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 September 30, 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 19,833,10320,007,469 shares of common stock, with a par value of $0.01 per share outstanding as of October 31, 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 September 30, 20182019 (unaudited) and December 31, 2017201823
  Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018,2019, and September 30, 2017201835
  Unaudited Consolidated Statements of Comprehensive (Loss) Income (Loss) for the Three and Nine Months Ended September 30, 2018,2019, and September 30, 2017201846
  Unaudited Consolidated Statement of Changes in Stockholders'Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019, and September 30, 201857
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20182019 and September 30, 2017201869
  Notes to Consolidated Financial Statements710
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations2436
Item 3. Quantitative and Qualitative Disclosures About Market Risk3851
Item 4. Controls and Procedures3851
    
PART II. OTHER INFORMATION3952
Item 1. Legal Proceedings3952
Item 1A. Risk Factors3952
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds3952
Item 3. Defaults Upon Senior Securities3952
Item 4. Mine Safety Disclosures3952
Item 5. Other Information3952
Item 6. Exhibits3952
  SIGNATURES4054

1


PART I - FINANCIAL INFORMATION
Item 1.Financial Statements

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

 September 30, 2018  December 31, 2017  September 30, 2019  December 31, 2018 
 (unaudited)     (unaudited)    
ASSETSASSETS ASSETS 
Current assets:            
Cash and cash equivalents $9,831  $19,111  $8,606  $12,123 
Restricted cash  9   960 
Contract receivables, net  19,238   13,997   16,566   21,077 
Prepaid expenses and other current assets  1,624   2,795   1,836   1,800 
Total current assets  30,702   36,863   27,008   35,000 
                
Equipment, software, and leasehold improvements  5,290   4,782   5,627   5,293 
Accumulated depreciation  (4,125)  (3,719)  (4,525)  (4,228)
Equipment, software, and leasehold improvements, net  1,165   1,063   1,102   1,065 
                
Software development costs, net  662   690   648   615 
Goodwill  12,185   8,431   16,709   13,170 
Intangible assets, net  6,597   2,604   7,960   6,080 
Deferred tax assets  6,203   6,494   6,635   5,461 
Operating lease - right of use assets, net  3,720   - 
Other assets  37   37   77   49 
Total assets $57,551  $56,182  $63,859  $61,440 
                
LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:                
Current portion of long-term debt, net of debt issuance costs and original issue discount $1,901  $-  $4,778  $1,902 
Accounts payable  1,096   1,251   1,174   1,307 
Accrued expenses  2,324   2,276   1,820   2,646 
Accrued compensation  3,532   2,866   2,904   3,649 
Billings in excess of revenue earned  7,810   14,543   3,870   10,609 
Accrued warranty  1,105   1,433   1,185   981 
Contingent consideration  -   1,701 
Income taxes payable  1,368   1,176 
Other current liabilities  1,035   1,182   1,078   60 
Total current liabilities  18,803   25,252   18,177   22,330 
                
Long-term debt, less current portion, net of debt issuance costs and original issue discount  7,089   -   14,968   6,610 
Operating lease liabilities  3,121   - 
Other liabilities  1,545   1,258   1,070   1,371 
Total liabilities  27,437   26,510   37,336   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; 60,000,000 shares authorized, 21,432,014 shares issued, 19,833,103 shares outstanding as of September 30, 2018; 30,000,000 shares authorized, 21,024,395 shares issued, 19,425,484 shares outstanding as of December 31, 2017  214   210 
Common stock $0.01 par value; 60,000,000 shares authorized, 21,788,525 shares issued, 20,189,614 shares outstanding as of September 30, 2019; 60,000,000 shares authorized, 21,485,445 shares issued, 19,886,534 shares outstanding as of December 31, 2018  218   214 
Additional paid-in capital  77,876   76,802   79,138   78,118 
Accumulated deficit  (43,248)  (42,870)  (48,050)  (42,569)
Accumulated other comprehensive loss  (1,729)  (1,471)  
(1,784
)
  (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 September 30, 2019 and December 31, 2018  (2,999)  (2,999)
Total stockholders' equity  30,114   29,672   26,523   31,129 
Total liabilities and stockholders' equity $57,551  $56,182  $63,859  $61,440 

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

2

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

 
Three months ended
September 30,
  
Nine months ended
September 30,
  Three months ended September 30,  
Nine months ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
                        
Revenue $21,801  $15,409  $69,394  $48,876  $20,031  $21,801  $65,683  $69,394 
Cost of revenue  16,380   11,185   52,735   35,513   15,358   16,380   50,407   52,735 
Gross profit  5,421   4,224   16,659   13,363   4,673   5,421   15,276   16,659 
                                
Operating expenses:                                
Selling, general and administrative  4,366   4,374   13,686   11,740   3,465   4,366   12,231   13,686 
Research and development  247   353   765   1,103   130   247   526   765 
Restructuring charges  70   -   1,177   45   740   70   742   1,177 
Loss on impairment  -   -   5,464   - 
Depreciation  132   79   411   254   107   132   300   411 
Amortization of definite-lived intangible assets  632   50   1,094   148   494   632   1,550   1,094 
Total operating expenses  5,447   4,856   17,133   13,290   4,936   5,447   20,813   17,133 
                                
Operating (loss) income  (26)  (632)  (474)  73 
Operating loss  (263)  (26)  (5,537)  (474)
                                
Interest (expense) income, net  (114)  15   (153)  60 
(Loss) gain on derivative instruments, net  (59)  71   (306)  226 
Other (expense) income, net  (5)  33   24   (4)
(Loss) income before income taxes  (204)  (513)  (909)  355 
Provision for income taxes  314   92   124   399 
Interest (expense), net  (288)  (114)  (812)  (153)
Loss on derivative instruments, net  (61)  (59)  (69)  (306)
Other income (expense), net  59   (5)  62   24 
Loss before income taxes  (553)  (204)  (6,356)  (909)
Provision (benefit) for income taxes  568   314   (874)  124 
Net loss $(518) $(605) $(1,033) $(44) $(1,121) $(518) $(5,482) $(1,033)
                                
                                
Basic loss per common share $(0.03) $(0.03) $(0.05) $0.00  $(0.06) $(0.03) $(0.27) $(0.05)
                                
Diluted loss per common share $(0.03) $(0.03) $(0.05) $0.00  $(0.06) $(0.03) $(0.27) $(0.05)
                
Weighted average shares outstanding - Basic  20,007,469   19,786,888   20,021,829   19,620,207 
                
Weighted average shares outstanding - Diluted  20,007,469   19,786,888   20,021,829   19,620,207 

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


3

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

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2018  2017  2018  2017 
             
             
Net loss $(518) $(605) $(1,033) $(44)
Foreign currency translation adjustment  (31)  192   (258)  319 
Comprehensive (loss) income $(549) $(413) $(1,291) $275 
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2019  2018  2019  2018 
             
             
Net loss $(1,121) $(518) $(5,482) $(1,033)
Cumulative translation adjustment  (89)  (31)  (149)  (258)
Comprehensive loss $(1,210) $(549) $(5,631) $(1,291)

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


4
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)

 
Common
Stock
         
Treasury
Stock
    
Common
Stock
         
Treasury
Stock
   
Nine Months Ended Shares  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated
Other Comprehensive
Loss
  Shares  Amount  Total 
Balance, January 1, 2019  21,485  $214  $78,118  $(42,569) $(1,635)  (1,599) $(2,999) $31,129 
 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  -   -   1,370   -   -   -   -   1,370   -   -   1,238   -   -   -   -   1,238 
Common stock issued for options exercised  214   2   37   -   -   -   -   39   9   1   89   -   -   -   -   90 
Common stock issued for RSUs vested  194   2   (2)  -   -   -   -   -   294   3   (3)  -   -   -   -   - 
Vested RSU shares withheld to pay taxes  -   -   (331)  -   -   -   -   (331)
Shares withheld to pay taxes  -   -   (304)  -   -   -   -   (304)
Foreign currency translation adjustment  -   -   -   -   (258)  -   -   (258)  -   -   -   -   (149)  -   -   (149)
Net loss  -   -   -   (1,033)  -   -   -   (1,033)  -   -   -   (5,482)  -   -   -   (5,482)
Balance, September 30, 2018  21,432  $214  $77,876  $(43,248) $(1,729)  (1,599) $(2,999) $30,114 
Balance, September 30, 2019  21,789  $218  $79,138  $(48,050) $(1,784)  (1,599) $(2,999) $26,523 

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  -   -   1,370   -   -   -   -   1,370 
Common stock issued for options exercised  214   2   37   -   -   -   -   39 
Common stock issued for RSUs vested  194   2   (2)  -   -   -   -   - 
Shares withheld to pay taxes  -   -   (331)  -   -   -   -   (331)
Foreign currency translation adjustment  -   -   -   -   (258)  -   -   (258)
Net loss  -   -   -   (1,033)  -   -   -   (1,033)
Balance, September 30, 2018  21,432  $214  $77,876  $(43,248) $(1,729)  (1,599) $(2,999) $30,114 

                  
 
Common
Stock
         
Treasury
Stock
    
                        
Three Months Ended Shares  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated
Other
Comprehensive
Loss
  Shares  Amount  Total 
Balance, July 1, 2019  21,699  $217  $79,028  $(46,930) $(1,695)  (1,599) $(2,999) $27,622 
                                 
Stock-based compensation expense  -   -   169   -   -   -   -   169 
Common stock issued for options exercised  0   -   15   -   -   -       15 
Common stock issued for RSUs vested  90   1   (1)  -   -   -       - 
Shares withheld to pay taxes  -   -   (73)  -   -   -       (73)
Foreign currency translation adjustment  -   -   -   -   (89)  -       (89)
Net loss  -   -   -   (1,121)  -   -       (1,121)
Balance, September 30, 2019  21,789  $218  $79,138  $(48,050) $(1,784)  (1,599) $(2,999) $26,523 
                                 
Balance, July 1, 2018  21,311  $213  $77,611  $(42,730) $(1,698)  (1,599) $(2,999) $30,397 
                                 
Stock-based compensation expense  -   -   402   -   -   -   -   402 
Common stock issued for options exercised  84   -   (56)  -   -   -   -   (56)
Common stock issued for RSUs vested  37   1   -   -   -   -   -   1 
Shares withheld to pay taxes  -   -   (81)  -   -   -   -   (81)
Foreign currency translation adjustment  -   -   -   -   (31)  -   -   (31)
Net income  -   -   -   (518)  -   -   -   (518)
Balance, September 30, 2018  21,432  $214  $77,876  $(43,248) $(1,729)  (1,599) $(2,999) $30,114 

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

5

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

  
Nine months ended
September 30,
 
  2018  2017 
Cash flows from operating activities:      
Net loss $(1,033) $(44)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Depreciation  411   254 
Amortization of definite-lived intangible assets  1,094   148 
Amortization of capitalized software development costs  353   352 
Stock-based compensation expense  1,535   1,873 
Bad debt expense  146   118 
Loss (gain) on derivative instruments, net  306   (226)
Deferred income taxes  74   78 
Changes in assets and liabilities:        
Contract receivables, net  (3,165)  5,318 
Prepaid expenses and other assets  948   770 
Accounts payable, accrued compensation, and accrued expenses  (965)  (911)
Billings in excess of revenue earned  (5,800)  (5,204)
Accrued warranty  (256)  112 
Other liabilities  (8)  359 
Cash (used in) provided by operating activities  (6,360)  2,997 
         
Cash flows from investing activities:        
Capital expenditures  (510)  (64)
Capitalized software development costs  (325)  (126)
Acquisition of Absolute Consulting, Inc., net of cash acquired  -   (8,455)
Acquisition of True North Consulting, net of cash acquired  (9,635)  - 
Cash used in investing activities  (10,470)  (8,645)
         
Cash flows from financing activities:        
Proceeds from issuance of long-term debt, net of debt issuance costs and original issue discount  10,154   - 
Repayment of long-term debt  (1,164)  - 
Proceeds from issuance of common stock on the exercise of stock options  39   276 
Contingent consideration payments to Hyperspring, LLC  (1,701)  (414)
RSUs withheld to pay taxes  (331)  (952)
Cash provided by (used in) financing activities  6,997   (1,090)
         
