice startup, shutdown, and other normal operations, as well as response to abnormal events we all hope they never have to experience in real life. Since our inception, we have delivered over 480 plant-specific simulators to clients in the nuclear power, fossil power and process industries worldwide.

29
Nuclear Industry Training and Consulting

As our customers' experienced staff retire, access to experts that can help operate and train existing and new employees in how to operate their plants is essential to ensure safe ongoing plant operations. In addition, operating and training needs change over time and sometimes our clients require fixed priced discrete projects or specialized courses in contrast to straight staff augmentation. The industry needs operating personnel, including procedure writers, engineers, operators and instructors who can step in and use as well as update the client's operating methods, procedures, training material and more. Finding technical professionals and instructors, who know the subject, can perform the work or teach it to others and can adapt to the client's culture, is critical. GSE provides qualified professionals, instructors and turnkey projects/courses that work within the client's system and complement the operating or training methods they already have in place. Examples of our training program courses include senior reactor operator certification, generic fundamentals training, and simulation supervisor training. In addition, we also provide expert support through consulting or turnkey projects for procedure writing, technical engineers, project managers, training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability.

We bring 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 Absolute and Hyperspring.

30
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. Effective January 1, 2018, we adopted ASU 2014-09 which is the new revenue standard. The comparative period revenue has not been restated and continues to be reported under the accounting standards in effect for those periods.

(in thousands) Three months ended March 31,
  2018 % 2017 %
Revenue $22,895 100.0 % $16,342 100.0 %
Cost of revenue  17,997 78.6 %  12,220 74.8 %
           
Gross profit  4,898 21.4 %  4,122 25.2 %
Operating expenses:          
Selling, general and administrative  4,527 19.8 %  3,592 22.0 %
Research and development  329 1.4 %  402 2.4 %
Restructuring charges  917 4.0 %  45 0.3 %
Depreciation  103 0.4 %  76 0.5 %
Amortization of definite-lived intangible assets  150 0.7 %  64 0.4 %
Total operating expenses  6,026 26.3 %  4,179 25.6 %
           
Operating loss  (1,128) (4.9)%  (57) (0.4)%
           
Interest income, net  22 0.1 %  27 0.2 %
Loss on derivative instruments, net  (156) (0.7)%  (160) (1.0)%
Other income (expense), net  25 0.1%  (3) 0.0%
           
Loss before income taxes  (1,237) (5.4)%  (193) (1.2)%
           
Provision for income taxes  259 1.1 %  73 0.4 %
           
Net loss $(1,496) (6.5)% $(266) (1.6)%


3125
Results of Operations - three months ended March 31, 20182019 versus three months ended March 31, 20172018

Revenue.  Revenue for the three months ended March 31, 20182019 totaled $22.9$22.2 million, which was 40.1% greater3.1% less than the $16.3$22.9 million of revenue for the three months ended March 31, 2017.2018. The year over year increasedecrease in revenue was primarily driven by the respective increasesdue to decrease in the two segmentsNITC segment listed below:
(in thousands)Three months endedThree months ended 
March 31,
2018 2017March 31, 
     2019 2018 
Revenue:           
Performance Improvement Solutions$9,901 $9,670 $12,190  $9,901 
Nuclear Industry Training and Consulting 12,994  6,672  10,004   12,994 
Total revenue$22,895 $16,342 $22,194  $22,895 

Performance Improvement Solutions revenue increased 2.4%23.1% to $12.2 million for the three months ended March 31, 2019 from $9.9 million for the three months ended March 31, 2018 from $9.7 million for the three months ended March 31, 2017.2018. The change was mainly driven by an increase of $0.4$3.7 million due to more work performed for some major projects,acquisitions of TNC and DP Engineering, which was partially offset by a decrease of $0.2 million from international subsidiaries as a result of the winding down of our international subsidiaries.subsidiaries, and a decrease of $1.2 million in GSE Performance due to major project completion in first quarter of 2019. We recorded total Performance Improvement Solutions orders of $5.9$4.6 million and $4.9$5.9 million for the three months ended March 31, 20182019 and 2017,2018, respectively.

