10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2017
	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.  See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

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]

There were 19,183,968 shares of common stock, with a par value of $0.01 per share outstanding as of May 12, 2017.

1

GSE SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	3
	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and March 31, 2016	4
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and March 31, 2016	5
	Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2017	6
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and March 31, 2016	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II.	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
	SIGNATURES	39

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	March 31, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	21,625		$	21,747
Restricted cash		1,140			1,140
Contract receivables, net		13,897			18,863
Prepaid expenses and other current assets		4,024			2,052
Total current assets		40,686			43,802
Equipment, software, and leasehold improvements		6,845			6,759
Accumulated depreciation		(5,648	)		(5,527	)
Equipment, software, and leasehold improvements, net		1,197			1,232
Software development costs, net		894			982
Goodwill		5,612			5,612
Intangible assets, net		402			454
Other assets		72			1,574
Total assets	$	48,863		$	53,656
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	587		$	923
Accrued expenses		2,389			2,437
Accrued compensation		2,015			2,624
Billings in excess of revenue earned		18,192			21,444
Accrued warranty		1,209			1,137
Contingent consideration		1,508			2,105
Other current liabilities		750			716
Total current liabilities		26,650			31,386
Other liabilities		1,261			1,149
Total liabilities		27,911			32,535
Commitments and contingencies
Stockholders' equity:
Preferred stock $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock $0.01 par value, 30,000,000 shares authorized, 20,777,168 and 20,433,608 shares issued and 19,178,257 and 18,834,697 shares outstanding		208			204
Additional paid-in capital		75,120			75,120
Accumulated deficit		(49,693	)		(49,427	)
Accumulated other comprehensive loss		(1,684	)		(1,777	)
Treasury stock at cost, 1,598,911 shares in 2017 and 2016		(2,999	)		(2,999	)
Total stockholders' equity		20,952			21,121
Total liabilities and stockholders' equity	$	48,863		$	53,656

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

3

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three months ended March 31,
	2017			2016
Revenue	$	16,342		$	12,976
Cost of revenue		12,220			9,352
Gross profit		4,122			3,624
Operating expenses:
Selling, general and administrative		3,592			2,757
Research and development		402			354
Restructuring charges		45			125
Depreciation		76			100
Amortization of definite-lived intangible assets		64			73
Total operating expenses		4,179			3,409
Operating (loss) income		(57	)		215
Interest income, net		27			27
Loss on derivative instruments, net		(160	)		(118	)
Other (expense) income, net		(3	)		102
(Loss) income before income taxes		(193	)		226
Provision for income taxes		73			88
Net (loss) income	$	(266	)	$	138
Basic (loss) earnings per common share	$	(0.01	)	$	0.01
Diluted (loss) earnings per common share	$	(0.01	)	$	0.01

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

4

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	Three months ended March 31,
	2017			2016
Net (loss) income	$	(266	)	$	138
Foreign currency translation adjustment		93			49
Comprehensive (loss) income	$	(173	)	$	187

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

5

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

(Unaudited)

	Common Stock													Treasury Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			Amount			Total
Balance, January 1, 2017		20,434	$	204	$	75,120		$	(49,427	)	$	(1,777	)		(1,599	)	$	(2,999	)	$	21,121
Stock-based compensation expense		-		-		614			-			-			-			-			614
Common stock issued for options exercised		31		1		61			-			-			-			-			62
Common stock issued for RSUs vested		312		3		(3	)		-			-			-			-			-
Vested RSU shares withheld to pay taxes		-		-		(672	)		-			-			-			-			(672	)
Foreign currency translation adjustment		-		-		-			-			93			-			-			93
Net loss		-		-		-			(266	)		-			-			-			(266	)
Balance, March 31, 2017		20,777	$	208	$	75,120		$	(49,693	)	$	(1,684	)		(1,599	)	$	(2,999	)	$	20,952

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

6

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three months ended March 31,
	2017			2016
Cash flows from operating activities:
Net (loss) income	$	(266	)	$	138
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		76			100
Amortization of definite-lived intangible assets		64			73
Amortization of capitalized software development costs		117			81
Change in fair value of contingent consideration		254			(69	)
Stock-based compensation expense		596			247
Loss on derivative instruments, net		160			118
Deferred income taxes		-			36
Gain on sale of equipment, software, and leasehold improvements		-			(1	)
Changes in assets and liabilities:
Contract receivables, net		4,937			334
Prepaid expenses and other assets		(523	)		(515	)
Accounts payable, accrued compensation, and accrued expenses		(1,184	)		1,226
Billings in excess of revenue earned		(3,279	)		(492	)
Accrued warranty		67			(101	)
Other liabilities		325			465
Cash provided by operating activities		1,344			1,640
Cash flows from investing activities:
Proceeds from sale of equipment, software and leasehold improvement		-			31
Capital expenditures		(44	)		(18	)
Capitalized software development costs		(29	)		(131	)
Restrictions of cash as collateral under letters of credit		-			(2	)
Releases of cash as collateral under letters of credit		-			1
Cash used in investing activities		(73	)		(119	)
Cash flows from financing activities:
Proceeds from issuance of common stock on the exercise of stock options		62			4
Contingent consideration payments to Hyperspring, LLC		(851	)		(1,421	)
RSUs withheld to pay taxes		(672	)		-
Cash used in financing activities		(1,461	)		(1,417	)
Effect of exchange rate changes on cash		68			37
Net (decrease) increase in cash and cash equivalents		(122	)		141
Cash and cash equivalents at beginning of year		21,747			11,084
Cash and cash equivalents at end of period	$	21,625		$	11,225

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

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1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the "Company," "GSE," "we," "us," or "our") and are unaudited.  In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted.  The results of operations for interim periods are not necessarily an indication of the results for the full year.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 28, 2017.  Certain reclassifications have been made to prior period amounts to conform to the current presentation.  Subcontractor payables have been reclassified on the Consolidated Balance Sheets from Accounts payable to Accrued expenses.  In addition, the Company reclassified research and development costs from Selling, general and administrative expenses and presented them as a separate caption within operating expenses on the consolidated statement of operations.  The Company also reclassified the current portion of deferred taxes to noncurrent within other assets and other liabilities on the consolidated balance sheets.

The Company has two reportable segments as follows:

● Performance Improvement Solutions (approximately 59% of revenue)

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

● Nuclear Industry Training and Consulting (approximately 41% of revenue)

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

Financial information about the two business segments is provided in Note 15 of the accompanying consolidated financial statements.

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

8

Revenue recognition

The Company recognizes revenue through fixed price contracts for the sale of uniquely designed/customized systems containing hardware, software and other materials which generally apply to the Performance Improvement Solutions segment and time and material contracts for Nuclear Industry Training and Consulting support and service agreements.

In accordance with Accounting Standards Codification (ASC) 605-35, Construction-Type and Production-Type Contracts (ASC 605), the Performance Improvement Solutions segment accounts for revenue under fixed-price contracts using the percentage-of-completion method.  This methodology recognizes revenue and earnings as work progresses on the contract and is based on costs incurred to date compared to total estimated cost to complete the project.  Estimated contract earnings are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which the change is identified.  Estimated losses are charged against earnings in the period such losses are identified.  We recognize revenue arising from contract claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is a legal basis of the claim.