Effect of exchange rate changes on cash  (398)  336 
Net (decrease) in cash, cash equivalents and restricted cash  (10,231)  (6,402)
Cash, cash equivalents, and restricted cash, beginning balance  20,071   22,887 
Cash, cash equivalents, and restricted cash, ending balance $9,840  $16,485 
         
         


  
Nine months ended
September 30,
 
  2019  2018 
Cash flows from operating activities:      
Net loss $(5,482) $(1,033)
Adjustments to reconcile net loss to net cash used in operating activities:        
Loss on impairment  5,464   - 
Depreciation  300   411 
Amortization of definite-lived intangible assets  1,550   1,094 
Amortization of capitalized software development costs  293   353 
Change in fair value of contingent consideration  (1,200)  - 
Stock-based compensation expense  1,150   1,535 
Loss on derivative instruments, net  69   306 
Bad debt expense  48   146 
Deferred income taxes  (1,276)  74 
Gain on sale of equipment, software, and leasehold improvements  (7)  - 
Changes in assets and liabilities:        
Contract receivables, net  7,314   (3,165)
Prepaid expenses and other assets  438   948 
Accounts payable, accrued compensation, and accrued expenses  (2,400)  (965)
Billings in excess of revenue earned  (6,777)  (5,800)
Accrued warranty  102   (256)
Other liabilities  82   (8)
Cash used in operating activities  (332)  (6,360)
         
Cash flows from investing activities:        
Proceeds from sale of equipment, software and leasehold improvements  8   - 
Purchase of equipment, software and leasehold improvements  (127)  (510)
Capitalized software development costs  (326)  (325)
Acquisition of True North Consulting, net of cash acquired  -   (9,635)
Acquisition of DP Engineering, net of cash acquired  (13,521)  - 
Cash used in investing activities  (13,966)  (10,470)
         
Cash flows from financing activities:        
Proceeds from issuance of long-term debt  14,263   10,154 
Repayment of long-term debt  (3,029)  (1,164)
Proceeds from issuance of common stock  90   39 
Contingent consideration payments to former owners of Hyperspring, LLC  -   (1,701)
Shares withheld to pay taxes  (304)  (331)
Cash provided by financing activities  11,020   6,997 
         
Effect of exchange rate changes on cash  (239)  (398)
Net decrease in cash, cash equivalents and restricted cash  (3,517)  (10,231)
Cash, cash equivalents, and restricted cash, beginning balance  12,123   20,071 
Cash, cash equivalents, and restricted cash, ending balance $8,606  $9,840 
         
         
The accompanying notes are an integral part of these consolidated financial statements.

6
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.Summary of Significant Accounting Policies

Basis of Presentation

GSE Systems, Inc. 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)("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, 2018.27, 2019.

The Company has two reportable segments as follows:

●Performance Improvement Solutions (approximately 44% 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 56% 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.

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 the determination of fair value in impairment tests, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock-based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.

7
Revenue recognitionGoing Concern Consideration

The Company derivesis currently in compliance with 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 segment and Nuclear Industry Training and Consulting segment.

The SDB contracts are typically fixed-price and consist of initial design, engineering, assembly and installation of training simulators which include hardware, software, labor, and post contract support (PCS) on the software. We generally have two main performance obligations for an SDB contract: the training simulator build and PCS. The training simulator build performance obligation generally includes hardware, software, and labor. The transaction price under the SDB contractsdebt covenants; however, it is allocated to each performance obligationprobable, 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, andforecasts, that 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-year base warranty on the systems. The base warranty will not be accounted forin compliance with these covenants at future measurement dates in the following twelve-month period. We do have the ability to cure one of the two financial covenants, the leverage ratio, by paying down an amount of debt necessary to meet the leverage ratio and we are considering taking this action. Regarding the fixed charge coverage ratio, we anticipate reducing fixed charges, namely excess real estate at the DP Engineering office and other space to be made idle. We will be working with Citizens Bank, National Association (the Bank) to obtain a modification of our covenant requirements that would, based on our projections, provide forecasted compliance with the covenants. If at such future time a covenant violation were to occur and if we are unable to agree to amended financial covenant measures with the Bank before such time or obtain a waiver in the event of subsequent non-compliance, the Company would likely not be able to repay the entirety of the outstanding debt in the event the Bank were to call the debt, thus leading to substantial doubt about the Company’s ability to continue as a separate performance obligation under the contract because it does not provide the customer with a servicegoing concern until such amendments or waivers are in addition to the assurance that the completed project complies with agreed-upon specifications. Warranties extended beyond our typical one-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.place.

RevenueBased on our cash flow projection, we believe our funds from the saleoperations and availability of perpetual standalone software licenses, which do not require significant modification or customization, is recognized upon its deliverycash provide us with sufficient funds to the customer.  Revenue from the sale of term or subscription-based standalone software licenses, which do not require significant modification or customization, is recognized ratably over the term of such licenses following delivery to the customer.  Delivery is considered to have occurred when the customer receives a copycure one of the softwareforecasted violations if we choose to; have sufficient cash to fund our on-going operations and is able to use and benefit frommake our scheduled debt repayments in the software.normal course of business.

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 either 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 per type of work, as well as approved expenses incurred. The customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (ASC) 606-10-55-18, 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 over the service period using the cost-to-cost input method as the Company's performance does not create an asset with an alternative use to the Company, and we have an enforceable right to payment for performance completed to date. Cost-to-cost input method best measures the progress toward complete satisfaction of the performance obligation.

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

Income Statement

  Three months ended September 30, 2018  Nine months ended September 30, 2018 
  As Reported  Balance without adoption of ASC 606  Effect of Change  As Reported  Balance without adoption of ASC 606  Effect of Change 
Revenue $21,801  $21,952  $(151) $69,394  $69,666  $(272)
Gross profit  5,421   5,572   (151)  16,659   16,931   (272)
Provision for income taxes  314   296   (18)  124   201   77 
Net loss  (518)  (349)  (169)  (1,033)  (838)  (195)

Balance Sheet
  September 30, 2018 
  As Reported  Balance without adoption of ASC 606  Effect of Change 
Contract receivables, net $19,238  $19,238  $- 
Deferred tax assets  6,203   6,367   (164)
Billings in excess of revenue earned  7,810   8,492   (682)
Accumulated deficit  (43,248)  (43,766)  518 

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 $0.4 million related to fair value adjustment and interest accretion of the contingent liability was included in financing activities. Upon the adoption of ASU 2016-15, it was reclassified as an operating activity.

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 is 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.

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 June 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 16 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. On October 16, 2019 the FASB voted to defer the deadlines for private companies and certain small public companies, including smaller reporting companies, to implement the new accounting standards on credit losses. The new effective date is January 1, 2023. 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").  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.

10

3.Basic and Diluted Loss(Loss) Income per Common Share

Basic loss(loss) income per share is computed by dividing net loss(loss) income by weighted average number of outstanding shares of common sharesstock outstanding for the period. Diluted net loss(loss) income per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised and restricted stock units ("RSU") were vested, unless the impact of potential dilutive common shares outstanding has an anti-dilutive impact onare anti-dilutive. Since we experienced a net loss in each period presented, basic and diluted net loss per share.share are the same. The diluted loss per share, in each period present, excludes the impact of potentially dilutive securities since they would have an anti-dilutive effect.

The 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  Nine months ended  Three months ended  Nine months ended 
 September 30,  September 30,  September 30,  September 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
Numerator:                        
Net loss $(518) $(605) $(1,033) $(44) $(1,121) $(518) $(5,482) $(1,033)
                                
Denominator:                                
Weighted-average shares outstanding for basic loss per share  19,786,888   19,280,770   19,620,207   19,204,778   20,007,469   19,786,888   20,021,829   19,620,207 
                                
Effect of dilutive securities:                                
Stock options and restricted stock units  -   -   -   -   -   -   -   - 
Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share  19,786,888   19,280,770   19,620,207   19,204,778   20,007,469   19,786,888   20,021,829   19,620,207 
                                
Shares related to dilutive securities excluded because inclusion would be anti-dilutive  713,024   534,833   645,714   550,218   578,676   713,024   397,131   645,714 

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4.Acquisitions
2019 Acquisition
DP Engineering
On February 15, 2019, through its wholly-owned subsidiary 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”), to purchase 100% of the membership interests in DP Engineering for $13.5 million. The purchase price is subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5 million, potentially payable in 2020 and 2021 depending on DP Engineering’s satisfaction of 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 escrow of approximately $1.7 million was funded at the closing and is available to GSE to satisfy indemnification claims arising within 18 months after the closing.
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, which is in line with our Performance segment. 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 DP Engineering for the years 2019 and 2020, as of the acquisition date, the estimated fair value of the total earn-out amount was $1.2 million and was recorded as contingent consideration. Subsequent to the acquisition, it was determined that the conditions related to the contingent consideration would not be met and hence $1.2 million was taken to income in the first quarter of 2019.
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 DP Engineering and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of September 30, 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, contingent consideration, accrued compensation and the residual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of DP Engineering, net of 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 $2.9 million, of which the Company has collected in full. GSE did not acquire any other class of receivable as a result of the acquisition of DP Engineering.
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, 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 years to fifteen years.
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. This incident adversely impacted the relationship between DP Engineering and its customer. The Company determined this represented a triggering event requiring an interim assessment for impairment. As a result of the impairment analysis, 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 during the quarter ended March 31, 2019. On August 6, 2019, as a follow on to the Notice of Suspension, the Company received a Notice of Termination from this customer, notifying the Company that they were terminating their Engineer of Choice consulting service agreement with DP Engineering.  Please see Note 8 for further analysis on the carrying amount change due to impairment on goodwill and definite-lived intangible assets during the nine months ended September 30, 2019. Additionally, also see Item 2. Management’s Discussion and Analysis for further discussion regarding the termination of Engineer of Choice of DP Engineering’s major customer.

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 

DP Engineering contributed revenue of $6.5 million to GSE for the period from February 15, 2019 to September 30, 2019.

2018 Acquisition
True North

On May 11, 2018, GSE, through its wholly-owned subsidiary GSE Performance Solutions, Inc. (Performance Solutions), entered into a membership interest purchase agreement with Donald R. Horn, Jenny C. Horn, and True North Consulting LLC (the True"True North Purchase Agreement)Agreement") to purchase 100% of the membership interests in True North Consulting LLC (True North)("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 forarising within 18 months after the closing. The acquisition of True North was completed on an all-cash transaction basis. In connection with the acquisition, we issueddrew down a $10.3 million term loan to finance the transaction (including the transaction costs). See Note 14. Debt,12, 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, complimentarycomplementary 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. Due to the recent completion of the acquisition, theThe Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of September 30, 2018,2019, 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. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of True North Consulting, net of cash acquired" line caption.

(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 

Total purchase price $9,941 
     
 Purchase price allocation:    
Cash  306 
Contract receivables  2,345 
Prepaid expenses and other current assets  4 
Property, and equipment, net  1 
Intangible assets  5,088 
Accounts payable, accrued expenses  (1,420)
Accrued compensation  (137)
 Total identifiable net assets  6,187 
 Goodwill  3,754 
 Net assets acquired $9,941 

The fair value of the assets acquired includes gross trade receivables of $2.3$1.9 million, of which the Company expects to collecthas collected in full.full as of September 30, 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 $3.8$4.7 million of goodwill was assigned to our Performance Improvement Solutions segment. As of the report date, 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 other intangible assets of $5.1 million, including customer contracts and relationships, tradename, non-compete agreements, and alliance agreements, with amortization periods of four years to fifteen years. The fair value of the intangible assets is provisional pending receipt of thefinalized per 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 
  (in years)  (in thousands) 
Customer relationships  15  $3,758 
Tradename  10   582 
Non-compete agreements  4   221 
Alliance agreements  5   527 
Total     $5,088 

12
Absolute

On September 20, 2017, GSE, through Performance Solutions, acquired 100% of the capital stock of Absolute Consulting, Inc. (Absolute) for $8.8 million pursuant to the Stock Purchase Agreement by and among Performance Solutions and the sellers of Absolute. The purchase price was subject to a customary working capital adjustment resulting in total consideration of $9.5 million. An indemnification escrow of $1.0 million was funded from the cash paid to the sellers 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.