Nuclear Industry Training and Consulting revenue increased 94.8%decreased (23.0%) to $13.0$10.0 million for the three months ended March 31, 20182019 from $6.713.0 million for the three months ended March 31, 20172018.  The increasedecrease in sales was primarily attributeddue to the acquisition of Absolute, which contributed $7.4 million to the current period revenue. The increase was partially offset by a decrease of $1.1 million from Hyperspring due to lower demand for staff augmentation needssupport from two major customers. Nuclear Industry Training and Consulting orders totaled $18.8$9.8 million, with $9.7 million attributable to Absolute, and $14.9$18.8 million for the three months ended March 31, 20182019 and 2017,2018, respectively. In the first quarter of 2019, the Company has increased the business development team to grow sales and to make us more responsive to the needs of our new and existing customers.

At March 31, 2018,2019, backlog was $72.4$68.9 million: $41.5$47.9 million for the Performance Improvement Solutions segment and $30.9$21.0 million for Nuclear Industry Training and Consulting. At December 31, 2017,2018, the Company's backlog was $71.4$69.0 million: $46.3$47.8 million for the Performance Improvement Solutions segment and $25.1$21.2 million for Nuclear Industry Training and Consulting.

Gross profit. Gross profit was $4.9$4.7 million, or 21.4%21.3%, for the three months ended March 31, 2018,2019, compared to $4.1$4.9 million, or 25.2%21.4% for the same period in 2017.2018.

(in thousands)Three months endedThree months ended 
March 31,March 31, 
2018 % 2017 %2019  % 2018  % 
Gross profit:                     
Performance Improvement Solutions$3,251 32.8% $3,044 31.5% $3,699   30.3% $3,251   32.8%
Nuclear Industry Training and Consulting 1,647 12.7%  1,078 16.2%  1,037   10.4%  1,647   12.7%
Total gross profit$4,898 21.4% $4,122 25.2% $4,736   21.3% $4,898   21.4%
The increase in gross margin percentageprofit for Performance Improvement Solutions for the three months ended March 31, 20182019 as compared to the same period in 20172018 was mainly dueprimarily driven by the acquisitions of True North and DP Engineering as well as cost savings realized on certain large projects through percentage of  completion contracts, which were not expected to increased software sales which generally have a higher gross margin percentage than SDB sales.recur in the foreseeable future. For the three months ended March 31, 2019 and 2018, our revenue on training and 2017, our software salesconsulting services through T&M or fixed-price contracts accounted for 9%41% and 5%16% of the segment revenue, respectively.

The decrease in gross profit margin during 20182019 for Nuclear Industry Training and Consulting was primarily driven by lower margin from Hyperspring and Absolute projects. For the three months ended March 31, 2018, Absolute contributed 57.1% of the segment revenue with a gross profit margin of 11.2%.
32
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses totaled $4.5$4.4 million and $3.6$4.5 million for the three months ended March 31, 2019 and 2018, and 2017, respectively. FluctuationsSignificant changes in the components of SG&A spending were as follows:

($ in thousands)Three months ended Three months ended 
March 31, March 31, 
2018 % 2017 % 2019  %  2018  % 
Selling, general and administrative expenses:                     
Corporate charges$3,337 73.7% $2,442 68.0% $3,233   73.1% $3,337   73.7%
Business development expenses 918 20.3%  685 19.0%  944   21.3%  918   20.3%
Facility operation & maintenance (O&M) 271 6.0%  211 5.9%  245   5.6%  271   6.0%
Contingent consideration accretion - 0.0%  254 7.1%
Others 1 0.0%  - 0.0%  1   0.0%  1   0.0%
Total$4,527 100.0% $3,592 100.0% $4,423   100.0% $4,527   100.0%

Corporate charges increased $0.9decreased $(0.1) million due primarily to $1.0 million of additional general and administrative expenses relate to our acquisitions of True North and DP Engineering, $0.6 million of acquisition related expense,  offset by $0.5 million of savings as a result of our international restructuring plan along with other corporate cost saving initiatives and $1.2 million of decrease due to $0.3 millionchange on the fair value of higher bonus expense mainly due to a new post earnout bonus plan in 2018 for certain Hyperspring employees, $0.3 million of higher one-time professional fees associated with the adoption of the new revenue standard (ASC 606) and the impact of the Tax Cuts and Jobs Act and $0.2 million of general administrative expenses attributable to Absolute, which was acquired in September 2017.contingent consideration.