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 our revenue recognition as a significant change in the estimates can cause our revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

As we recognize revenue under the percentage-of-completion method, we provide an accrual for estimated future warranty costs based on historical and projected claims experience.  Our long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.

Our system design contracts do not normally provide for post contract support (PCS) in terms of software upgrades, software enhancements or telephone support.  To obtain PCS, the customers must normally purchase a separate contract.  Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases.  We recognize revenue from these contracts ratably over the term of the agreements.

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

We also recognize revenue from the sale of software licenses from contracts with multiple deliverables.  These software license sales are evaluated under ASC 985-605, Software Revenue Recognition.  Contracts with multiple element arrangements typically include, but are not limited to, components such as installation, training, licenses, and PCS listed in the contract.  The Company concluded that vendor specific objective evidence does not exist for all elements of its software license sales.  If a PCS or professional services element exists in the software license arrangement, revenue is recognized ratably over the longest service period.  If no PCS or professional services element exists in the arrangement, revenue is deferred until the last undelivered element is delivered.

We recognize revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts.  Revenue on time and material contracts is recognized as services are rendered and performed.  Under a typical time-and-materials billing arrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly.  Any unbilled amounts are typically billed the following month.  Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.  However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs.

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2. Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11).  ASU 2015-11 requires that an entity measure inventory at the lower of cost and net realizable value.  This ASU does not apply to inventory measured using last-in, first-out.  ASU 2015-11 was effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  We adopted ASU 2015-11 effective January 1, 2017.  The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based Accounting (ASU 2016-09).  The new guidance is intended to simplify the accounting for share based payment award transactions.  The amendments in the update include the following aspects for share based accounting: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes.  The adoption of ASU 2016-09 was required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years.  We adopted ASU 2016-09 effective January 1, 2017. The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

Accounting pronouncements not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company for the fiscal year ending December 31, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated financial statements and our method of adoption.  The adoption is expected to impact our revenue recognition and related disclosures.  For example, our revenue from software arrangements with multiple elements including services are currently recognized ratably due to the lack of vendor-specific objective evidence (VSOE) of fair value.  We will be required to separate these performance obligations under these arrangements and recognize them as delivered.

10

In February 2016, the FASB issued ASU No. 2016-02, Leases.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available.  We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.

In 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.  Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-15 on our consolidated financial statements.

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.  Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-18 on our consolidated financial statements.

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

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

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

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

(in thousands, except for share amounts)	Three months ended
	March 31,
	2017			2016
Numerator:
Net (loss) income	$	(266	)	$	138
Denominator:
Weighted-average shares outstanding for basic (loss) income per share		19,094,382			17,912,045
Effect of dilutive securities:
Stock options and restricted stock units		-			221,697
Adjusted weighted-average shares outstanding and assumed conversions for diluted (loss) income per share		19,094,382			18,133,742
Shares related to dilutive securities excluded because inclusion would be anti-dilutive		564,833			752,042

4. 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.

As of March 31, 2017, and December 31, 2016, the contingent consideration totaled $1.5 million and $2.1 million, respectively.  During the three months ended March 31, 2017 and 2016, the Company made payments of $0.9 million and $1.4 million, respectively, related to the liability-classified contingent consideration arrangement.

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5. Contract Receivables

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

The components of contract receivables are as follows:

(in thousands)	March 31,			December 31,
	2017			2016
Billed receivables	$	5,971		$	13,325
Recoverable costs and accrued profit not yet billed		7,944			5,555
Allowance for doubtful accounts		(18	)		(17	)
Total contract receivables, net	$	13,897		$	18,863

During April 2017, the Company invoiced $1.6 million of the unbilled amounts related to the balance at March 31, 2017.

As of March 31, 2017, the Company had one customer that accounted for 21% of the Company's consolidated contract receivables.  As of December 31, 2016, the Company did not have any customers that accounted for more than 10% of the Company's consolidated contract receivables.

6.  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(in thousands)	March 31,		December 31,
	2017		2016
Inventory	$	2,158	$	-
Income taxes receivable		380		446
Prepaid expenses		583		422
Other current assets		903		1,184
Total prepaid expenses and other current assets	$	4,024	$	2,052

At March 31, 2017, prepaid expenses and other current assets are comprised primarily of inventory that is being purchased to support the construction of three major nuclear simulation projects related to a significant contract that was executed during the first quarter of 2016. Inventory is recorded at the lower of cost or market value in accordance with ASC 330, Inventory.  At December 31, 2016, inventory related to the simulation projects was classified as a long-term asset within other assets on the consolidated balance sheet. The earliest completion date of these projects is expected to occur in the first quarter of 2018.

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7. Software Development Costs, Net

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

Software development costs capitalized were approximately $29,000 and $131,000 for the three months ended March 31, 2017 and 2016, respectively.  Total amortization expense was approximately $117,000 and $81,000 for the three months ended March 31, 2017 and 2016, respectively.

8. Goodwill and Intangible Assets

The Company's intangible assets include amounts recognized in connection with business acquisitions, including goodwill, customer relationships, contract backlog, and software.

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).  As of March 31, 2017, and December 31, 2016, goodwill of $5.6 million related to the Nuclear Industry Training and Consulting segment.  No events or circumstances occurred during the current reporting period that would indicate impairment of such goodwill.

Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for contract backlog and contractual customer relationships which are recognized in proportion to the related projected revenue streams.  Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise.  The Company does not have any intangible assets with indefinite useful lives, other than goodwill. There were no indications of impairment of intangible assets other than goodwill during the current reporting period.

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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.

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

The Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2017, and December 31, 2016, based upon the short-term nature of the assets and liabilities.

For the three months ended March 31, 2017, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at March 31, 2017.

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

(in thousands)	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	$	12,145	$	-		$	-		$	12,145
Foreign exchange contracts		-		71			-			71
Total assets	$	12,145	$	71		$	-		$	12,216
Foreign exchange contracts	$	-	$	(36	)	$	-		$	(36	)
Contingent consideration		-		-			(1,508	)		(1,508	)
Total liabilities	$	-	$	(36	)	$	(1,508	)	$	(1,544	)

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

(in thousands)	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	$	16,435	$	-		$	-		$	16,435
Foreign exchange contracts		-		141			-			141
Total assets	$	16,435	$	141		$	-		$	16,576
Foreign exchange contracts	$	-	$	(20	)	$	-		$	(20	)
Contingent consideration		-		-			(2,105	)		(2,105	)
Total liabilities	$	-	$	(20	)	$	(2,105	)	$	(2,125	)

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the three months ended March 31, 2017:

(in thousands)
Balance, January 1, 2017	$	2,105
Payments made on contingent liabilities		(851	)
Change in fair value		254
Balance, March 31, 2017	$	1,508

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10. Derivative Instruments

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

As of March 31, 2017, the Company had foreign exchange contracts outstanding of approximately 281.4 million Japanese Yen, 0.2 million Euro, 0.4 million Australian Dollars, and 0.3 million Canadian Dollars at fixed rates.  The contracts expire on various dates through December 2018.  At December 31, 2016, the Company had contracts outstanding of approximately 281.4 million Japanese Yen, 0.1 million Euro, 0.6 million Australian Dollars, and 0.5 million Canadian Dollars at fixed rates.