Absolute is a provider of technical consulting and staffing solutions to the global nuclear power industry. Located in Navarre, Florida, Absolute has established long-term relationships with blue-chip customers primarily in the nuclear power industry. The acquisition of Absolute is expected to strengthen 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.

The following table summarizes the consideration paid to acquire Absolute and the 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 to the additional capacities to offer broader solutions to new and existing customers and the expected enhanced cost and growth synergies as a result of the acquisition. The total amount of goodwill that is expected to be tax deductible is $2.8 million. All of the $2.8 million of goodwill was assigned to our Nuclear Industry Training and Consulting segment.

The fair value of the assets acquired includes gross trade receivables of $5.1 million, which was collected in full after acquisition. GSE did not acquire any other class of receivable as a result of the acquisition of Absolute.

The Company identified $2.6 million of other intangible assets, including customer relationships and trademarks/names, with amortization periods of three to ten years. 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  10  $1,856 
Trademarks/Names  3   713 
Total     $2,569 

13
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 AbsoluteDP Engineering as if the business combinations had occurred on January 1, 2017.

  Three months ended September 30,  Nine months ended September 30, 
  2018  2017  2018  2017 
  
(unaudited and in thousands)
 
             
Revenue $21,801  $24,975  $72,564  $83,337 
Net loss  (361)  (736)  (2,178)  (1,224)

True North contributed revenue of $3.7 million and net loss of $(0.4) million to the Company for the period from May 11, 2018 to September 30, 2018.

Three months ended September 30,  Nine months ended September 30, 
  2019  2018  2019  2018 
  
(unaudited and in thousands)
 
             
Revenue $20,031  $26,932  $68,667  $89,679 
Net loss  (919)  (1,204)  (5,371)  (1,509)

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 True North,DP Engineering, and the related tax effects as if aforementioned companies were combined as of January 1, 2017.2018.

For the nine months ended September 30, 2019, the Company has incurred $0.6 million of selling, general and administrative costs related to the acquisition of DP Engineering. Due to a triggering event described in Note 8, an impairment test was conducted, which resulted in substantially writing down the estimated fair value of goodwill and some of the 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 nine months ended September 30, 2019, in the table above.
For the nine months ended September 30, 2018, the Company has incurred $0.5 million of transactionselling, general and administrative costs related to the acquisition of True North. 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 nine months ended September 30, 2017,2018, 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, 2017,2018, nor is it intended to be an indication of future operating results.

5.Restructuring Activities

International Restructuring
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 United Kingdom (UK). As a result, the Company closed 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, 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 eliminated approximately 40 positions since 2017 due to these changes, primarily in Europe and India, and will continue to undertake other cost-savings measures. The international restructuring plan is expected to be completed by the end of 2018.2019. As a result of these efforts, as shown in the table below, GSE expects to record a total restructuring charge of approximately $2.1$2.2 million, primarily related to the international workforce reductions, contract termination costs and asset write-offs due to the exit activities. As of September 30, 2018,2019, we had recorded total restructuring charges totaling $1.9of $2.0 million ($1.2 millionsince 2017. We incurred $2,000 of costs during the nine months ended September 30, 2018).2019. We recognized $1.3 million of restructuring cost for the year ended December 31, 2018. In addition to the restructuring costs in the table below,recognized to date, the Company has an estimated $1.6$1.3 million of cumulative translation adjustments that will be charged against net income (loss)loss and an estimated $1.0 million of tax benefits that will be realized upon liquidation of these foreign entities. GSE expects to recognize the remaining restructuring costs, currency translation adjustments and tax benefits by the end of 2018.2019.

The following tables summarizeFor the restructuring costs and restructuring liabilities atnine months ended September 30, 2018:

(in thousands)
  September 30, 2018 
  Total Expected Costs  Costs Incurred to Date  Expected Costs Remaining 
Employee termination benefits $824  $824  $- 
Lease termination costs  591   591   - 
Assets write-offs/impairment  222   222   - 
Other restructuring costs  432   273   159 
Total Restructuring costs $2,069  $1,910  $159 

The restructuring costs2019,  we made payments related to our Performance Improvement Solutions segment and are included in the consolidated statements 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  359   591   227   1,177 
Payments  (632)  (613)  (260)  (1,505)
Currency translation and other adjustments  (11)  71   -   60 
Balance as of September 30, 2018 $181  $49  $-  $230 

The accruedrestructuring for employee termination benefits were includedand other legal expenses in "accrued compensation",the amount of $54,000 that had been previously accrued.
DP Engineering Restructuring

During the third quarter of 2019, the Company implemented a restructuring plan as a result of the work suspension of DP Engineering's largest customer and subsequent notification on August 6, 2019 that the accruedEngineer of Choice contract was being terminated.  Accordingly, the Company took the necessary measures to reduce DP’s workforce by approximately 12 FTE’s and in addition terminated one of its office leases early resulting in one-time costs of $293,000 being paid in the quarter.  This reduction in force aligns the workforce to the current level of business going forward. 

Collectively, for the nine months ended September 30, 2019, the Company recorded restructuring charges of approximately $0.7 million, of which $0.3 million related to DP Engineering severance and lease termination costs were included in "accrued expenses" inand $0.4 million related to an executive departure related to the consolidated balance sheets.suspension of the Company’s acquisition strategy.

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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.

AsIn connection with the acquisition of December 31, 2017,DP Engineering on February 15, 2019, the remainingCompany recognized the estimated fair value of contingent consideration related to ourfor $1.2 million. During the nine months ended September 30, 2019, as a result of the triggering event described in Note 8, an impairment test was conducted on DP Engineering's goodwill and definite-lived intangible assets and the Company determined the $1.2 million of contingent consideration recognized upon acquisition of HyperspringDP Engineering has reduced to zero since the related earn-out payment is no longer expected to be paid. We have recorded this reduction as an offset to selling, general and administrative expenses in 2014 was $1.7 million, allunaudited consolidated statements of which was paid in January 2018.operations. There was no contingent consideration liability as of September 30, 2018.2019.

7.Contract Receivables

Contract receivables represent the Company's unconditional rights to consideration 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) September 30,  December 31,  September 30,  December 31, 
 2018  2017  2019  2018 
            
Billed receivables $12,592  $8,154  $8,281  $15,998 
Unbilled receivables  6,926   5,980   8,754   5,506 
Allowance for doubtful accounts  (280)  (137)  (469)  (427)
Total contract receivables, net $19,238  $13,997  $16,566  $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 due according to the contractual terms of the receivable. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, and specific identification and review of customer accounts. During the nine months ended September 30, 20182019 and 2017,2018, the Company recordeddid not record any allowances for doubtful accounts. The minor fluctuation on the balance of allowances for doubtful accounts of $146,000 and $118,000, respectively.was due to foreign currency exchange rates.

During October 2018,2019, the Company invoiced $5.0$6.3 million of the unbilled amounts related to the balance at September 30, 2018.2019 unbilled amounts.

As of September 30, 2018, the Company had two customers that accounted for 19.7% and 13.1% of its consolidated contract receivables, respectively. As of December 31, 2017,2019, the Company had one customer that accounted for 26.7%26.3% its consolidated contract receivables. As of December 31, 2018, the Company had one customer that accounted for 16.8% of its consolidated contract receivables.


15
8. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(in thousands) September 30,  December 31, 
  2018  2017 
       
Inventory $261  $755 
Income taxes receivable  296   418 
Prepaid expenses  298   549 
Other current assets  769   1,073 
Total prepaid expenses and other current assets $1,624  $2,795 

At September 30, 2018 and December 31, 2017, prepaid expenses and other current assets are comprised primarily of inventory and other current assets. Inventory has been purchased and used 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 $53,000 and $325,000 for the three and nine months ended September 30, 2018, respectively, and $38,000 and $126,000 for the three and nine months ended September 30, 2017, respectively. Total amortization expense was $150,000 and $353,000 for the three and nine months ended September 30, 2018, respectively, and $118,000 and $352,000 for the three and nine months ended September 30, 2017, respectively.

10.8Goodwill and Intangible Assets
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 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.

The Company'sAs discussed in Note 4, we recognized definite-lived intangible assets include amountsof $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 5 to 15 years. Amortization of our definite-lived intangible assets is recognized on a straight-line basis over the estimate useful life of the associated assets.
Following the February 23, 2019 event occurring at a DP Engineering customer location and subsequent receipt of the Notice of Suspension on February 28, 2019, the Company concluded that DP Engineering's relationship with it's largest customer has been adversely impacted. The DP Engineering customer contracts and relationships were the major component of the definite-lived intangible assets recognized in connection with business acquisitions, including customer relationships, trade names, non-compete agreementsthe acquisition of DP Engineering. Accordingly, the Company determined that a triggering event had occurred requiring an interim assessment of whether a potential impairment of definite-lived intangible asset impairment test was necessary.
Therefore, the impairment test of the definite-lived intangible assets recognized upon the acquisition of DP Engineering was also conducted according to ASC 350, Intangibles-Goodwill and alliance agreements.other.
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 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 at March 31, 2019. 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 rules. The impairment charge of $3.4 million on definite-lived intangible assets was recorded within "Loss on impairment" in our consolidated statements of operations. Due to the August 6th Notice of Termination of the EOC agreement with DP Engineering, the Company performed  additional impairment testing as of September 30th, 2019 and at this time have determined no further impairment is needed.

Changes in the gross carrying amount, accumulated amortization, addition and impairment of definite-lived intangible assets from December 31, 2018 through September 30, 2019 were as following:

(in thousands)
  For the Nine Months Ended September 30, 2019 
  Beginning Gross  Accumulated  Addition  Impairment  Net 
  Carrying Amount  Amortization          
Amortized intangible assets:               
Customer relationships $6,833  $(3,411) $4,898  $(3,370) $4,950 
Trade names  1,295   (621)  1,172   -   1,846 
Developed technology  471   (471)  -   -   - 
Non-contractual customer relationships  433   (433)  -   -   - 
Noncompete agreement  221   (167)  728   -   782 
Alliance agreement  527   (145)  -   -   382 
Others  167   (167)  -   -   - 
Total $9,947  $(5,415) $6,798  $(3,370) $7,960 

(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 agreements  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 $0.6 million for the three months ended September 30, 2019 and 2018, and $1.6 million and $1.1 million for the nine months ended September 30, 2019, and 2018, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:
(in thousands)   
Years ended December 31:   
2019 (remainder) $495 
2020  1,974 
2021  1,471 
2022  1,152 
2023  868 
Thereafter  2,000 
Total $7,960 

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 described 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 terminated the existing contract on August 6th 2019. The changeCompany determined that the notice of suspension was a triggering event necessitating a goodwill impairment test.
On May 10, 2019, the Company determined that a material impairment had occurred, requiring an assessment for impairment to be completed related to $5.6 million of goodwill recorded in the acquisition.
The impairment test used an income-based approach with discounted cash flow method, and market-based approach including both guideline public company method and merger and acquisition method.
The impairment test results 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. Due to the August 6th Notice of Termination of the EOC agreement with DP Engineering, the Company performed, under ASC 350 guidance, additional impairment testing as of September 30th, 2019 and at this time have determined no further impairment is needed.
Changes in the net carrying amount of goodwill from December 31, 20172018 through September 30, 2018 was2019 were due to the acquisition of DP Engineering, and were comprised of the following items:

(in thousands)
  Performance Improvement Solutions  Nuclear Industry Training and Consulting  Total 
Balance, January 1, 2018 $-  $8,431  $8,431 
Acquisition  3,754   -   3,754 
Balance, September 30, 2018 $3,754  $8,431  $12,185 
  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, September 30, 2019 $8,278  $8,431  $16,709 

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

Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for customer relationships which are recognized in proportion to the related projected revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. The Company does not have any intangible assets with indefinite useful lives, other than goodwill. There were no indications of impairment of intangible assets during the current reporting period. The increase in intangible assets during the three and nine months ended September 30, 2018 was due to the acquisition of True North. See Note 4, Acquisitions for details.