The increase in business development expenses was primarily due to the acquisition of Absolute.

Contingent consideration accretion mainly represented fair value adjustments of the contingent consideration liability related to our 2014 Hyperspring acquisition. The earnout period expired in November 2017, and the final payment was made in January 2018, therefore no contingent consideration adjustment was recorded for the current period.

Research and development.  Research and development costs consist primarily of software engineering personnel and other related costs.  Research and development costs, net of capitalized software, totaled $329,000$240,000 and $402,000$329,000 for the three months ended March 31, 20182019 and 2017,2018, respectively. Before capitalization of software development costs, research and development totaled $434,000$350,000 and $431,000$434,000 for three months ended March 31, 2019 and 2018, and 2017, respectively.

Restructuring charges. On December 27, 2017, theour Board of GSE Systems, Inc.Directors approved an international restructuring plan to streamline and optimize the Company'sour global operations and we announced weoperations. We expected restructuring charges to total $1.8$2.2 million, excluding any tax impacts and cumulative translation adjustments. We recorded $0.7 million in the fourth quarter of 2017. For the three months ended March 31, 2018,2019, we did not incur any restructuring charges totaled $0.9 million, including severance expense of $0.3 million, lease termination costs of $0.5 million and other costs of $0.1 million.charges. As of March 31, 2018,2019, we had recorded accumulatedincurred total restructuring charges of $1.7$2.0 million since 2017, and we expect to record the remaining restructuring charges of approximately $0.1$0.2 million bybefore the end of June 2018. These2019. The restructuring charges exclude cumulative translation adjustment losses of approximately $1.4$1.7 million, assuming currency rates at March 31, 2018, and2019, which will be recorded as a charge against net income upon liquidation of the respective foreign subsidiaries. We also expect to recognize tax benefits related to the liquidation of these subsidiaries that maywe anticipate will offset thea majority of the currency translation adjustment losses. Under the restructuring plan, the Company expects a total of $1.6 million cash outflow in 2018, which primarily includes severance expense, facility closing costs, and other restructuring costs. For the three months ended March 31, 2017,2019, the Company made payments related to our restructuring for employee termination benefits totaling $0.1 million that had been previously accrued for. For the three months ended March 31, 2018, we recorded restructuring charges of $45,000,$0.9 million, which represented true-up adjustments related to the restructuring plan initiated in 2015.

Depreciation. Depreciation expense totaled $103,000$91,000 and $76,000$103,000 for the three months ended March 31, 2019 and 2018, and 2017, respectively. The increase in 2018 was primarily attributable to our acquisition of Absolute.

26
Amortization of definite-lived intangible assets. AmortizationTotal amortization expense related to definite-lived intangible assets totaled $150,000$0.5 million and $64,000$0.2 million for the three months ended March 31, 2019, and 2018, and 2017, respectively. Amortization expense increased $118,000 due to our acquisition of Absolute. The increase in amortization was partially offset by lower amortization of customer-related intangible assets that were recorded when we acquired Hyperspring in 2014.
33

LossImpairment on goodwill and definite-lived intangible assets. Due to the interim impairment test performed on the goodwill and definite-lived intangible assets obtained through business combination with DP Engineering, the Company recognized an impairment charge of $2.1 million related to goodwill and $3.4 million related to definite-lived intangible assets, both initially recognized upon the acquisition of DP Engineering for the three months ended March 31, 2019 (See Note 9). There was no impairment recognized for the three months ended March 31, 2018.