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

	March 31,			December 31,
(in thousands)	2017			2016
Asset derivatives
Prepaid expenses and other current assets	$	27		$	57
Other assets		44			84
		71			141
Liability derivatives
Other current liabilities		(36	)		(20	)
		(36	)		(20	)
Net fair value	$	35		$	121

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

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

For the three months ended March 31, 2017 and 2016, the Company recognized a net loss on its derivative instruments as outlined below:

	Three months ended March 31,
(in thousands)	2017			2016
Foreign exchange contracts - change in fair value	$	(86	)	$	(183	)
Remeasurement of related contract receivables,  and billings in excess of revenue earned		(74	)		65
Loss on derivative instruments, net	$	(160	)	$	(118	)

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11. Stock-Based Compensation

The Company recognizes share-based payment expense for all equity-based awards issued to employees, directors and non-employees that are expected to vest.  Share-based payment expense is based on the fair value of awards as of the grant date.  The Company recognized $614,000 and $247,000 of share-based payment expense related to equity awards for the three months ended March 31, 2017 and 2016, respectively, under the fair value method. Offsetting this expense during the three months ended March 31, 2017, was a reduction in the fair value of cash-settled RSUs totaling approximately $18,000.

During the three months ended March 31, 2017, the Company granted 223,802 time-based restricted stock units (RSUs) to employees with an aggregate fair value of $783,000, of which a portion will vest quarterly in equal amounts over the course of eight quarters and the remainder will vest annually in equal amounts over the course of three years.  During the three months ended March 31, 2016, the Company granted 129,824 time-based RSUs to employees with an aggregate fair value of $286,000, which will vest quarterly in equal amounts over the course of eight quarters.  The fair value of the time-based RSUs is expensed ratably over the requisite service period, which ranges from two to three years.

During the three months ended March 31, 2017, the Company did not grant performance-based RSUs.  The Company granted 160,000 performance-based RSUs with an aggregate fair value of $282,000 during the three months ended March 31, 2016.  These RSUs vest upon the achievement of specific performance measures.  The fair value of the performance-based RSUs is expensed ratably over the requisite service period, which ranges between one and four years.

The Company did not grant stock options during the three months ended March 31, 2017 and granted 40,000 stock options for the three months ended March 31, 2016.  The aggregate fair value of the granted options at the grant date was $46,000.

12. Debt

Line of Credit

Citizens Bank

The Company entered into a new three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank on December 29, 2016, to fund general working capital needs, including acquisitions.  Working capital advances bear interest of LIBOR plus 2.25% per annum and letter of credit fees are 1.25% per annum.  The Company is not required to maintain a restricted cash collateral account at Citizens Bank for outstanding letters of credit and working capital advances. 

The maximum availability under the RLOC is subject to a borrowing base equal to 80% of eligible accounts receivable, and is reduced for any issued and outstanding letters of credit and working capital advances.  At March 31, 2017, there were no outstanding borrowings on the RLOC and six letters of credit totaling $1.7 million.  The amount available at March 31, 2017, after consideration of the borrowing base, letters of credit and working capital advances was approximately $1.8 million.

The credit facility agreement is subject to standard financial covenants and reporting requirements. At March 31, 2017, the Company was in compliance with its financial covenants.

BB&T Bank

At March 31, 2017, we had four letters of credit with BB&T totaling $1.0 million, which we expect to terminate during the second quarter of 2017.  At March 31, 2017, and December 31, 2016, the cash collateral account with BB&T totaled $1.1 million and was classified as restricted cash on the consolidated balance sheets.

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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 long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.  The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.2 million, while the remaining $0.4 million is classified as long-term within other liabilities.  The activity in the accrued warranty accounts is as follows:

(in thousands)
Balance, January 1, 2017	$	1,478
Current period provision		235
Current period claims		(62	)
Currency adjustment		2
Balance, March 31, 2017	$	1,653

14. Income Taxes

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

	Three months ended March 31,
($ in thousands)	2017				2016
Provision for income taxes		$	73			$	88
Effective tax rate			(37.8	%)			38.6	%

The Company's movement in effective tax rate for 2017 as compared to 2016 resulted mainly from an increase in pre-tax loss in the U.S.  The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter.  Tax expense in both years is comprised mainly of foreign income tax expense, Alternative Minimum Tax, state taxes, and deferred tax expense relating to the tax amortization of goodwill.

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 1997 forward.  The Company is subject to foreign tax examinations by tax authorities for years 2010 forward for Sweden, 2012 forward for China, and 2014 forward for both India and the UK.

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

The Company recognizes deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized.  The Company has evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its U.S., Swedish, U.K., and Chinese net deferred assets as of March 31, 2017.  The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in India.  In 2016, the Company paid income taxes in India and expects to do so again in 2017.

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15. 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 training applications include turnkey and custom training services, while engineering services include plant design verification and validation. The Company provides these services across all market segments.  Contracts typically range from 9 months to 24 months.  The Company and its predecessors have been providing these services since 1976.

The Nuclear Industry Training and Consulting segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities.  This business is managed through our Hyperspring subsidiary.  The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.  Hyperspring has been providing these services since 2005.

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 (loss) before income taxes:

(in thousands)	Three months ended
	March 31,
	2017			2016
Revenue:
Performance Improvement Solutions	$	9,670		$	8,843
Nuclear Industry Training and Consulting		6,672			4,133
	$	16,342		$	12,976
Operating income (loss):
Performance Improvement Solutions	$	(738	)	$	(42	)
Nuclear Industry Training and Consulting		935			188
Change in fair value of contingent consideration, net		(254	)		69
Operating (loss) income		(57	)		215
Interest income, net		27			27
Loss on derivative instruments, net		(160	)		(118	)
Other (expense) income, net		(3	)		102
(Loss) income before income taxes	$	(193	)	$	226

16. Commitments and Contingencies

Westinghouse Electric Company ("Westinghouse") filed for Chapter 11 Bankruptcy protection on March 29, 2017.  Westinghouse is a customer in our Performance Improvement Solutions segment.  At March 31, 2017, the Company had approximately $0.5 million in billed and unbilled pre-petition receivables attributable to Westinghouse. The Company has assessed the recoverability of these amounts and concluded that the likelihood of loss is not probable, and therefore, none of the outstanding amounts have been reserved at March 31, 2017.

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

GSE is a world leader in real-time high-fidelity simulation, providing a wide range of simulation, training, and engineering solutions to the global power and process industries.  We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide services that systematically help clients fill key vacancies in the organization on a short-term basis, primarily in training professionals focused on regulatory compliance and certification in the nuclear power industry.  At March 31, 2017, GSE was the parent company of:

● GSE Performance Solutions, Inc., a Delaware corporation;

● GSE Power Systems, AB, a Swedish corporation;

● GSE Engineering Systems (Beijing) Co. Ltd., a Chinese limited liability company;

● GSE Systems, Ltd., a Scottish limited liability company;

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

● Hyperspring, LLC, an Alabama limited liability company.

The Company has a 50% interest in IntelliQlik, LLC, a Delaware limited liability company.  The Company also has a 50% interest in General Simulation Engineering RUS LLC, a Russian closed joint-stock company, which we are currently in the process of winding down.