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11.9.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 September 30, 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 discussed in Note 14, Debt, we issued a new term loan to finance the acquisition of True North. As of September 30, 2018,2019, the carrying amountCompany had four standby letters of the long-term debt was $9.0 million. The carrying value of the Company's long-term debt approximated its fair value basedcredit totaling $1.2 million which represent performance bonds on Level 2 inputs since the debt carries a variable interest rate that is tied to the current LIBOR rate plus an applicable spread.four contracts.

For the three and nine months ended September 30, 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 September 30, 2018.2019.

The following table presents assets and liabilities measured at fair value at September 30, 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 $852  $-  $-  $852  $375  $-  $-  $375 
Foreign exchange contracts  -   14   -   14   -   68   -   68 
Total assets $852  $14  $-  $866  $375  $68  $-  $443 
                                
Liability awards $-  $(404) $-  $(404) $-  $(18) $-  $(18)
Interest rate swap contract  -   (39)  -   (39)  -   (192)  -   (192)
Total liabilities $-  $(443) $-  $(443) $-  $(210) $-  $(210)
                                

Money market funds at both September 30, 20182019 and December 31, 20172018 are included in cash and cash equivalents in the respective consolidated balance sheets.

The following table presents assets and liabilities measured at fair value at December 31, 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)  -   (103)
Total liabilities $-  $(242) $(1,701) $(1,943) $-  $(221) $-  $(221)
                

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the nine months ended September 30, 2018:2019:

(in thousands)   
    
    
Balance, January 1, 2018 $1,701 
Payments made on contingent liabilities  (1,701)
Change in fair value  - 
Balance, September 30, 2018 $- 
(in thousands)
Balance, January 1, 2019$-
Issuance of contingent consideration in connection with acquisitions1,200
Change in fair value(1,200)
Balance, September 30, 2019$-


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12.10.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 September 30, 2018,2019, the Company had one foreign exchange contractscontract outstanding of approximately 112.51.0 million Japanese Yen, 3.2 million Euro, and 0.2 million Australian Dollars at fixed rates.Euro. The contractscontract is set to expire on various dates through December 2018.in March 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 14, Debt,12, the Company entered into a new term loan to finance the acquisition of True North in May.May 2018 and revised on June 28, 2019. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2%2.00% 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.fluctuations. The notional value amortizes monthly in equal amounts based on the five-year5-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 GSEthe 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'sderivative’s fair value. The estimated net fair values of the derivative contracts on the consolidated balance sheets are as follows:

 September 30,  December 31,  September 30,  December 31, 
(in thousands) 2018  2017  2019  2018 
      
Prepaid expenses and other current assets            
Foreign exchange contracts $14  $201  $68  $43 
Total asset derivatives  14   201   68   43 
                
Other liabilities                
Interest rate swaps  (39)  -   (192)  (103)
Total liability derivatives  (39)  -   (192)  (103)
                
Net fair value $(25) $201  $(124) $(60)
        

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

For the three and nine months ended September 30, 20182019 and 2017,2018, the Company recognized a net (loss) gain on its derivative instruments as outlined below:

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
(in thousands) 2018  2017  2018  2017  2019  2018  2019  2018 
                        
Interest rate swap - change in fair value $(28) $-  $(39) $-  $(1) $(28) $(89) $(39)
Foreign exchange contracts-change in fair value  (14)  74   (178)  145   (45)  (14)  25   (178)
Remeasurement of related contract receivables,
billings in excess of revenue earned, and
subcontractor accruals
  (17)  (3)  (89)  81   (15)  (17)  (5)  (89)
                
(Loss) gain on derivative instruments, net $(59) $71  $(306) $226 
Loss on derivative instruments, net $(61) $(59) $(69) $(306)

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13.11.Stock-Based Compensation

The Company recognizes compensation expense for all equity-based compensation awards issued to employees and directors that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date. The Company recognized $0.4$0.2 million and $0.5$0.4 million of stock-based compensation expense related to equity awards for the three months ended September 30, 20182019 and 2017,2018, respectively, and recognized $1.4$1.2 million and $1.8$1.4 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 20182019 and 2017,2018, respectively, under the fair value method. In addition to the equity-based compensation expense recognized, the Company also recognized $105,000income of $(55,000) and $92,000expense of $105,000 of stock-based compensation related to the change in the fair value of cash-settled restricted stock units (RSUs) during the three months ended September 30, 20182019 and 2017,2018, respectively. During the nine months ended September 30, 20182019 and 2017,2018, the Company recorded an expense of $165,000 and a net reduction of $80,000$88,000 and an increase of $165,000 in the fair value of cash-settled RSUs, respectively.

During the three and nine months ended September 30, 2019, the Company granted approximately 8,500 and 508,500 time-based RSUs with an aggregate fair value of $0.02 million and $1.4 million, respectively. For the three and nine months ended September 30, 2018, the Company granted approximately 0 and 388,526400,000 time-based RSUs with an aggregate fair value of $0.0 million and $1.3 million, respectively. For the three and nine months ended September 30, 2017, the Company granted 0 and 396,677 time-based RSUs with an aggregate fair value of $0.0 million and $1.4 million, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, a portion vest one year after grant and the remainder vest annually in equal amounts over the course of three years. The fair value of the time-based RSUs is expensed ratably over the requisite service period, which ranges from one year 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 periods 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 nine months ended September 30, 2019, the Company granted approximately 350,000 performance-based RSUs to employees with an aggregate fair value of $0.9 million. A cumulative adjustment reversing $150,000 of expense recognized in the first half of 2019 was recorded in the three-month period ended September 30, 2019 upon determination that vesting was no longer probable related to the revenue and EBITDA targets. During the three months ended September 30, 2019, the Company did not grant any performance-based RSUs. During the three and nine months ended September 30, 2018, and 2017, the Company did not grant any performance-based RSUs orRSUs. The Company did not grant any stock options.options during the three and nine months ended September 30, 2019 and 2018.


19

14.12.Debt

Citizens Bank

The Company entered into a three-year,3-year, $5.0 million revolving line of credit facility (RLOC)("RLOC") with Citizens Bank National Association (the Bank) on December 29, 2016 to fund general working capital needs.needs and provide funding for acquisitions. On May 11, 2018, GSE and Performance 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 facility between the BorrowerCompany and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (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 Borrower.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 the BorrowerCompany and its 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 Borrower'sCompany's obligations under the Credit Agreement are guaranteed by GSE's wholly-owned subsidiaries Hyperspring, Absolute, and True North and by any future material domestic subsidiaries (collectively, the Guarantors).Company's wholly owned subsidiaries. The credit facilities are secured by liens on all assets of the BorrowerCompany. Attendant to the Company's acquisition of DP Engineering, the Company and the Guarantors.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. On June 28, 2019, the Company and the Bank entered into a Fifth Amendment and Reaffirmation Agreement, which changed the fixed charge coverage ratio from 1.25, to four different ratios ranging from 1.05 to 1.25 among different time periods and changed the leverage ratio to: (i) 2.75 to 1.00 for the periods ending on June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020; (ii) 2.50 to 1.00 for the periods ending June 30, 2020 and September 30, 2020; (iii) 2.25 to 1.00 for the periods ending December 31st, March 31st, June 30th and September 30th thereafter.

RLOC

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

At September 30, 2018,2019, there were no outstanding borrowings under the RLOC and fivefour letters of credit totaling $2.3$1.2 million. The amount available at September 30, 2018,2019, after consideration of letters of credit was approximately $2.7$3.8 million.

Term Loan

As discussed in Note 4, Acquisitions, we acquired DP Engineering on February 15, 2019 for approximately $13.5 million in cash. The purchase price was subject to customary 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 LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. There were no debt issuance costs and loan origination fees associated with the loan related for our acquisition of DP Engineering.

As discussed in Note 4, we also acquired True North on May 11, 2018 for total consideration of approximately $9.9$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.

At September 30, 2018, the
The outstanding long-term debt under the delayed draw term loan facility was as follows:
   
(in thousands) September 30, 2019  December 31, 2018 
Long-term debt, net of discount $8,990  $19,746  $8,512 
Less: current portion of long-term debt  (1,901)  (4,778)  1,902 
Long-term debt, less current portion $7,089  $14,968  $6,610 

The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the BorrowerCompany to satisfy certain financial covenants and restrict the Borrower's and Guarantors'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 September 30, 2018,2019, the Company was in compliance with its financial covenants. See Note 1 going concern consideration regarding future covenant compliance.

BB&T Bank

At September 30, 2018 and December 31, 2017, the cash collateral account with BB&T totaled $0.0 million and $1.0 million, respectively. The balances were classified as restricted cash on the consolidated balance sheets.

20
15.13.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-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 $1.1$1.2 million, while the remaining $0.6$0.5 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  (73)  185 
Current period claims  (183)  (83)
Currency adjustment  (10)  (7)
Balance at September 30, 2018 $1,687 
Balance at September 30, 2019 $1,716 


16.14.Revenue

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, upon the adoption of ASU 2014-09, Revenue from Contracts with Customers, and all the related updates (collectively, the new revenue standard) on January 1, 2018, using the modified retrospective transition method.

We generate revenue primarily through three broad revenue streams: 1) SDB,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 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 and nine months ended September 30, 20182019 and 2017,2018, along with the reportable segment for each category:

(in thousands)
  Three months ended September 30,  Nine months ended September 30, 
  2019  2018  2019  2018 
Performance Improvement Solutions segment            
System Design and Build $4,435  $5,109  $16,472  $19,904 
Software  786   586   2,170   2,001 
Training and Consulting Services  6,196   4,154   17,975   8,709 
                 
Nuclear Industry Training and Consulting segment                
Training and Consulting Services  8,614   11,952   29,066   38,780 
                 
Total revenue $20,031  $21,801  $65,683  $69,394 

  Three months ended September 30,  Nine months ended September 30, 
  2018  
2017 (1)
  2018  
2017 (1)
 
Performance Improvement Solutions segment            
System Design and Build $5,109  $5,736  $19,904  $21,828 
Software  586   889   2,001   2,436 
Training and Consulting Services  4,154   2,112   8,709   5,829 
                 
Nuclear Industry Training and Consulting segment                
Training and Consulting Services  11,952   6,672   38,780   18,783 
                 
Total revenue $21,801  $15,409  $69,394  $48,876 

(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 periodperiods that waswere included in the contract liabilities from contracts with customers:

(in thousands)
  September 30, 2018  December 31, 2017 
Billings in excess of revenue earned (BIE) $7,810  $14,543 
Revenue recognized in the period from amounts included in BIE at the beginning of the period $9,934   N/A 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2019  2018  2019  2018 
Revenue recognized in the period from amounts included in Billings in Excess at the beginning of the period $762  $1,980  $8,615  $9,934 

For an SDB contract, we generally have two main performance obligations: the training simulator build and PCS.post contract support ("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 and nine months ended September 30, 2018,2019, the Company recognized revenue of $1.1$0.7 million and $2.4 million related to performance obligations satisfied in previous periods.periods, respectively.

As of September 30, 2018,2019, the aggregate amount of transaction price allocated to the remaining performance obligations of SDB, software and fixed-price training and consulting services contracts is $49.6$27.4 million. The Company will recognize the revenue as the performance obligations are satisfied, which is expected to occur over the next 12 months.

Part of the training and consulting services contracts are 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.

21
17.15.Income Taxes

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

(in thousands)
 
Three months ended
September 30,
  
Nine months ended
September 30,
  Three months ended September 30,  Nine months ended September 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
                        
Provision for income taxes $314  $92  $124  $399 
Provision (benefit) for income taxes $568  $314  $(874) $124 
Effective tax rate  (153.9)%  (17.9)%  (13.6)%  112.4%  (102.7)%  (153.9)%  13.8%  (13.6)%

The Company's income tax provision (benefit) provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. TaxTotal income tax expense infor the nine months ended September 30, 2019 is comprised mainly of the tax impact of the loss on impairment, federal, foreign, and state tax expense. Total income tax expense for the nine months ended September 30, 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.