Gain (Loss) on derivative instruments, net. LossGain (loss) on derivative instruments relates to the Company's foreign exchange contracts and remeasurement of foreign currency-denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals. These amounts are remeasured into the functional currency using the current exchange rate at the end of the period. For the three months ended March 31, 2019, we recognized a gain of $102,000 on the change in fair value of foreign exchange contracts, and a gain of $17,000 from the remeasurement of contract receivables, billings in excess of revenue earned and subcontractor accruals. For the three months ended March 31, 2018, we recognized a loss of $118,000 on the change in fair value of foreign exchange contracts, and a loss of $38,000 from the remeasurement of contract receivables, billings in excess of revenue earned and subcontractor accruals. For

Interest (expense) income, net. Interest expense totaled $222,000 and $0 for the three months ended March 31, 2017, we recognized a loss2019 and 2018, respectively. Interest income totaled $14,000 and $22,000 for the three months ended March 31, 2019 and 2018, respectively. The Company drew down under its five-year term loan of $86,000 on$14.3 million in February 2019 to finance the changeacquisition of  DP Engineering, and has recorded interest expense of $83,000 related to the term loan for the period of time this additional debt was outstanding during the three months ended March 31, 2019. Interest expense is expected to increase in fair value of foreign exchange contracts, and a loss of $74,000the future as the debt from the remeasurementacquisition of contract receivables, billings in excessDP Engineering was only outstanding for a half of revenue earned and subcontractor accruals.the three months ended March 31, 2019.

Other (expense) income, net.  The Company recognized $25,000$22,000 of other income, net and $3,000$25,000 of other expense,income, net for the three months ended March 31, 2019 and 2018, and 2017, respectively.

(Benefit) Provision for income taxes.  Income tax expensebenefit was $259,000,$(1.8) million, or an effective income tax rate of 30.4%, for the three months ended March 31, 2019, compared to $0.3 million, or an effective income tax rate of (20.9%), for the three months ended March 31, 2018, compared to $73,000, or an effective income tax rate of (37.8%), for the three months ended March 31, 2017.2018. 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 2019 is comprised mainly of the tax impact of the loss for impairment, federal income tax expense, foreign income tax expense, and state tax expense. Tax expense in 2018 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.expense.

The difference in our effective tax rate and the U.S. statutory federal income tax rate of 21% was primarily due to our China subsidiary which had taxable income for the three months ended March 31, 2018 and thepermanent differences, accruals related to uncertain tax positions for certain U.S. and foreign tax contingencies.contingencies, a change in valuation allowance in our China subsidiary, discrete item adjustments for the U.S. and foreign taxes, including the tax impact of the loss for impairment, and the excess book deduction related to stock options and restricted stock units that were exercised or vested during the year.

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 19972000 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 20142015 forward for China, and 2015 forward for both India and 2016 forward for 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 has recorded full valuation allowance for its U.K. and Swedish net deferred tax assets at March 31, 2018.
27

Critical Accounting Policies and Estimates

In preparing the Company's consolidated financial statements, management makes several estimates and assumptions that affect the Company's reported amounts of assets, liabilities, revenues and expenses. The Company's most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, 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. These critical accounting policies and estimates are discussed in the Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations section in our most recent Annual Report on Form 10-K. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates may require adjustment.
34

Liquidity and Capital Resources

As of March 31, 2018,2019, the Company'sCompany’s cash and cash equivalents and restricted cash totaled $12.4$11.3 million compared to $20.1$12.1 million at December 31, 2017.2018.

For the three months ended March 31, 20182019 and 2017,2018, net cash (used in) provided byused in operating activities was $(5.5)$(0.6) million and $1.1$(5.5) million, respectively. The year over year change of $6.6$4.9 million in cash flows (used in) provided byused in operating activities was primarily driven by the loss on impairment, change in the fair value of contingent consideration,  the change in contract receivables, billing in excess of revenue earned and accounts payable and accrued expenses, which was mainly due to timing differences of cash collections and payments. The majority of the cash outflows from operations was due to a significant increase in our contract receivables and unbilled revenues during the first quarter of 2018. These contract receivables and unbilled revenues related to a limited number of our larger customers, and the majority were billed or collected during April and May of 2018.billing.