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 looking statements to reflect new events or circumstances.  We caution you that a variety of factors, including but not limited to the factors described under Item 1A - Risk Factors in our most recent annual report on Form 10-K, could cause our business conditions and results to differ materially from what is contained in forward-looking statements.

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

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

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General Business Environment

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

Performance Improvement Solutions (approximately 59% of revenue)

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

Nuclear Industry Training and Consulting (approximately 41% of revenue)

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

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Business Strategy

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

Expand our total addressable market.  Our focus on growth means introducing product capabilities or new product categories that create value for our customers and therefore expand our total addressable market.  Currently we are working on initiatives to expand our solution offerings in both our business segments which may include, but not be limited to, the following: expanding our software product portfolio to the industries we serve with enhanced power and process simulation tools and systems that are complementary to our core offerings; delivering enhanced learning management systems/solutions; offering fully outsourced training solutions to our customers; adding work flow process improvement solutions; and tailoring operational reporting and business intelligence solutions to address the unique need of our end user markets.

Initiatives such as these will broaden our scope and enable us to engage more deeply with the segments we serve.  Recently, we have delivered a compelling new solution, the GSE GPWR^TM Generic Pressurized Water Reactor simulation technology, proving that our modeling technology can be sold via traditional license terms and conditions to the nuclear industry ecosystem.  We have both upgraded and expanded the EnVision library of simulation and eLearning tutorials for the process industries with specific new products for training clients in the upstream segment of the oil and gas industry.  We continue to provide cutting edge training systems by adapting our technology to systems to meet the specific needs of customers such as U.S. government laboratories.

Pursue strategic acquisitions opportunistically.  We intend to complement our organic growth strategy through selective acquisitions of other software, technical engineering, and nuclear oriented training, staffing and consulting service businesses, both domestic and international. We are focusing our efforts on acquisitions that would enhance our existing portfolio of products and services, strengthen our relationships with our existing customers, and potentially expand our footprint to include new customers in our core served industries.  We have made several acquisitions since 2010 and believe the opportunity exists to acquire businesses that are complementary to ours, allowing us to accelerate our growth strategy.

In January 2011, we acquired a software company called EnVision Systems Inc., which provided interactive multi-media tutorials and simulation models, primarily to the process industries.  We have integrated the technology assets from this acquisition and expanded the firm's application to other industries, and we intend to repeat this successful process.  In 2014, we acquired Hyperspring, which enabled GSE to offer highly skilled nuclear operations and consulting know-how on site at a large segment of our client base on an operational basis providing essential services.  This deepened our relationship with existing clients and won business for us at new client sites in the nuclear industry.  This acquisition has proven to be synergistic, enabling cross selling domestically, and in 2015, expanding these services internationally for the first time.

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

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

Expand international operations in selected markets.  We believe there are additional opportunities for us to market our software and services to international customers, and to do so in a cost effective manner.  For example, we believe partnerships with Value Added Resellers (VAR) could significantly expand our sales pipeline for the EnVision software suite.  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 programs in key growth regions.

Employees.  As of March 31, 2017, we had approximately 286 employees, which includes approximately 174 in our Performance Improvement segment and 112 in our Nuclear Industry Training and Consulting segment.  In addition, we have approximately 100 licensed engineers and other advanced degreed professionals.  To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.

Backlog.  As of March 31, 2017, we had approximately $79.6 million of total gross revenue backlog.  Most of our contracts range from 9 to 24 months. With respect to our backlog, it includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts.  Our backlog includes future expected revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client.  We calculate backlog without regard to possible project reductions or expansions or potential cancellations unless and until such changes may occur.

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

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Industry Trends

Industry need for building and sustaining a highly skilled workforce

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

According to Power Engineering magazine (December 2014), in the United States every sector in the energy industry is expected to lose a large percentage of its workforce within the next few years as baby boomers retire on the traditional schedule.  The power sector alone will be forced to replace more than 100,000 skilled workers by 2018 simply to replace those retiring.  The Nuclear Energy Institute estimates that 39% of the nuclear workforce will be eligible to retire by 2018.  As the nuclear industry expands its fleet and strains to maintain the high standards of training the existing workforce, existing plant simulator systems, which provide these training services, are operating 24 hours a day.  With workers retiring and the need to backfill as well as expand the workforce for new units, certain operators are exploring the opportunity to de-bottleneck their existing simulator capabilities through the creation of dual reference simulators.

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

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Growing global power demand and the increasing emphasis on nuclear power

World Energy Outlook 2015 projects that electricity demand will increase by more than 70% over the time period from 2013 to 2040.  At the same time, countries globally are pledging to reduce greenhouse gas emissions despite this growth in demand for power.  These trends are increasingly favorable to nuclear power.  The United Kingdom illustrates this trend, with a recently announced energy policy that places a much greater reliance on nuclear power and unveiled plans for a new nuclear fleet, while slashing subsidies for solar energy and seeking to phase out coal fired power plants.  With plans to build at least three new nuclear plants, the UK plans to add 16GWe of new nuclear capacity operating by 2030 according to World Nuclear Association.

There are currently 59 nuclear plants under construction in 14 countries, including 21 in China, seven in Russia, five in India and four in the United Arab Emirates per the Nuclear Energy Institute.  Four reactors are currently under construction in the U.S., two for Southern Nuclear at the Vogtle, Georgia site and two at SCANA's VC Summer site.  Southern Nuclear and SCANA are currently determining how to complete these four reactors following the Westinghouse Bankruptcy.  Tennessee Valley Authority's Watts Bar generating facility started operations in 2016, which represents a watershed for the U.S. nuclear power industry.  Per the World Nuclear Association, there are 164 reactors in 25 countries in specific phases of planning that will be operating by 2030.  This pace of construction is surpassing the peak construction velocity of the 1970s and 1980s.

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

For the existing nuclear U.S. fleet, there is recognition that these plants are essential to meeting goals of reducing carbon emissions even as renewable energy sources are introduced.  This recognition of the importance of nuclear providing zero-carbon baseload is demonstrated most recently by the state of New York's Clean Energy Standard that values the emission-free energy of New York's nuclear fleet and in so doing providing an emissions-free subsidy of 1.7¢/kWh.  This subsidy helps ensure the state's existing nuclear plants remain economically viable in an era of low cost natural gas and even with wind and solar receiving a subsidy of 4.5¢/kWh.  In addition, the Illinois Legislature passed the Future Energy Jobs Bill on December 2, 2016, a measure that ensures the continued operation of the Clinton and Quad Cities nuclear power plants in that state.  In a statement, the Nuclear Energy Institute said the bill's passage was a "remarkable moment" for the state and the nuclear industry. Gov. Bruce Rauner signed the bill into law on December 7, 2016.  The Future Energy Jobs Bill provides Exelon and Commonwealth Edison with a $235 million annual credit for the carbon-free energy produced by the Clinton and Quad Cities nuclear plants. The actions of New York and Illinois starts a trend which may continue to states such as Ohio, Pennsylvania, New Jersey and Connecticut to recognize the value of zero carbon power produced by nuclear plants in those states.  This would be similar to how the Renewable Portfolio Standard was rolled out across more than half the states in the U.S. to recognize the benefits of zero carbon renewable power.