Our effective tax rates were (153.9)(102.7)% and (13.6%)13.8% for the three and nine months ended September 30, 2018.2019, respectively. For the three months ended September 30, 2018,2019, the difference between our effective tax rate of (153.9)(102.7)% 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, the excess book deduction related to stock options and restricted stock units that were exercised or vested during the quarter, and the impact of the loss on impairment. For the nine months ended September 30, 2019, the difference between the effective tax rate of 13.8% 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 foreign tax contingencies, and discrete item adjustments, forincluding the foreign taxes, and return to provision true-ups which were known astax impact of September 30, 2018. For the nine months ended September 30, 2018, the difference between the effective tax rate of (13.6)% and the U.S. statutory federal income tax rate of 21% was primarily due to changes in jurisdictional income and the inclusion of income (loss) from an acquisition in the second quarter of 2018.loss on impairment.

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, 2015 forward for China, 2015 forward for 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 Chinese,India, Swedish and U.K. net deferred assets as of September 30, 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. and India.Refer to Note 1 – Going Concern Considerations which highlights possible events which could negatively impact the realization of deferred tax assets.

16.Leases

The Company followsmaintains 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 term 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 the 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 majority of the lease liability. The majority of our lease payments are fixed, although an immaterial portion of payments are variable in SEC Staff Accounting Bulletin 118 (SAB 118),nature. Variable lease payments vary based on changes in facts and circumstances related to the use of the ROU and are recorded as incurred. The Company uses an incremental borrowing rate based on rates available at commencement in determining the present value of future payments.
The Company has lease agreements with lease and non-lease components, which provides additional clarification regardingare accounted for as a single lease component. The Company applies a portfolio approach to effectively account for the application of ASC 740 in situationsoperating lease ROU assets and liabilities.

Lease contracts are evaluated at inception to determine whether they contain a lease, where the Company does not haveobtains the necessary information available, prepared, or analyzed 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 reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act's enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year of the enactment date. The Company will complete the remeasurement of its deferred taxes at December 31, 2018.thousands):

Operating LeasesClassification September 30, 2019 
Leased Assets    
Operating lease - right of use assetsLong term assets $3,720 
      
Lease Liabilities     
Operating lease liabilities - CurrentOther current liabilities  1,024 
Operating lease liabilitiesLong term liabilities  3,121 
    $4,146 

The Company recognizesexecuted a sublease agreement with a tenant to rent out 3,650 square feet from the taxlease at its Sykesville office on GILTIMay 1, 2019. This agreement is in addition to the 3,822 of square feet previously subleased, which was entered into on April 1, 2017. The sublease does not relieve the Company of its primary lease obligation. The lessor agreements are both considered operating leases, maintaining the historical classification of the underlying lease. The Company does not recognize any underlying assets for the subleases as a period costlessor of  operating leases. 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 periodconsolidated statements of operations incurred during the tax is incurred. Under thisthree and nine months ended September 30, 2019, (in thousands):

Lease CostClassification Three Months Ended September 30, 2019  Nine Months Ended September 30, 2019 
Operating lease cost (1)
Selling, general and administrative expenses $307  $852 
Short-term leases costs (2)
Selling, general and administrative expenses  46   119 
Sublease income (3)
Selling, general and administrative expenses  (43)  (75)
Net lease cost  $310  $896 

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

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 September 30, 2019 consolidated balance sheets (in thousands):

  Operating Leases 
2019 $305 
2020  1,199 
2021  1,181 
2022  1,156 
2023  622 
After 2023  107 
Total lease payments $4,570 
Less: Interest  424 
Present value of lease payments $4,146 

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, we have not provided deferred taxes related to temporary differences that upon their reversal will affect the amountCompany uses the incremental borrowing rate as the lease discount rate.

Lease Term and Discount RateNine Months Ended September 30, 2019
Weighted-average remaining lease term (years)
         Operating leases4.00
Weighted-average discount rate
         Operating leases5%

The table below sets out the classification of income subject to GILTIlease payments in the period. Forconsolidated statement of cash flows. The right-of-use assets obtained in exchange for operating lease liabilities represent new operating leases obtained through our business combination during the nine months ended September 30, 2018, there is no GILTI inclusion.2019.

The Company has made an entity classification (CTB) election to treat GSE UK as a disregarded entity effective January 1, 2018. Therefore, as of January 1, 2018, GSE UK is treated as a branch of the US for tax purposes. Accordingly, GSE UK's 2018 activity has been included (in the US Company's income tax (benefit) provision.thousands)
Other Information Nine Months Ended September 30, 2019 
 - Operating cash flows used in operating leases $893 
Cash paid for amounts included in measurement of liabilities  893 
     
Right-of-use assets obtained in exchange for new operating liabilities $1,777 

During the quarter ended June 30, 2018, the Company identified an immaterial error of $1.2 million, or $0.06 per share, in the December 31, 2017 financial statements related to the release of the valuation allowance against deferred tax assets attributable to windfall tax benefits recognized upon the adoption of ASU 2016-09. The portion relating to ASU 2016-09 should have been recorded to the consolidated statement of operations as an increase to our benefit for income taxes with a resulting increase to net income during the year ended December 31, 2017, however, the adjustment was recorded to accumulated deficit in the consolidated statement of changes in stockholders' equity. This had no impact to the ending accumulated deficit balance at December 31, 2017.
Additionally, the Company identified a $0.7 million classification error between deferred tax asset and deferred tax liability at December 31, 2017 due to improper netting of deferred taxes by jurisdiction. Accordingly, we reclassified $0.7 million of deferred tax liabilities, which was included in other liabilities to deferred tax assets in our December 31, 2017 consolidated balance sheet.
The Company evaluated the required changes and determined that their impact was not material. The financial statements for the year ended December 31, 2018 will reflect the correct comparative data.

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18.17.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 are 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. 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.

As discussedOn 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 Note 4, Acquisitions,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. 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.

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 Improvement Solutions segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector. As
Due to the impairment described in Note 8 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 assets and goodwill, and the change in fair value of contingent consideration, net, which we do not believe are representative of the report date, the Company is still evaluating the impactongoing operations of the True North acquisition onPerformance segment. Excluding these discrete items from our reporting units.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 income before income taxes:taxes. Inter-segment revenue is eliminated in consolidation and is not significant:

(in thousands)
 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
 2018  2017  2018  2017  2019  2018  2019  2018 
                        
Revenue:                        
Performance Improvement Solutions $9,849  $8,737  $30,614  $30,093  $11,417  $9,849  $36,617  $30,614 
Nuclear Industry Training and Consulting  11,952   6,672   38,780   18,783   8,614   11,952   29,066   38,780 
  21,801   15,409   69,394   48,876   20,031   21,801   65,683   69,394 
                                
Operating income:                
Operating income (loss):                
Performance Improvement Solutions  494   (892)  110   (6)  77   494   285   110 
Nuclear Industry Training and Consulting  (520)  339   (584)  455   (340)  (520)  (1,558)  (584)
Loss on impairment�� -   -   (5,464)  - 
Change in fair value of contingent consideration, net  -   (79)  -   (376)  -   -   1,200   - 
                                
Operating (loss) income  (26)  (632)  (474)  73 
Operating loss  (263)  (26)  (5,537)  (474)
                                
Interest (expense) income, net  (114)  15   (153)  60 
(Loss) gain on derivative instruments, net  (59)  71   (306)  226 
Other (expense) income, net  (5)  33   24   (4)
(Loss) income before income taxes $(204) $(513) $(909) $355 
Interest (expense), net  (288)  (114)  (812)  (153)
Loss on derivative instruments, net  (61)  (59)  (69)  (306)
Other income (expense), net  59   (5)  62   24 
Loss before income taxes $(553) $(204) $(6,356) $(909)

Effective January 2018,
18.          Non-consolidated Variable Interest Entity
The Company, through its wholly owned subsidiary DP Engineering, effectively holds a 48% membership interest in DP-NXA Consultants LLC ("DP-NXA").
DP-NXA was established to provide 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 entity, 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.
The Company evaluated the nature of DP Engineering's investment in DP-NXA and determined that DP-NXA is a variable interest entity (“VIE”). Since the Company does not have the power to direct activities that most significantly impact DP-NXA, it 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. The Company accounts for its investment in DP-NXA using the equity method of accounting due to the acquisitionfact the Company exerts significant influence with its 48% of Absolute,membership interest, but does not control the Performance Improvement Solutions allocated corporate overheadfinancial and operating decisions.
The Company's maximum exposure to any losses incurred by DP-NXA is limited to its investment. As of September 30, 2019, the Nuclear Industry TrainingCompany has not made any additional contributions to DP-NXA and Consulting segment. believes its maximum exposure to any losses incurred by DP-NXA was not material. As of September 30, 2019, the Company does not have existing guarantee with or to DP-NXA, or any third-party work contracted with it.
For the three months ended September 30, 2018 and 2017, a total of $1.3 million and $0.7 million of corporate overhead, respectively, was allocated to Nuclear Industry Training and Consulting segment. For the nine months ended September 30, 20182019, the carrying value of the investment in DP-NXA is zero. We do not have any investment income or loss from DP-NXA for the three and 2017, a total of $3.4 million and $1.9 million of corporate overhead, respectively, was allocated to Nuclear Industry Training and Consulting segment. Prior period amounts were reclassified to reflect the change.nine months ended September 30, 2019.

19.Supplemental Cash Flow Information

The following table provides a reconciliationpresents the carrying amount and classification of cash, cash equivalentsthe assets related to the Company’s variable interests in non-consolidated VIE and restricted cash reported within the consolidated balance sheets:maximum exposure to loss at September 30, 2019.

  September 30, 2018  December 31, 2017 
Cash and cash equivalents $9,831  $19,111 
Restricted cash  9   960 
Cash, cash equivalents, and restricted cash $9,840  $20,071 
(In thousands)
 September 30, 2019 
Assets   
Cash:   
Checking account $254 
Total assets $254 
Liabilities    
Credit card and other payables  254 
Total liabilities  254 
Total net assets $- 
Maximum exposure to loss $- 

23

19Commitments and Contingencies

Contingencies

On March 29, 2019, a former employee of Absolute Consulting, Inc., filed a putative class action against Absolute and the Company, Joyce v. Absolute Consulting Inc., case number 1:19 cv 00868 RDB, in the United States District Court for the District of Maryland. The lawsuit alleges that plaintiff was not properly compensated for overtime hours that he worked. The Company and Absolute intend to vigorously defend this litigation. The Company is unable to conclude that the likelihood of an unfavorable outcome in this matter is remote or probable, but the Company and Absolute continue to deny the allegations and defend the case. Legal defense costs are expensed as incurred.

Item 2.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

GSE is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the 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 May 11, 2018,February 15, 2019, GSE acquired True North Consulting, LLC, now a wholly-owned subsidiary of GSE Performance Solutions, Inc.,DP Engineering for $9.75$13.5 million (subject to customary pre- and post-closing working capital adjustments). True NorthDP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. Locatedpreparation and implementation of design modifications during plant outages. 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 Montrose, Colorado, True Northour 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 a well-regarded service provider to leading companiescustomary in the power industry.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 restart all existing work with the Company, however, the customer also informed DP Engineering that it was suspended from bidding new contracts. This incident adversely impacted the relationship between DP Engineering and its customer. As a result, DP Engineering experienced a significant decline in new orders from this customer and was not able or permitted to bid on new work. The Company determined this represented a triggering event requiring an interim assessment for impairment. As a result of the impairment analysis, 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 True NorthDP Engineering during the quarter ended March 31, 2019. On August 6, 2019, as a follow on to the Notice of Suspension, the Company received a Notice of Termination from this customer, notifying the Company that they were terminating their Engineer of Choice consulting service agreement with DP Engineering. Accordingly, DP Engineering is expected to broaden our engineering services offering, expand our relationshipscompleting work under any open Contract Orders in accordance with severalthe terms of the largest nuclear energy providersrespective Contract Orders and the Agreement, which shall be deemed to remain in effect for purposes only of completing any such Contract Orders. Upon notice of termination from the United States,customer, management has been assessing the impact of this customer loss on DP Engineering and add a highly specialized, complimentary talent poolthe likelihood of additional impairment that would be recognized against goodwill and intangible assets. Due to the recentness of this acquisition, we have not finalized the allocation of our employee base.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.