Net cash used in investing activities totaled $0.4$(13.6) million and $0.1$(0.4) million for the three months ended March 31, 20182019 and 2017,2018, respectively. The increase in cash outflow in 20182019 was primarily due to $0.3 million increase in lease improvements and furniture and fixtures as we entered into a new lease agreement in December 2017 and relocated mostdriven by the acquisition of our corporate functions, including finance, legal, and R&D to a new office in Columbia, Maryland in March 2018.DP Engineering, the net cash consideration of which was $14.8 million.

For the three months ended March 31, 2019 and 2018, and 2017, net cash used inprovided by (used in) financing activities totaled $1.7$13.5 million and $1.2$(1.7) million, respectively. The increase in the cash outflowinflow from financing activities iswas largely driven by the increaseproceeds from issuance of $1.1 million in contingent consideration payments toa term loan of $14.3 million; the former Hyperspring owners as we paid off the earnout, whichincrease was partially offset by a decreasean increase of $0.6$0.1 million in the Company's withholding of RSUs in order to pay employees'employees’ payroll withholding taxes on vested RSUs.RSUs, and repayments of $0.7 million on the term loan.

At March 31, 2018,2019, the Company had cash and cash equivalents and restricted cash of $12.4$11.3 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.

Line of Credit Facilities

Citizens Bank

The Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs. Working capital advances bear interest of one-month LIBOR plus 2.25% per annumOn 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. 

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 lettersincluding a letter of credit sub-facility, and working capital advances.(b) a $25.0 million delayed draw term loan facility available to be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Company.

On May 11, 2018, upon acquisition of True North, the Company drew down approximately $10.3 million to fund the transaction, $0.5 million of which was repaid to the Bank on the same day. On February 15, 2019, upon acquisition of DP Engineering, the Company drew down approximately $14.3 million to fund the transaction. At March 31, 2018,2019, the outstanding balance of the long-term debt was $22.1 million.

At March 31, 2019, there were no outstanding borrowings on the RLOC and twofour letters of credit totaling $0.7$1.9 million. The amount available at March 31, 2018,2019, after consideration of the borrowing base, letters of credit and working capital advances was approximately $4.3$3.1 million.

The credit facility agreement is subject to standard financial covenants and reporting requirements. At March 31, 2018,2019, the Company was in compliance with its financial covenants.

On May 11, 2018, GSE entered into an amended and restated credit agreement with Citizen's Bank, consisting of a five-year $5 million revolving line of credit and a five-year $25 million delayed draw term loan facility to fund acquisitions approved by the Lender. At close, we drew down approximately $10.3 million to fund the acquisition of True North. Interest will be based on a LIBOR spread of 200 to 275 basis points, depending on pre-defined leverage thresholds defined in the agreement.

BB&T Bank

At March 31, 2018, we had two letters of credit with BB&T totaling $0.6 million, which expired and are pending on release by the bank and customer. At March 31, 2018 and December 31, 2017, the cash collateral account with BB&T totaled $0.6 million and $1.0 million, respectively and were classified as restricted cash on the consolidated balance sheets.
3528
Non-GAAP Financial Measures

References to “EBITDA” mean net (loss) income, before taking into account interest expense (income), provision for income taxes, depreciation and amortization. References toAdjusted EBITDA exclude loss on impairment, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, and acquisition-related expense. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles ("GAAP")(GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate the Company'sCompany’s results because it excludes certain items that are not directly related to the Company'sCompany’s core operating performance that may, or could, have a disproportionate positive or negative impact on our results for any particular period. Investors should recognize that EBITDA and Adjusted EBITDA might not be comparable to similarly-titled measures of other companies. These measuresThis measure should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. ReconciliationA reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measures are asmeasure in accordance with SEC Regulation G follows:

(in thousands)
 Three months ended Three months ended 
 March 31, March 31, 
 2018 2017 2019  2018 
Net lossNet loss$(1,496) $(266) $(4,236) $(1,496)
Interest income, net (22)  (27)
Interest expense (income), net  208   (22)
Provision for income taxesProvision for income taxes 259  73  (1,848)  259 
Depreciation and amortizationDepreciation and amortization 371  257  729   371 
EBITDAEBITDA (888)  37  (5,147)  (888)
Loss from the change in fair value of contingent consideration -  254
Loss on impairment  5,464   - 
Impact of the change in fair value of contingent consideration  (1,200)  - 
Restructuring chargesRestructuring charges 917  45  -   917 
Stock-based compensation expenseStock-based compensation expense 627  596  597   627 
Loss on derivative instruments, net 156  160
Impact of the change in fair value of derivative instruments  (93)  156 
Acquisition-related expense  628   - 
Adjusted EBITDAAdjusted EBITDA$812 $1,092 $249  $812 




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Adjusted Net Income and Adjusted EPS Reconciliation (in thousands, except share and per share amounts)

References to Adjusted net income exclude the impact of gain from loss on impairment, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, acquisition-related expense, and amortization of intangible assets related to acquisitions. Adjusted Net Income and adjusted earnings (loss) per share ("adjusted EPS")(adjusted EPS) are not measures of financial performance under GAAP.generally accepted accounting principles (GAAP). Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, provide meaningful supplemental information regarding our operational performance. Our management uses Adjusted Net Income and other non-GAAP measuresare useful to investors to evaluate the performance of our business and makeCompany’s results because they exclude certain operating decisions (e.g., budgeting, planning, employee compensation and resource allocation). This information facilitates management's internal comparisons to our historical operating results as well asitems that are not directly related to the Company’s core operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results of our competitors. Since management finds this measure to be useful, we believe that our investors can benefit by evaluating both non-GAAP and GAAP results.for any particular period, such as stock-based compensation expense.  These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to GAAP net income, the most directly comparable GAAP financial measure, is as follows:
(in thousands) Three months ended 
  March 31, 
  2019  2018 
Net loss $(4,236) $(1,496)
Loss on impairment  5,464   - 
Impact of the change in fair value of contingent consideration  (1,200)  - 
Restructuring charges  -   917 
Stock-based compensation expense  597   627 
Impact of the change in fair value of derivative instruments  (93)  156 
Acquisition-related expense  628   - 
Amortization of intangible assets related to acquisitions  509   150 
Adjusted net income $1,669  $354 
         
Diluted loss per common share $(0.21) $(0.08)
         
Adjusted earnings per common share – Diluted $0.08  $0.02 
         
Weighted average shares outstanding - Diluted(1)
  20,188,580   19,902,752 

(in thousands)Three months ended
 March 31,
 2018 2017
Net loss$(1,496) $(266)
Loss from the change in fair value of contingent consideration -  254
Restructuring charges 917  45
Stock-based compensation expense 627  596
Loss on derivative instruments, net 156  160
Adjusted net income$204 $789
      
Loss per share - diluted$(0.08) $(0.01)
      
Adjusted earnings per share - diluted (a)$0.01 $0.04
      
Weighted average shares outstanding - Diluted (a) 19,902,752  19,502,057
(a)(1) During the three months ended March 31, 20182019 and 2017,2018, the Company reported both a GAAP net loss and positive adjusted net income. Accordingly, there were 388,367237,834 and 407,675388,367 dilutive shares from options and RSUs included in the adjusted earnings per common share calculation, for the three months ended March 31, 2018 and 2017, respectively, that were considered anti-dilutive in determining the GAAP diluted loss per common share.


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Item 3.Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

On September 20, 2017,February 15, 2019, the Company completed the acquisitionpurchase of Absolute Consulting, Inc. AbsoluteDP Engineering. DP Engineering constitutes 21%17.0% of total assets of the Company at March 31, 2018,2019, and 32%7% of the Company's consolidated revenue for the three months ended March 31, 2018.2019. As permitted by SEC guidance for newly acquired businesses, because it was not possible to complete an effective assessment of the acquired company's controls by the quarter-end, the Company's management has excluded AbsoluteDP Engineering from its evaluation of disclosure controls and procedures from the date of such acquisition through March 31, 2018.2019.