In regulated markets where the economy is growing, the nuclear fleet is profitable and expanding, with four reactors under construction in the southeast U.S.  Longer term, the trends for nuclear power are favorable as well.  The U.S. Department of Energy recently released a draft plan to double America's nuclear power capacity by 2050.  The plan, dubbed "Vision 2050", promotes expanding America's nuclear capacity through advanced reactor designs including small and medium-size reactors.

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

We believe GSE is well positioned to take full advantage of these strategic global and domestic trends by providing high fidelity simulation and training solutions to the global power and process industries.

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 which provide a structured program focused on continuous skills improvement for experienced employees to engineering services, which include plant design verification and validation.  We provide the right solution 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 achieve this, GSE's simulation solution starts with the most robust engineering approach possible.  Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, GSE provides simulation solutions that achieve unparalleled fidelity and accuracy.  The solutions that GSE provides are also known for ease of use, resulting in increased productivity by end-users.  For these reasons, GSE has delivered more nuclear power plant simulators than any other company in the world.

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

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

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

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

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Nuclear Industry Training and Consulting

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

Westinghouse bankruptcy

On March 29, 2017, Westinghouse, a customer of our Performance Improvement Solutions segment, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York, Case No. 17-10751. The U.S. Bankruptcy Court overseeing the Westinghouse Bankruptcy approved, on an interim basis, an $800 million Debtor-in-Possession Financing Facility to allow Westinghouse to finance its business operations during the reorganization process.  In April 2017, Southern Company and SCANA Corporation reached interim agreements with Westinghouse to continue construction on the Vogtle and V.C. Summer nuclear plants, respectively. Westinghouse also announced that it intends to continue projects in China, and that generally operations in Asia, Europe, the Middle East and Africa will not be affected by the bankruptcy filing.

At March 31, 2017, the Company had approximately $0.5 million in billed and unbilled pre-petition receivables attributable to Westinghouse. The Company has assessed the recoverability of these amounts and concluded that the likelihood of loss is not probable, and therefore, none of the outstanding amounts have been reserved at March 31, 2017.

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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 March 31,
	2017			%			2016			%
Revenue	$	16,342			100.0	%	$	12,976			100.0	%
Cost of revenue		12,220			74.8	%		9,352			72.1	%
Gross profit		4,122			25.2	%		3,624			27.9	%
Operating expenses:
Selling, general and administrative		3,592			22.0	%		2,757			21.2	%
Research and development		402			2.4	%		354			2.7	%
Restructuring charges		45			0.3	%		125			1.0	%
Depreciation		76			0.5	%		100			0.8	%
Amortization of definite-lived intangible assets		64			0.4	%		73			0.6	%
Total operating expenses		4,179			25.6	%		3,409			26.3	%
Operating (loss) income		(57	)		(0.4	)%		215			1.6	%
Interest income, net		27			0.2	%		27			0.2	%
Loss on derivative instruments, net		(160	)		(1.0	)%		(118	)		(0.9	)%
Other (expense) income, net		(3	)		0.0	%		102			0.8	%
(Loss) income before income taxes		(193	)		(1.2	)%		226			1.7	%
Provision for income taxes		73			0.4	%		88			0.7	%
Net (loss) income	$	(266	)		(1.6	)%	$	138			1.1	%

Results of Operations - Three Months ended March 31, 2017 versus Three Months ended March 31, 2016

Revenue.  Revenue for the three months ended March 31, 2017 totaled $16.3 million, which was 25.9% greater than the $13.0 million of revenue for the three months ended March 31, 2016.  The increase in revenue was primarily driven by the year over year increase in revenue at Hyperspring, represented by our Nuclear Industry Training and Consulting segment, depicted below.

($ in thousands)	Three months ended
	March 31,
	2017			2016
Revenue:
Performance Improvement Solutions		$	9,670		$	8,843
Nuclear Industry Training and Consulting			6,672			4,133
Total revenue		$	16,342		$	12,976

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Performance Improvement Solutions revenue increased 9.4% primarily due to the continued work that is secured by our near-record backlog.  We recorded total Performance Improvement Solutions orders of $4.9 million and $34.8 million for the three months ended March 31, 2017 and 2016, respectively.

Nuclear Industry Training and Consulting revenue increased 61.4% to $6.7 million from $4.1 million for the three months ended March 31, 2016 and 2017, respectively.  The increase was primarily due to a year-over-year increase in customer staffing needs of a major customer. Nuclear Industry Training and Consulting orders totaled $14.9 million and $5.0 million for the three months ended March 31, 2017 and 2016, respectively.

At March 31, 2017, backlog was $79.6 million: $67.0 million for the Performance Improvement Solutions segment and $12.6 million for Nuclear Industry Training and Consulting.  At December 31, 2016, the Company's backlog was $73.2 million: $68.8 million for the Performance Improvement Solutions segment and $4.4 million for Nuclear Industry Training and Consulting.

Gross profit.  Gross profit was $4.1 million, or 25.2%, for the three months ended March 31, 2017, compared to $3.6 million, or 27.9% for the same period in 2016.

($ in thousands)	Three months ended
	March 31,
	2017			%			2016			%
Gross profit:
Performance Improvement Solutions		$	3,044		31.5	%		$	3,145		35.6	%
Nuclear Industry Training and Consulting			1,078		16.2	%			479		11.6	%
Consolidated gross profit		$	4,122		25.2	%		$	3,624		27.9	%

The decrease in gross margin percentage for Performance Improvement Solutions for the three months ended March 31, 2017 as compared to the same period in 2016 was mainly due to three lower margin major nuclear simulation projects.

The increase in gross profit during 2017 for Nuclear Industry Training and Consulting was primarily driven by the segment's focus on entering higher margin contracts.

30

Selling, general and administrative expenses.  Selling, general and administrative (SG&A) expenses totaled $3.6 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively. Fluctuations in the components of SG&A spending were as follows:

($ in thousands)	Three months ended
	March 31,
	2017		%			2016			%
Selling, general and administrative expenses:
Corporate charges	$	2,442		68.0	%	$	1,783			64.7	%
Business development		685		19.0	%		786			28.5	%
Contingent consideration		254		7.1	%		(69	)		(2.5	%)
Other		211		5.9	%		257			9.3	%
Total	$	3,592		100.0	%	$	2,757			100.0	%

Corporate charges increased $0.7 million primarily due to higher stock-based compensation expense and higher professional fees.

Business development charges decreased slightly mainly due to lower headcount.

Contingent consideration increased $0.3 million primarily due to fair value adjustments related to our 2014 Hyperspring acquisition.  The contingent consideration liability expires in November 2017 with the final payment expected to be made in January 2018.

Other charges are primarily comprised of facility charges, which decreased $46,000.

Research and development.  Research and development costs consist primarily of software engineering personnel and other related costs.  Research and development costs, net of capitalized software, totaled $402,000 and $354,000 for the three months ended March 31, 2017 and 2016, respectively. Before capitalization of software development costs, research and development totaled $431,000 and $485,000 for three months ended March 31, 2017 and 2016, respectively. The $54,000 decrease is primarily due to a more targeted research and development strategy undertaken by the Company.

Restructuring charges.  Restructuring charges totaled $45,000 and $125,000 for the three months ended March 31, 2017 and 2016, respectively.  The decrease of $80,000 is primarily due to the winding down of the Company's restructuring activities initiated during 2015.