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.


24
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 44%56% of revenue)revenue at September 30, 2019 )

Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions, technical engineering services for ASME programs, and 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 natural adjacencies in 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 56%44% of revenue)revenue at September 30, 2019)

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 ourthe Hyperspring and 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.
 
25
Business Strategy

Our objective ishas been 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 ishad been 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:

PursueStrategic pause in our executed 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, particularlywith a particular focus on nuclear power; and software utilized in the power industry, both domestic and international. We are focusingdeliberately had focused our acquisition efforts on acquisitions thatto 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. Given our current desire to focus on cross selling and upselling across our existing business portfolio, our acquisition of tuck-ins is on pause.  We will focus on organic growth across the portfolio and leverage cash flow to pay down debt associated with our acquisition line of credit with our bank. While our roll-up acquisition strategy is on pause, the company remains open to transformational opportunities that may present themselves.

Summary of recent acquisitions: In February 2019, we acquired DP Engineering, a specialized provider of high-value engineering services and solutions to the nuclear power industry. In May 2018, we acquired True North, a leading provider of specialty engineering solutions to the nuclear power industry. Inindustry and in September 2017, we acquired Absolute, a provider of technical consulting and staffing solutions to the global nuclear power 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 added 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. In November 2014, we acquired Hyperspring, which enabled GSE to offer highly skilled nuclear operations and consulting personnel with unique know-how to our client base of nuclear power plants. This deepened our relationship with existing clients and won business for us at new client sites inWe believe 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. The acquisitions add 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. We feel that now is a good time to focus on organic growth opportunities through cross selling and upselling to the industry.

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. To reiterate, the current focus of these expansion efforts are primarily organic in nature.

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.

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 work on projects by Bechtel's Nuclear, Security & Environmental global business unit (NS&E) at the Bechtel Supply Chain Recognition awards in April 2016. In addition, we have a recognized high-value brand as one of the most respected providers of software and services to the 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.service.

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

Employees.  As of September 30, 2018,2019, we had approximately 447411 employees, which includes approximately 192219 in our Performance Improvement segment and approximately 255192 in our Nuclear Industry Training and Consulting segment. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.

Backlog.  As of September 30, 2018,2019, we had approximately $74.0$53.7 million of total gross revenue backlog, which included $50.8$37.8 million of Performance Improvement Solutions backlog and $23.2$15.9 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.

26
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 the 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.

27
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.

28
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:

(in thousands) Three months ended September 30,  Nine months ended September 30,  Three months ended September 30,  Nine months ended September 30, 
 2018  %  2017  %  2018  %  2017  %  2019  %  2018  %  2019  %  2018  % 
Revenue $21,801   100.0% $15,409   100.0% $69,394   100.0% $48,876   100.0% $20,031   100.0% $21,801   100.0% $65,683   100.0% $69,394   100.0%
Cost of revenue  16,380   75.1%  11,185   72.6%  52,735   76.0%  35,513   72.7%  15,358   76.7%  16,380   75.1%  50,407   76.7%  52,735   76.0%
Gross profit  5,421   24.9%  4,224   27.4%  16,659   24.0%  13,363   27.3%  4,673   23.3%  5,421   24.9%  15,276   23.3%  16,659   24.0%
Operating expenses:                                                                
Selling, general and administrative  4,366   20.0%  4,374   28.4%  13,686   19.7%  11,740   24.0%  3,465   17.3%  4,366   20.0%  12,231   18.6%  13,686   19.7%
Research and development  247   1.1%  353   2.3%  765   1.1%  1,103   2.3%  130   0.6%  247   1.1%  526   0.8%  765   1.1%
Restructuring charges  70   0.3%  -   0.0%  1,177   1.7%  45   0.1%  740   3.7%  70   0.3%  742   1.1%  1,177   1.7%
Loss on impairment  -   0.0%  -   0.0%  5,464   8.3%  -   0.0%
Depreciation  132   0.6%  79   0.5%  411   0.6%  254   0.5%  107   0.5%  132   0.6%  300   0.5%  411   0.6%
Amortization of definite-lived intangible assets  632   2.9%  50   0.3%  1,094   1.6%  148   0.3%  494   2.5%  632   2.9%  1,550   2.4%  1,094   1.6%
Total operating expenses  5,447   25.0%  4,856   31.5%  17,133   24.7%  13,290   27.2%  4,936   24.6%  5,447   25.0%  20,813   31.7%  17,133   24.7%
                                                                
Operating (loss) income  (26)  (0.1)%  (632)  (4.1)%  (474)  (0.7)%  73   0.1%
Operating loss  (263)  (1.3)%  (26)  (0.1)%  (5,537)  (8.4)%  (474)  (0.7)%
                                                                
Interest (expense) income, net  (114)  (0.5)%  15   0.1%  (153)  (0.2)%  60   0.1%
(Loss) gain on derivative instruments, net  (59)  (0.3)%  71   0.5%  (306)  (0.4)%  226   0.5%
Other (expense) income, net  (5)  0.0%  33   0.3%  24   0.0%  (4)  0.0%
Interest (expense), net  (288)  (1.4)%  (114)  (0.5)%  (812)  (1.2)%  (153)  (0.2)%
Loss on derivative instruments, net  (61)  (0.3)%  (59)  (0.3)%  (69)  (0.1)%  (306)  (0.4)%
Other income (expense), net  59   0.3%  (5)  0.0%  62   0.1%  24   0.0%
                                                                
(Loss) income before income taxes  (204)  (0.9)%  (513)  (3.3)%  (909)  (1.3)%  355   0.7%
Provision for income taxes  314   1.4%  92   0.7%  124   0.2%  399   0.8%
Loss before income taxes  (553)  (2.8)%  (204)  (0.9)%  (6,356)  (9.7)%  (909)  (1.3)%
Provision (benefit) for income taxes  568   2.8%  314   1.4%  (874)  (1.3)%  124   0.2%
Net loss $(518)  (2.4)% $(605)  (3.9)% $(1,033)  (1.5)% $(44)  (0.1)% $(1,121)  (5.6)% $(518)  (2.4)% $(5,482)  (8.3)% $(1,033)  (1.5)%

29

Results of Operations - Three and nine months ended September 30, 2018,2019, versus three and nine months ended September 30, 20172018

Revenue. Total revenue for the three months ended September 30, 2018, increased 41.5%2019 decreased 8.1% compared to the three months ended September 30, 2017.2018. For the nine months ended September 30, 2018,2019 revenue increased 42.0%decreased 5.3% compared to the nine months ended September 30, 2017.2018. The increasedecrease in revenue was primarily driven by the year over year increasedue to decrease in revenue in the Nuclear Industry Training and Consulting segment, as described below.

 Three months ended  Nine months ended  Three months ended  Nine months ended 
 September 30,  September 30,  September 30,  September 30, 
(in thousands) 2018  2017  2018  2017  2019  2018  2019  2018 
Revenue:                        
Performance Improvement Solutions $9,849  $8,737  $30,614  $30,093  $11,417  $9,849  $36,617  $30,614 
Nuclear Industry Training and Consulting  11,952   6,672   38,780   18,783   8,614   11,952   29,066   38,780 
Total revenue $21,801  $15,409  $69,394  $48,876  $20,031  $21,801  $65,683  $69,394 

Performance Improvement Solutions revenue increased approximately $1.1$1.6 million or 12.7%15.9% during the three months ended September 30, 2018,2019 compared to the same period in the prior year. Total new orders for this segment were $17.2 million during the three months ended September 30, 2018, an increase of $14.3 million when compared to the $2.9 million in the new orders during the three months ended September 30, 2017. The increase in revenue was primarily due to the acquisition of True North,DP Engineering, which contributed to $2.4$2.2 million of revenue to the segment during the three months ended September 30, 2018.2019. This increase was partially offset by a decline of $0.7 million due to timing differences, and a decline of $0.6$0.4 million from foreign subsidiaries asthat we will close by the end of 2019. The decline in new orders is due to a resultcombination of factors including expected new orders being delayed until the second half of the winding downyear, the cyclical nature of our industry and business, and the re-establishment of our business development strategy in the first half of the international subsidiaries.

For the nine months ended September 30, 2018, Performance Improvement Solutions revenue was $30.6 million compared to $30.1 million for the nine months ended September 30, 2017. We recorded total new orders of $31.7 million during the nine months ended September 30, 2018, an increase of $19.7 million compared to $12.0 million in the nine months ended September 30, 2017. The increase in revenue for the nine months ended September 30, 2018 compared to the prior year was mainly driven by the acquisition of True North, which contributed $3.7 million of revenues to the segment since the acquisition. This increase was partially offset by a decrease of $2.1 million in revenues due to timing differences, and a decrease of $1.1 million from foreign subsidiaries as a result of restructuring international subsidiaries and structure.

For the three months ended September 30, 2018, Nuclear Industry Training and Consulting revenue increased $5.3 million, or 79.1% compared to the three months ended September 30, 2017.year. Total new orders for this segment were $10.7 million induring the three months ended September 30, 2018,2019, a decrease of $(6.5) million when compared to $6.3the $17.2 million in the prior year. The increase in the revenue was largely due to the acquisition of Absolute which contributed $6.2 million of revenues fornew orders during the three months ended September 30, 2018.

For the nine months ended September 30, 2018,2019 Performance Improvement Solutions revenue was $36.6 million compared to $30.6 million for the nine months ended September 30, 2018. We recorded total new orders of $19.0 million during the nine months ended September 30, 2019, a decrease of $(12.7) million compared to $31.7 million in the nine months ended September 30, 2018. The increase in revenue for the nine months ended September 30, 2019 compared to the prior year was mainly driven by the acquisition of True North Consulting and DP Engineering, which contributed  $10.3 million of revenue, partially offset by a decrease from foreign operations of $1.5 million for the period.

For the three months ended September 30, 2019, Nuclear Industry Training and Consulting revenue increased $20.0decreased $(3.3) million, or 106.5%27.9% compared to the three months ended September 30, 2018. Total new orders for this segment were $8.3 million in the three months ended September 30, 2019, compared to $10.7 million in the prior year. The decrease in the revenue was largely due to lower customer demand for staffing during the three months ended September 30, 2019. The decline in new orders is due to a combination of factors including customer budget cut, the cyclical nature of our industry and business, and the re-establishment of our business development strategy in the first half of the year.

For the nine months ended September 30, 2019, Nuclear Industry Training and Consulting revenue decreased $(9.7) million, or 25.0% compared to the nine months ended September 30, 2017.2018. We recorded total new orders of $23.9 million in the nine months ended September 30, 2019, compared to $36.9 million in the nine months ended September 30, 2018, compared to $25.02018. The $(9.7) million in the nine months ended September 30, 2017. The $20.0 million increasedecrease in revenue was primarily attributabledue to lower customer demand for staffing from the acquisition of Absolute acquired in September 2017, which contributed $21.1 million of revenuesCompany's major customers for the nine months ended September 30, 2018.2019.

As of September 30, 2018,2019, backlog was $74.0$53.7 million: $50.8$37.8 million for the Performance Improvement Solutions business segment, $5.6 million of which was attributable to True North, and $23.2$15.9 million for Nuclear Industry Training and Consulting. As of December 31, 2017,2018, the Company's backlog was $71.4$70.6 million: $46.3$49.4 million for the Performance Improvement Solutions business segment and $25.1$21.2 million for Nuclear Industry Training and Consulting. The decrease in the Nuclear Industry Training and Consulting business segmentof backlog wasis primarily due to 2017 backlog that was converted to revenues during 2018lower orders in 2019. Orders have decreased by $25.7 million (37.5%): $12.7 million (40.1%) for Performance Improvement Solutions, and has only been partially backfilled by new orders.$13.0 million (35.2%) for NITC.