On May 11, 2018, the Company completed the acquisition of True North, LLC (True North). True North constitutes 23.7% of total assets of the Company at December 31, 2018, and 8.6% of the Company's consolidated revenue for the year ended December 31, 2018. As permitted by SEC guidance for newly acquired businesses, because it was not possible to complete an effective assessment of the acquired company's controls by quarter-end, the Company's management has excluded True North from its evaluation of disclosure controls and procedures and management's report on internal control over financial reporting and changes therein below from the date of such acquisition through March 31, 2019. Our management is in the process of reviewing the operations of True North and implementing GSE's internal control structure over the acquired operations.
Changes in Internal Control over Financial Reporting

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.

Limitation of Effectiveness of Controls

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.


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PART II - OTHER INFORMATION

Item 1.Legal Proceedings

None.

Item 1A.Risk Factors

The Company has no material changesadded the below risk factor to the disclosuredisclosure.
If we cannot comply with the financial or other restrictive covenants in our credit agreement, or obtain waivers or other relief from our lender, we may cause an event of default to occur, which could result in loss of our sources of liquidity and acceleration of our debt.
In order to fund our recent acquisitions, we borrowed under a delayed-draw term loan. Our ability to generate sufficient cash flow from operations to make scheduled payments on this matter madeour term loan will depend on a range of economic, competitive and business factors, some of which are outside our control. If we are unable to meet our debt service obligations, we may need to refinance or restructure all or a portion of our debt on or before its stated maturity date, sell assets, pay down our outstanding debt and/or raise equity. We may not be able to refinance or restructure any of our debt, sell assets or raise equity, in its Annual Reporteach case on Form 10-K forcommercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance or restructure our obligations on commercially reasonable terms could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our credit agreement also contains financial and other restrictive covenants. Our ability to comply with the fiscal year ended December 31, 2017.covenants in our credit agreement will depend upon our future performance and various other factors, some of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we would need to seek an amendment to our credit agreement, a waiver from our lender, utilize cash to pay down outstanding debt and/or refinance or restructure our debt. There can be no assurance that we could obtain future amendments or waivers of our credit agreement, or refinance or restructure our debt, in each case on commercially reasonably terms or at all. Our failure to maintain compliance with the covenants under our credit agreement could result in an event of default, subject to applicable notice and cure provisions. Upon the occurrence of an event of default under our credit agreement, our lender could elect to declare all amounts outstanding thereunder to be immediately due and payable, terminate all commitments to extend further credit and cease making further loans. If we were unable to repay all outstanding amounts in full, our lender could exercise various remedies including instituting foreclosure proceedings against our assets pledged to them as collateral to secure that debt.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.Exhibits

 
2.110.1
Membership Interest PurchaseFourth Amendment and Reaffirmation Agreement dated as of May 11, 2018, betweenMarch 20, 2019, by and among GSE Systems, Inc., and GSE Performance Solutions, Inc., as Borrowers, GSE True North Consulting, LLC, Donald R. Horn, Jenny C. Horn, GSE Performance Solutions,Hyperspring, LLC, Absolute Consulting, Inc., and Donald R. Horn in his capacityDP Engineering LLC, as Seller Representative. Incorporated herein by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the SecuritiesGuarantors, and Exchange Commission on May 14, 2018.Citizens Bank, National Association, as Bank. Filed herewith.
   
 
10.1
Amended and Restated Credit and Security Agreement, dated as of May 11, 2018, by and among Citizens Bank, National Association, as Bank, and GSE Systems, Inc. and GSE Performance Solutions, Inc., as Borrower. Incorporated herein by reference to Exhibit 99.1 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 14, 2018.
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


3932
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:  May 15, 20182019
GSE SYSTEMS, INC.

/S/ KYLE J. LOUDERMILK
Kyle J. Loudermilk
Chief Executive Officer
(Principal Executive Officer)



/S/ EMMETT A. PEPE
Emmett A. Pepe
Chief Financial Officer
(Principal Financial and Accounting Officer)

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