Depreciation.  Depreciation expense totaled $76,000 and $100,000 for the three months ended March 31, 2017 and 2016, respectively.

Amortization of definite-lived intangible assets. Amortization expense related to definite-lived intangible assets totaled $64,000 and $73,000 for the three months ended March 31, 2017, and 2016, respectively.  The first quarter 2017 amortization expense decrease is primarily due to lower amortization of customer-related intangible assets that were recorded in conjunction with the Hyperspring acquisition in 2014.

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Loss on derivative instruments, net.  Loss on derivative instruments, net increased $42,000, and relates to the Company's foreign exchange contracts and remeasurement of foreign currency-denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals, that are remeasured into the functional currency using the current exchange rate at the end of the period.

For the three months ended March 31, 2017, we recognized a loss of $86,000 on the change in fair value of foreign exchange contracts, compared to a loss of $183,000 for the same period in 2016.

For the three months ended March 31, 2017, we recognized a loss of $74,000 from the remeasurement of contract receivables, billings in excess of revenue earned and subcontractor accruals, compared to a gain of $65,000 for the same period in 2016.

Other (expense) income, net.  The Company recognized $3,000 of other expense, net and $102,000 of other income, net for the three months ended March 31, 2017 and 2016, respectively. The 2016 amount was primarily related to a $101,000 refund of Value Added Tax that was received by our Chinese subsidiary that did not recur in the 2017 period.

Provision for income taxes.  Income tax expense was $73,000, or an effective income tax rate of (37.8%), for the three months ended March 31, 2017, compared to $88,000, or an effective income tax rate of 38.6%, for the three months ended March 31, 2016.  The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter.  Tax expense in both years is comprised mainly of foreign income tax expense, alternative minimum tax, and deferred tax expense relating to the tax amortization of goodwill.

Because of the net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from years 1997 and forward.  The Company is subject to foreign tax examinations by tax authorities for years 2010 and forward for Sweden, 2012 and forward for China, and 2014 and forward for both India and the UK.

An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) 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 fifty percent likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense.  The Company has recorded uncertain tax positions for certain foreign tax contingencies in China, South Korea and the Ukraine.

The Company has a full valuation allowance on its U.S., U.K., Swedish, and Chinese net deferred tax assets at March 31, 2017.

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.  Those accounting estimates that have the most significant impact on the Company's operating results and place the most significant demands on management's judgment include revenue recognition, impairment of intangible assets, including goodwill, capitalization of computer software development costs, valuation of contingent consideration for business acquisitions, and deferred income tax valuation allowance.  These critical accounting policies and estimates are discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in 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.

32

Liquidity and Capital Resources

As of March 31, 2017, the Company's cash and cash equivalents totaled $21.6 million compared to $21.7 million at December 31, 2016.

Cash provided by operating activities.  For the three months ended March 31, 2017, net cash provided by operations totaled $1.3 million. Significant changes in the Company's assets and liabilities in the three months ended March 31, 2017, included:

● A $4.9 million decrease in the Company's contract receivables, which is comprised of trade receivables and unbilled receivables. The Company's trade receivables, net of allowance for doubtful accounts, decreased approximately $7.4 million primarily due to the collection of $6.4 million in receivables during the first quarter of 2017 from a significant customer.  At March 31, 2017, trade receivables outstanding for more than 90 days, net of the bad debt reserve, totaled approximately $0.6 million as compared to $0.3 million at December 31, 2016.  The Company believes the entire 90-day balance at March 31, 2017, is collectible.  The Company's unbilled receivables increased by approximately $2.4 million to $7.9 million at March 31, 2017, as compared to December 31, 2016. The increase in the unbilled receivables is due to the timing of contracted billing milestones of the Company's current projects, most of which relates to Hyperspring's largest customer.  In April 2017, the Company invoiced $1.6 million of the unbilled amounts; the remaining balance is expected to be invoiced and collected within one year.

● A $3.3 million decrease in billings in excess of revenue earned. The decrease is due to the timing of contracted billing milestones of the Company's current projects.

● A $1.2 million decrease in accounts payable, accrued compensation and accrued expenses.  The decrease primarily reflects a decrease in Hyperspring accrued payroll due to the timing of their biweekly payroll cycle and the timing of payments made by the Company to vendors and subcontractors.

For the three months ended March 31, 2016, net cash provided by operations totaled $1.6 million.  Significant changes in the Company's assets and liabilities in the three months ended March 31, 2016, included:

● A $0.3 million decrease in the Company's contract receivables.  The Company's trade receivables, net of the allowance for doubtful accounts, decreased from $9.7 million at December 31, 2015 to $7.6 million at March 31, 2016.  At March 31, 2016, trade receivables outstanding for more than 90 days, net of the bad debt reserve, totaled approximately $0.9 million as compared to $0.6 million at December 31, 2015.  The Company believes the entire 90-day balance at March 31, 2016, is collectible.  The Company's unbilled receivables increased by approximately $1.8 million to $5.2 million at March 31, 2016 as compared to December 31, 2015.  The increase in the unbilled receivables is due to the timing of contracted billing milestones of the Company's current projects.  In April 2016, the Company invoiced $1.8 million of the unbilled amounts; the balance is expected to be invoiced and collected within one year.

● A $1.2 million increase in accounts payable, accrued compensation and accrued expenses.  The increase reflects an increase in Hyperspring accrued payroll due to the timing of their biweekly payroll cycle and timing of payments made by the Company to vendors and subcontractors.

Cash used in investing activities.  Net cash used in investing activities totaled $73,000 for the three months ended March 31, 2017.  Capital expenditures totaled $44,000 and capitalized software development costs totaled $29,000.

Net cash used in investing activities totaled $119,000 for the three months ended March 31, 2016.  Capital expenditures totaled $18,000 and capitalized software development costs totaled $131,000 for the three months ended March 31, 2016.  Proceeds from the sale of fixed assets totaled $31,000.

Cash used in financing activities.  Net cash used in financing activities totaled $1.5 million for the three months ended March 31, 2017.  During the three months ended March 31, 2017, the Company made payments of $0.9 million to the former Hyperspring owners in accordance with the 2014 purchase agreement due to the achievement of certain EBITDA targets in 2016 and withheld approximately $0.7 million in RSUs to pay employees' payroll withholding taxes.

Net cash used in financing activities totaled $1.4 million for the three months ended March 31, 2016 due to payments of $1.4 million to the former Hyperspring owners in accordance with the 2014 purchase agreement due to the achievement of certain EBITDA targets in 2015.

33

At March 31, 2017, the Company had cash and cash equivalents of $21.6 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.

Line of Credit

Citizens Bank

The Company entered into a new three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank on December 29, 2016, to fund general working capital needs, including acquisitions.  Working capital advances bear interest of LIBOR plus 2.25% per annum and letter of credit fees are 1.25% per annum.  The Company is not required to maintain a restricted cash collateral account at Citizens Bank for outstanding letters of credit and working capital advances. 

The maximum availability under the RLOC is subject to a borrowing base equal to 80% of eligible accounts receivable, and is reduced for any issued and outstanding letters of credit and working capital advances.  At March 31, 2017, there were no outstanding borrowings on the RLOC and six letters of credit totaling $1.7 million.  The amount available at March 31, 2017, after consideration of the borrowing base, letters of credit and working capital advances was approximately $1.8 million.