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Gross Profit. Gross profit totaled $5.4$4.7 million for the three months ended September 30, 2018,2019, compared to $4.2$5.4 million for the same period in 2017.2018.  As a percentage of revenue, gross profit decreased from 27.4% for the three months ended September 30, 2017, to 24.9% for the three months ended September 30, 2018.2018, to 23.3% for the three months ended September 30, 2019.  For the nine months ended September 30, 2018,2019, gross profit was $16.7$15.3 million compared to $13.4$16.7 million for the same period in 2017.2018.  As a percentage of revenue, gross profit decreased from 27.3% for the nine months ended September 30, 2017, to 24.0% for the nine months ended September 30, 2018.2018, to 23.3% for the nine months ended September 30, 2019.

 Three months ended  Nine months ended  Three months ended  Nine months ended 
 September 30,  September 30,  September 30,  September 30, 
(in thousands) 2018  %  2017  %  2018  %  2017  %  2019  %  2018  %  2019  %  2018  % 
Gross profit:                                                
Performance Improvement Solutions $3,638   36.9% $2,904   33.2% $11,318   37.0% $10,337   34.4% $3,548   31.1% $3,638   36.9% $11,787   32.2% $11,318   37.0%
Nuclear Industry Training and Consulting  1,783   14.9%  1,320   19.8%  5,341   13.8%  3,026   16.1%  1,125   13.1%  1,783   14.9%  3,489   12.0%  5,341   13.8%
Consolidated gross profit $5,421   24.9% $4,224   27.4% $16,659   24.0% $13,363   27.3% $4,673   23.3% $5,421   24.9% $15,276   23.3% $16,659   24.0%

The year over year increase in gross profit percentage forIn Performance Improvement Solutions, three and nine months ended September 30, 2019, gross margin percentage decreased 5.8% and 4.8% respectively. This decrease is primarily related to DP Engineering, which decreased gross margin percentage by 7.9% and 7.9%  for the three and nine months ended September 30, 2018, was primarily driven by cost savings realized in 2018 on certain larger projects. These savings resulted in  revenue recognition of $1.1 million related to performance obligations satisfied in previous periods.2019 respectively.

The gross profit percentage in Nuclear Industry Consulting and Training was slightly lower during the three and nine months ended September 30, 2018,2019, as compared to other periods; this wasperiods, mainly due to normal changes in the mix of projects with different margins.margins and overall lower utilization rates.

.

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Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses totaled $4.4$3.5 million in the three months ended September 30, 2018,2019, a 0.2%20.6% decrease from the $4.4 million for the same period in 2017.2018. For the nine months ended September 30, 20182019 and 2017,2018, SG&A expenses totaled $13.7$12.2 million and $11.7$13.7 million, respectively. Fluctuations in the components of SG&A spending were as follows:

 Three months ended  Nine months ended  Three months ended  Nine months ended 
 September 30,  September 30,  September 30,  September 30, 
(in thousands) 2018  2017  2018  2017  2019  2018  2019  2018 
Corporate charges $3,265  $3,245  $10,034  $8,287  $2,321  $3,265  $9,800  $10,034 
Business development  844   773   2,727   2,250   747   844   2,549   2,727 
Facility operation & maintenance (O&M)  228   213   775   645   348   228   1,027   775 
Bad debt expense  29   -   146   118   48   29   48   146 
Contingent consideration accretion  -   139   -   436 
Change in contingent consideration  -   -   (1,200)  - 
Other  -   4   4   4   1   -   7   4 
Total $4,366  $4,374  $13,686  $11,740  $3,465  $4,366  $12,231  $13,686 

Corporate charges increased from $3.2 million for the three months ended September 30, 2017, towere $3.3 million for the three months ended September 30, 2018. The slight increase was primarily due2018 compared to higher operating expenses related to$2.3 million for the May 2018 acquisition of True North. The increase was partially offset by lower acquisition costs related to the Absolute acquisition inthree months ended September 2017.30, 2019. For the nine months ended September 30, 2019 and 2018, and 2017,the Company incurred corporate charges of $9.8 and $10.0 million, respectively. The acquisition of DP Engineering and True North Consulting, increased from $8.3Corporate charges by $1.3 million to $10.0 million. The increasewhich was offset primarily driven by the following: higher employee bonusesa $1.4 million dollar reduction in the amount of $0.4incentive compensation, and $0.1 million mainly due to a new post earnout bonus planreduction in 2018 for certain Hyperspring employees; $0.4 million ofseverance expense included as corporate charges attributable to Absolute; higher professional fees of $0.3 million associated with the adoption of the new revenue standard (ASC 606) and the impact of the Tax Cuts and Jobs Act; $0.3 million of corporate charges attributable to True North; and higher labor costs of $0.3 million due to additional headcount in our corporate office.charges.

Business development expense increased $0.1decreased $(0.1) million and $0.5$(0.2) million for the three and nine months ended September 30, 2018,2019, respectively, compared to the same periods in 2017. This was mainly due to additional business development expenses incurred in 2018 related to the acquisition of Absolute.2018.

Facility O&M expenses increased $15,000$120,000 and $130,000$252,000 for the three and nine months ended September 30, 2018,2019, respectively, compared to the same periods in 2017.2018. The increase in 20182019 was mainly due to the lease of a new office building in Columbia, Maryland location in March 2018, the acquisition of AbsoluteDP Engineering in September 2017,February 2019, which resulted in the lease of additional office space in Navarre, Florida,Fort Worth, Texas, Baton Rouge, Louisiana, and Russellville, Arkansas.

As a result of the triggering event occurring at DP Engineering, the Company determined the fair value of the contingent consideration recorded in connection with the acquisition of True NorthDP Engineering in May 2018, which resulted inFebruary 2019 was zero and recorded the lease of additional office space in Montrose, Colorado.reduction as an offset to selling, general and administrative expenses.

Contingent consideration expense mainly reflected the fair value adjustments related to our November 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 year.



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Research and Development Expenses. Research and development (R&D) costs consist primarily of software engineering personnel and other related costs. R&D costs, net of capitalized software, totaled $247,000$0.1 and $353,000$0.2 for the three months ended September 30, 20182019 and 2017,2018, respectively. Before capitalization of software development costs, R&D costs totaled $0.3$0.2 million and $0.4$0.3 million for each of the three months ended September 30, 20182019 and 2017.2018. R&D costs, net of capitalized software, totaled $0.8$0.5 million and $1.1$0.8 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. R&D expenses before capitalization of software development costs totaled $1.1$0.9 million and $1.2$1.1 million for each of the nine months ended September 30, 20182019 and 2017.2018. The decrease in R&D expenses in 20182019 was mainly due to more software projects having reachedless headcount in the development stage in current year.

Restructuring Charges. On December 27, 2017, the Board of GSE Systems, Inc. approved an international restructuring plan to streamline and optimize the Company's global operations and we announced we expected restructuring charges to total $2.1$2.2 million, excluding any tax impacts and cumulative translation adjustments. The Company recorded restructuring charges of $0.1 million and $1.2 million for the three and nine months ended September 30, 2018, primarily consisting of lease termination costs, employee severance costs and other charges. As of September 30, 2018,2019, we had recorded accumulatedincurred restructuring charges of $1.9$2 million, and we expect to record the remaining restructuring charges of approximately $0.2 million by the end of 2018. For2019. Additionally for the nine months ended September 30, 20172018 we recordedincurred restructuring charges of $45,000,$1.1 million, which represented true-up adjustments relatedcosts associated to the restructuring plan initiated in 2015. For the three months ended September 30, 2019, the Company recorded restructuring charges of approximately $0.7 million of which $0.3 million related to DP Engineering severance and $0.4 million related to an executive departure related to the suspension of the Company’s acquisition strategy.

Depreciation. Depreciation expense increased $53,000decreased $(25,000) and $157,000$(111,000) for the three and nine months ended September 30, 2018,2019, compared to the same periods in 2017. The increase in 2018 was largely driven by the 2017 acquisition of Absolute and the depreciation of additional leasehold improvements as we relocated most of our corporate functions to a new office building in Columbia, Maryland in March 2018.

Amortization of Definite-lived Intangible Assets. Amortization expense related to definite-lived intangible assets totaled $0.6$0.5 million  and $50,000$0.6 million for the three months ended September 30, 20182019 and 2017,2018, respectively. For the nine months ended September 30, 20182019 and 2017,2018, amortization expense related to definite-lived intangible assets totaled $1.1$1.6 million and $0.1$1.1 million, respectively. The increase in amortization of definite-lived intangible assets in 20182019 was primarily due to the acquisition of AbsoluteDP Engineering and True North. During

Interest (expense), net. Interest expense totaled $0.3 million and $0.8 million for the three and nine months ended September 30, 2018, Absolute's amortization expenses2019, respectively. Interest expense totaled $168,000$0.1 million and $454,000, respectively. During the three months ended September 30, 2018, True North's amortization expense was $420,000. Amortization expense for True North since the date of acquisition totaled $556,000.

Interest (expense) income, net. Interest expenses totaled $114,000 and $153,000$0.2 million for the three and nine months ended September 30, 2018, respectively. Interest income totaled $15,000 and $60,000 for the three and nine months ended September 30, 2017, respectively. The Company issued a five-year term loan of $10.3$14.3 million in May 2018February 2019 to finance the acquisition of True North,DP Engineering, and has recorded interest expense of $130,000 related to the term loan$0.2 million and $0.4 million for the three months ended September 30, 2018.2019, respectively, related to the term loan.

(Loss) gainLoss on derivative instruments, net. In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We control a portion of these risks through a risk management program that includes the use of derivative instruments. (Loss) gain on derivative instruments relates to the Company's interest rate swap contracts, foreign exchange contracts and remeasurement of foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals. The following table summarizes the components of the (loss) gain recognized for the three and nine months ended September 30, 20182019 and 2017:2018:

 Three months ended September 30,  Nine months ended September 30,  Three months ended September 30,  Nine months ended September 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
Interest rate swap - change in fair value $(28) $-  $(39) $-  $(1) $(28) $(89) $(39)
Foreign exchange contracts- change in fair value  (14)  74   (178)  145   (45)  (14)  25   (178)
Remeasurement of related contract receivables, billings in excess of revenue earned, and subcontractor accruals  (17)  (3)  (89)  81   (15)  (17)  (5)  (89)
(Loss) gain on derivative instruments, net $(59)  71  $(306) $226 
Loss on derivative instruments, net $(61)  (59) $(69) $(306)


Other Income (Expense), Net.  For the three and nine months ended September 30, 2018,2019, the Company recognized other expense, net, of $5,000$59,000 and other income, net, of $24,000,$62,000, respectively. For the three and nine months ended September 30, 2017,2018, the Company recognized other income, net, of $33,000($5,000) and other expense,income, net, of $4,000,$24,000, respectively.

33
(Benefit) provisionProvision (benefit) for Income Taxes

Income tax expense (benefit) was $0.6 million and $(0.9) million with effective income tax rates of (102.7)% and 13.8% for the three and nine months ended September 30, 2019, respectively. This is compared to income tax expense of $0.3 million and $0.1 million with effective income tax rates of (153.9)% and (13.6)%, for the three and nine months ended September 30, 2018, respectively. This is compared to income tax expense of $0.1 million and $0.4 million with effective income tax rates of (17.9)% and 112.4%, for the three and nine months ended September 30, 2017, respectively. The Company's income tax provision (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 for loss on impairment, and federal, foreign, 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.

Our effective tax rates were (153.9)(102.7)% and (13.6%)13.8% for the three and nine months ended September 30, 2018.2019. For the three months ended September 30, 2018,2019, the difference between our effective tax rate of (153.9)(102.7)% 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, the excess book deduction related to stock options and return to provision true-ups whichrestricted stock units that were known asexercised or vested during the quarter, and the tax impact of September 30, 2018.the loss on impairment.  For the nine months ended September 30, 2018,2019, the difference between the effective tax rate of  (13.6)%13.8% and the U.S. statutory federal income tax rate of 21% was primarily due to changes in jurisdictional incomepermanent differences, accruals related to uncertain tax positions for certain foreign contingencies, and discrete item adjustments, including the inclusiontax impact of income (loss) from an acquisition in the second quarter of 2018.loss on impairment.