The credit facility agreement is subject to standard financial covenants and reporting requirements. At March 31, 2017, the Company was in compliance with its financial covenants.

BB&T Bank

At March 31, 2017, we had four letters of credit with BB&T totaling $1.0 million, which we expect to terminate during the second quarter of 2017.  At March 31, 2017 and December 31, 2016, the cash collateral account with BB&T totaled $1.1 million and was classified as restricted cash on the consolidated balance sheets.

34

Non-GAAP Financial Measures

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's results because it excludes certain items that are not directly related to the Company'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.  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 follows:

	Three Months ended
	March 31,
(in thousands)	2017			2016
Net (loss) income	$	(266	)	$	138
Interest income, net		(27	)		(27	)
Provision for income taxes		73			88
Depreciation and amortization		140			173
EBITDA		(80	)		372
Loss (gain) from the change in fair value of contingent consideration		254			(69	)
Restructuring charges		45			125
Stock-based compensation expense		596			247
Consulting support for finance restructuring		-			78
Adjusted EBITDA	$	815		$	753

35

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

Adjusted Net Income and adjusted earnings (loss) per share (adjusted EPS) are not measures of financial performance under 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 measures to evaluate the performance of our business and make 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 as to the operating 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.  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:

	Three Months ended
	March 31,
	2017			2016
Net (loss) income	$	(266	)	$	138
Loss (gain) from the change in fair value of contingent consideration		254			(69	)
Restructuring charges		45			125
Stock-based compensation expense		596			247
Consulting support for finance restructuring		-			78
Adjusted net income	$	629		$	519
Diluted (loss) earnings per common share	$	(0.01	)	$	0.01
Adjusted earnings per common share – Diluted(a)	$	0.03		$	0.03
Weighted average shares outstanding – Diluted(a)		19,502,057			18,133,742

^(a) During the three months ended March 31, 2017, the Company reported a GAAP net loss and positive adjusted net income.  Accordingly, there were 407,675 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.

36

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to management, including the Company's Chief Executive Officer (CEO), who is its principal executive officer, and Chief Financial Officer (CFO), who is its principal financial officer, to allow timely decisions regarding required disclosure.  At the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management including our CEO and our CFO, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13-15(e) of the Exchange Act.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective because of the material weakness identified below.

(b)  Changes in Internal Control over Financial Reporting

As described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, management assessed the effectiveness of the Company's internal control over financial reporting and concluded that they were not effective as of December 31, 2016, due to the fact that there was a material weakness in its internal control over financial reporting.

As of March 31, 2017, management concluded that additional work was still required to remediate control deficiencies over revenue recognition due to inadequate design and operation.  As a result of this material weakness in our internal control over financial reporting, we performed additional review and analysis over our consolidated financial statements for the three months ended March 31, 2017.  As a result of these procedures, we believe that our consolidated financial statements are presented in accordance with U.S. GAAP.  We anticipate that we will complete the remediation of our controls over revenue recognition during 2017.

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

(c)  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.

37

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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

10.1	Employment Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of December 1, 2015, filed herewith.
10.2	Restricted Share Unit Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of December 1, 2015, filed herewith.
10.3	Amendment to Restricted Share Unit Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of July 1, 2016, filed herewith.
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

38

SIGNATURES

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

Date:  May 15, 2017

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)

39

EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement, dated as of  December 1, 2015 (the "Effective Date"), by and between GSE Systems, Inc., a Delaware corporation with principal executive offices at 1332 Londontown Blvd., Sykesville, MD  21784 (the "Company"), and Bahram Meyssami, residing at ______________ ("Executive").

BACKGROUND

The Company and the Executive desire that the Executive be employed by the Company and have entered into this Employment Agreement to set forth the terms and conditions on which the Executive shall be employed by the Company.

NOW, THEREFORE, in consideration of the premises, the mutual promises, covenants, and conditions herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows:

1.Employment.  The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed by the Company, upon the terms and subject to the conditions set forth in this Agreement.

2.Capacity and Duties.  Executive shall be employed in the capacity of Chief Technology Officer of the Company and shall have the duties, responsibilities and authorities normally undertaken by the Chief Technology Officer of a company as well as such other duties, responsibilities, and authorities as are assigned to him by the Chief Executive Officer of the Company, including, but not limited to, those duties set forth on Exhibit A to this Employment Agreement, so long as such additional duties, responsibilities and authorities are consistent with Executive's position as Chief Technology Officer of the Company. The Executive shall devote substantially all of his business time and attention to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise without the prior written consent of the Board of Directors (the "Board").  Executive will spend substantially all of his working time for the Company, when not traveling on Company business, at the Company's headquarters.  The Executive will be permitted to act or serve as a director, trustee, or committee member of any type of civic or charitable organization or to teach in a university on a part-time basis as long as such activities do not materially interfere with the performance of the Executive's duties and responsibilities to the Company as provided hereunder.

3.Term of Employment.  The term of this Agreement shall commence on the Effective Date and continue through December 31, 2017 (the "Initial Term").  The Initial Term shall be automatically extended for an additional one year period on December 31 of each year, beginning December 31, 2016, unless either party provides written notice to the other of its intention not to extend at least 60 days' prior to such date (as so extended, the "Term").

4.Compensation.  During the Term, subject to all the terms and conditions of this Agreement, and as compensation for all services to be rendered by Executive under this Agreement, the Company shall pay to or provide Executive with the following:

a. Base Salary.  The Company shall pay to Executive an annual base salary (the "Base Salary") of Two Hundred Twenty Five  Thousand Dollars ($225,000).  The Executive's Base Salary shall be reviewed at least annually with the Board, and the Board may, but shall not be required to, increase (but not decrease) the Base Salary during the Term based upon changes in cost of living, the Executive's performance and other factors deemed relevant by the Board.  The Base Salary will be payable at such intervals as salaries are paid generally to other executive officers of the Company.

b. Bonus.  For each fiscal year of the Term, beginning with fiscal year 2016, the Executive shall be eligible to earn an annual bonus award (the "Bonus") of up to 25% of Base Salary, based upon the achievement of annual performance goals established by Board prior to the beginning of each fiscal year.  The amount of Bonus to be paid to Executive for any year of this Agreement may, at the sole discretion of the Board of Directors of the Company, be prorated for the number of months which Executive was employed by the Company during such year.  Any Bonus shall be paid on or prior to March 15 of the following year.

c. Restricted Stock Units.

i. Upon execution of this Agreement, the Executive will be granted 200,000 performance-restricted stock units ("RSUs"), subject to vesting and all other terms and conditions set forth in the Company's 1995 Long Term Incentive Plan and in a written grant agreement issued to Executive in connection with the grant of such RSUs.

ii. For each fiscal year during the Initial Term, commencing with fiscal year 2016, the Executive will have the potential to earn 25% of his Base Salary in RSUs, non-qualified stock options or a combination thereof, based upon metrics, such as performance against budget, profitability and stock price performance, as determined by the Board of Directors prior to the beginning of each fiscal year.  All such grants shall be made via a written grant agreement.

d. Benefits.  Executive shall be entitled to participate in all employee benefit plans maintained by the Company for its senior executives or employees including, without limitation, the Company's medical, dental, vision, 401(k) and life insurance plans and the following benefits:

i. Vacation.  Executive shall be entitled to vacation in accordance with the Company's policy for its senior executives.

ii. Automobile.  The Company shall pay the gasoline in connection with Executive's automobile in accordance with the written policy and guidelines established by the Company for executive officers.

iii. Medical and Dental/Vision Insurance.  The Company shall pay Executive's monthly Medical and Dental/Vision Insurance premiums in association with Company provided health insurance plans.