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, 2015 forward for China, 2015 forward for 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 allowances for its Chinese, U.K., and Swedish net deferred tax assets at September 30, 2018.2019.

The Company follows the guidance in SEC Staff Accounting Bulletin 118 (SAB 118), which provides additional clarification regarding the application of ASC 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act's enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year of the enactment date. The Company will complete the remeasurement of its deferred taxes at December 31, 2018.

During the quarter ended June 30, 2018, the Company identified an immaterial error of $1.2 million, or $0.06 per share, in the December 31, 2017 financial statements related to the release of the valuation allowance against deferred tax assets attributable to windfall tax benefits recognized upon the adoption of ASU 2016-09. The portion relating to ASU 2016-09 should have been recorded to the consolidated statement of operations as an increase to our benefit for income taxes with a resulting increase to net income during the year ended December 31, 2017, however, the adjustment was recorded to accumulated deficit in the consolidated statement of changes in stockholders' equity. This had no impact to the ending accumulated deficit balance at December 31, 2017.
Additionally, the Company identified a $0.7 million classification error between deferred tax asset and deferred tax liability at December 31, 2017 due to improper netting of deferred taxes by jurisdiction. Accordingly, we reclassified $0.7 million of deferred tax liabilities, which was included in other liabilities to deferred tax assets in our December 31, 2017 consolidated balance sheet.
The Company evaluated the required changes and determined that their impact was not material. The financial statements for the year ended December 31, 2018 will reflect the correct comparative data.

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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.

Liquidity and Capital Resources

As of September 30, 2018,2019, the Company'sCompany’s cash and cash equivalents and restricted cash totaled $9.8$8.6 million compared to $20.1$12.1 million at December 31, 2017.2018.

For the nine months ended September 30, 20182019 and 2017,2018, net cash (used in) provided byused in operating activities was $(6.4)$(0.3) million and $3.0$(6.4) million, respectively. The year over year changeincrease of $9.4$6.0 million in cash flows (used in) provided by operating activities was primarily driven by cash paymentsthe collection of $1.5 million for the restructuring expenses and 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 billing.during the period.

Net cash used in investing activities totaled $10.5$(14.0) million and $8.6$(10.6) million for the nine months ended September 30, 20182019 and 2017,2018, respectively. The increase in cash outflow in 20182019 was primarily driven by the acquisition of True North,DP Engineering, the net cash consideration of which was $9.6 million; $0.4 million increase in fixed assets primarily due to increase in lease improvements and furniture and fixtures as we entered into a new lease agreement in December 2017 and relocated most of our corporate functions, including finance, legal, and R&D to a new office in Columbia, Maryland in March 2018; and $0.2 million increase in capitalized software development costs as more software reached development stage. These increases were offset by a decrease of $8.5 million net consideration related to the acquisition of Absolute in 2017.$13.5 million.

For the nine months ended September 30, 20182019 and 2017,2018, cash provided by (used in) financing activities totaled $7.0$11.0 million and $(1.1)$7.0 million, respectively. The increase in the cash inflow from financing activities was largely driven by the proceeds from issuancedraw down of a term loan of $10.2 million, net of discount and issuance costs, a decrease of $0.6 million in the Company's withholding of RSUs in order to pay employees' payroll withholding taxes on vested RSUs;$14.3 million; the increase was partially offset by an increase of repayments of $1.2$3.0 million on the term loan and an increase of $1.3 million in contingent consideration payments to the former Hyperspring owners as we paid off the earnout.loan.

At September 30, 2018,2019, the Company had cash and cash equivalents and restricted cash of $9.8$8.6 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.

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. On May 11, 2018,June 28, 2019, GSE and Performance 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 facility between the Borrower and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (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 $13.5 million to fund the transaction. At September 30, 2018,2019, the outstanding balance of the long-term debt was $9.0$19.7 million.

At September 30, 2018,2019, there were no outstanding borrowings on the RLOC and fivefour letters of credit totaling $2.3$1.2 million. The amount available at September 30, 2018,2019, after consideration of the letters of credit was approximately $2.7$3.8 million.

The credit facility agreement is subject to standard financial covenants, some of which was amended on June 28, 2019, and reporting requirements. At September 30, 2018,2019, the Company was in compliance with its financial covenants.

Going Concern Consideration
35
The Company is currently in compliance with its debt covenants; however, it is probable, based on our forecasts, that we will not be in compliance with these covenants at future measurement dates in the following twelve-month period. We do have the ability to cure one of the two financial covenants, the leverage ratio, by paying down an amount of debt necessary to meet the leverage ratio and we are considering taking this action. Regarding the fixed charge coverage ratio, we anticipate reducing fixed charges, namely excess real estate at the DP Engineering office and other space to be made idle. We will be working with the Bank to obtain a modification of our covenant requirements that would, based on our projections, provide forecasted compliance with the covenants. If at such future time a covenant violation were to occur and if we are unable to agree to amended financial covenant measures with the Bank before such time or obtain a waiver in the event of subsequent non-compliance, the Company would likely not be able to repay the entirety of the outstanding debt in the event the Bank were to call the debt, thus leading to substantial doubt about the Company’s ability to continue as a going concern until such amendments or waivers are in place.
Based on our cash flow projection, we believe our funds from operations and availability of cash provide us with sufficient funds to cure one of the forecasted violations if we choose to; have sufficient cash to fund our on-going operations and make our scheduled debt repayments in the normal course of business.
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). 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 each measureit 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. Our management uses EBITDA and Adjusted EBITDA and other non-GAAP measures to evaluate the performance of our business and make certain operating decisions (e.g., budgeting, planning, employee compensation and resource allocation). This 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. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation G is as follows:

(in thousands)
  Three months ended  Nine months ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
Net loss $(1,121) $(518) $(5,482) $(1,033)
Interest expense (income), net  288   114   812   153 
Provision for income taxes  568   314   (874)  124 
Depreciation and amortization  666   573   2,143   1,858 
EBITDA  401   483   (3,401)  1,102 
Loss on impairment  -   -   5,464   - 
Impact of the change in fair value of contingent consideration  -   -   (1,200)  - 
Restructuring charges  740   70   742   1,107 
Stock-based compensation expense  114   401   1,150   1,535 
Impact of the change in fair value of derivative instruments  61   59   69   306 
Acquisition-related expense  116   491   744   491 
Bad debt expense due to customer bankruptcy  -   65   -   65 
Adjusted EBITDA $1,432  $1,569  $3,568  $4,606 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
Net loss $(518) $(605) $(1,033) $(44)
Interest expense (income), net  114   (15)  153   (60)
(Benefit) provision for income taxes  314   92   124   399 
Depreciation and amortization  914   247   1,858   754 
EBITDA  824   (281)  1,102   1,049 
Change in fair value of contingent consideration  -   139   -   436 
Restructuring charges  70   -   1,177   45 
Stock-based compensation expense  507   627   1,535   1,873 
Impact of the change in fair value of derivative instruments  59   (71)  306   (226)
Acquisition-related expense  -   454   491   473 
Bad debt expense due to customer bankruptcy  -   -   65   122 
Adjusted EBITDA $1,460  $868  $4,676  $3,772 




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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, net of income tax expense impact of adjustments. 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  Nine months ended 
(in thousands) Three months ended  Nine months ended 
 September 30,  September 30,  September 30,  September 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
Net loss $(518) $(605) $(1,033) $(44) $(1,121) $(518) $(5,482) $(1,033)
Change in fair value of contingent consideration  -   139   -   436 
Loss on impairment  -   -   5,464   - 
Impact of the change in fair value of contingent consideration  -   -   (1,200)  - 
Restructuring charges  70   -   1,177   45   740   70   742   1,107 
Stock-based compensation expense  507   627   1,535   1,873   114   401   1,150   1,535 
Impact of the change in fair value of derivative instruments  59   (71)  306   (226)  61   59   69   306 
Acquisition-related expense  -   454   491   473   116   491   744   491 
Amortization of intangible assets related to acquisitions  632   50   1,094   148   494   312   1,550   1,094 
Bad debt expense due to customer bankruptcy  -   -   65   122   -   65   -   65 
Income tax expense impact of adjustments  186   (63)  (1,761)  (1,165)
Adjusted net income $750  $594  $3,635  $2,827  $590  $817  $1,276  $2,400 
                
Diluted loss per common share $(0.03) $(0.03) $(0.05) $- 
                                
Adjusted earnings per common share – Diluted $0.04  $0.03  $0.18  $0.14  $0.03  $0.04  $0.06  $0.12 
                                
Weighted average shares outstanding - Diluted(1)
  20,166,912   19,702,742   19,932,921   19,601,661   20,586,145   20,166,912   20,418,960   19,932,921 

(1) During the three and nine months ended September 30, 2019 and 2018, the Company reported both a GAAP net loss and positive adjusted net income. Accordingly, there were 397,131 and 645,714 dilutive shares from options and RSUs included in the adjusted earnings per common share calculation, that were considered anti-dilutive in determining the GAAP diluted loss per common share.

(1)  During the three months ended September 30, 2019 and 2018, the Company reported a GAAP net loss and positive adjusted net income. Accordingly, there were 380,024578,676 and 312,714713,024  dilutive shares from options and RSUs included in the adjusted earnings per common share calculation, for the three and nine months ended September 30, 2018, that were considered anti-dilutive in determining the GAAP diluted loss per common share.

(1) During the three and nine months ended September 30, 2017, the Company reported a GAAP net loss and positive adjusted net income. Accordingly, there were 421,972 and 396,883 dilutive shares from options and RSUs included in the adjusted earnings per common share calculation for the three and nine months ended September 30, 2017, 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 May 11, 2018,February 15, 2019, the Company completed the purchase of True North Consulting, LLC. True NorthDP Engineering. DP Engineering constitutes 18%16.8% of total assets of the Company at September 30, 2018,2019, and 5%10% of the Company's consolidated revenue for the nine months ended September 30, 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 True NorthDP Engineering from its evaluation of disclosure controls and procedures from the date of such acquisition through September 30, 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.  Our management has implemented GSE's disclosure controls and procedures over the acquired operation of True North as of June 30, 2019.
Changes in Internal Control over Financial Reporting

ThereOther than changes to apply our internal control structure to True North, 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.On March 29, 2019, a former employee of Absolute Consulting, Inc., filed a putative class action against Absolute and the Company, Joyce v. Absolute Consulting Inc., case number 1:19 cv 00868 RDB, in the United States District Court for the District of Maryland. The lawsuit alleges that plaintiff was not properly compensated for overtime hours that he worked.  In addition, he alleges that there is a class of employees who were not properly compensated for overtime hours worked. Absolute and the Company waived service and, on May 28, 2019, Absolute filed an answer to the complaint and the Company filed a motion to dismiss asserting that the Company was not the plaintiff’s employer and, therefore, not a proper party to the litigation. The plaintiff has responded and opposed the motion to dismiss. No scheduling order has been issued and the motion to dismiss remains pending. The Company and Absolute intend to vigorously defend this litigation. The Company is unable to conclude that the likelihood of an unfavorable outcome in this matter is remote or probable, but the Company and Absolute continue to deny the allegations and defend the case. The Company has asserted an indemnification claim related to this litigation against the sellers of Absolute.

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-Kcommercially 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 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.
A disruption, failure or breach of our networks or systems, including as a result of cyber-attacks, could harm our business.
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 their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the 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 fiscal year ended December 31, 2017.value of our investment in research, development and engineering, loss of intellectual property, and increased cyber security protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations

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

99.1
Separation Agreement of Christopher D. Sorrells, dated September 18, 2019, including Amendment to Restricted Share Unit Agreements.
 
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

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SIGNATURES

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


Date:  November 14, 201819, 2019
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)

40