5.Business Expenses.  The Company shall reimburse Executive for all reasonable expenses (including, but not limited to, continuing education, business travel, and customer entertainment expenses) incurred by him in connection with his employment hereunder in accordance with the written policy and guidelines established by the Company for executive officers.

6.Non-Competition, Non-Solicitation, Non-Disparagement.

a. Acknowledgements.  The Executive acknowledges and agrees that the services to be rendered by the Executive to the Company are of a special and unique character; that the Executive will obtain knowledge and skill relevant to the Company's industry, methods of doing business and marketing and investment strategies by virtue of the Executive's employment; and that the restrictive covenants and other terms and conditions of this Agreement are reasonable and reasonably necessary to protect the legitimate business interest of the Company. The Executive further acknowledges that:  the amount of the Executive's compensation reflects, in part, the Executive's obligations and the Company's rights under this Agreement; that the Executive has no expectation of any additional compensation, royalties or other payment of any kind not otherwise referenced herein in connection herewith; and that the Executive will not be subject to undue hardship by reason of his full compliance with the terms and conditions of this Agreement or the Company's enforcement thereof.

b. Non-Competition.  Because of the Company's legitimate business interest as described herein and the good and valuable consideration offered to the Executive, during the Term and for the 12-month period beginning on the last day of the Executive's employment with the Company, the Executive agrees and covenants not to engage in Prohibited Activity within the United States. For purposes of this Section 6, "Prohibited Activity" means any activity to which the Executive contributes his knowledge, directly or indirectly, in whole or in part, as an employee, employer, owner, operator, manager, advisor, consultant, agent, employee, partner, director, stockholder, officer, volunteer, intern or any other similar capacity to an entity engaged in the same or similar business as the Company anywhere in the world.  Nothing herein shall prohibit the Executive from purchasing or owning less than five percent (5%) of the publicly traded securities of any corporation, provided that such ownership represents a passive investment and that the Executive is not a controlling person of, or a member of a group that controls, such corporation.

c. Non-solicitation of Employees. The Executive agrees and covenants not to directly or indirectly solicit, hire, recruit, attempt to hire or recruit, or induce the termination of employment of any employee of the Company during the Term and the 12-month period beginning on the last day of the Executive's employment with the Company.

d. Non-solicitation of Customers.  The Executive understands and acknowledges that because of the Executive's experience with and relationship to the Company, he will have access to and learn about much or all of the Company's customer information. "Customer Information" includes, but is not limited to, names, phone numbers, addresses, e-mail addresses, order history, order preferences, chain of command, pricing information and other information identifying facts and circumstances specific to the customer. The Executive understands and acknowledges that loss of this customer relationship and/or goodwill will cause significant and irreparable harm to the Company. The Executive agrees and covenants, during the Term and for the 12-month period following the effective date of termination of this Agreement for any reason, not to directly or indirectly solicit, contact (including but not limited to e-mail, regular mail, express mail, telephone, fax, and instant message), attempt to contact or meet with the Company's current customers for purposes of offering or accepting goods or services similar to or competitive with those offered by the Company or for purposes of inducing any such customer to terminate its relationship with the Company.

e. Confidential Information.  All Confidential Information which Executive may now possess, may obtain during the Term, or may create prior to the end of the Term  relating to the business of the Company or of any of its customers or suppliers shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the Term in the business and for the benefit of the Company, in each case without prior written permission of the Company. Executive shall return all tangible evidence of any Confidential Information to the Company prior to or at the termination of his employment. For purposes of this Agreement, "Confidential Information" means any and all information related to the Company or any of its subsidiaries that is not generally known by others with whom they compete or do business.

f. Enforcement.  Executive acknowledges and agrees that the covenants contained herein are fair and reasonable in light of the consideration paid hereunder, and that damages alone shall not be an adequate remedy for any breach by Executive of his covenants which then apply and accordingly expressly agrees that, in addition to any other remedies which the Company may have, the Company shall be entitled to injunctive relief in any court of competent jurisdiction for any breach or threatened breach of any such covenants by Executive.  Nothing contained herein shall prevent or delay the Company from seeking, in any court of competent jurisdiction, specific performance or other equitable remedies in the event of any breach or intended breach by Executive of any of his obligations hereunder.

g. Tolling.  The period of time applicable to any covenant in this Section 6 will be extended by the duration of any violation by Executive of such covenant.

h. Reformation.  If any covenant in this Section 6 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against Executive.

7.Patents.  Any interest in patents, patent applications, inventions, copyrights, developments, know-how and processes ("Inventions") which Executive now or hereafter during the period he is employed by the Company under this Agreement  may own or develop relating to the fields in which the Company or any of its subsidiaries may then be engaged shall belong to the Company; and forthwith upon request of the Company, Executive shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all his right, title, and interest in and to all Inventions, free and clear of all liens, charges, and encumbrances.

8.Termination.  Executive's employment hereunder may be terminated prior to the expiration of the Term under the following circumstances:

a. Death. Executive's employment hereunder shall terminate upon his death.

b. Disability. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been unable to perform his duties hereunder on a full-time basis for a period of three (3) consecutive months, or for 180 days in any 12 month period (a "Disability"), the Company may, on 30 days written Notice of Termination (defined in Section 8(e)), terminate Executive's employment if Executive fails to return to the performance of his duties hereunder on a full-time basis within said period.

c. Cause. The Company may terminate Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate  Executive's employment upon the occurrence of any of the following:

i. the willful and continued failure by Executive to substantially perform his material duties or obligations hereunder (other than any such failure resulting from Executive's incapacity due to physical or mental illness), after written demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes Executive has not substantially performed his duties or obligations, and provides the Executive with at least 30 days to effect a cure;

ii. the willful engaging by Executive in misconduct which, in the reasonable opinion of the Board, will have a material adverse effect on the reputation, operations, prospects or business relations of the Company;

iii. the conviction of Executive of any felony or the entry by Executive of any plea of nolo contendere in response to an indictment for a crime involving moral turpitude;

iv. Executive abuses alcohol, illegal drugs or other controlled substances which impact Executive's performance of his duties;

v. the material breach by Executive of a material term or condition of this Agreement.

vi.For purposes of this Section 8(c), no act, or failure to act, on Executive's part shall be considered "willful" if it was done, or omitted to be done, by him in good faith and with the reasonable belief that his action or omission was in the best interest of the Company.  Notwithstanding the foregoing, Executive's employment shall not be deemed to have been terminated for Cause without the following: (i) reasonable notice to Executive setting forth the reasons for the Company's intention to terminate his employment for Cause, (ii) an opportunity for Executive, together with his counsel, to be heard before the Board, and (iii) delivery to Executive of a Notice of Termination in accordance with Section 8(e).

d. Termination Without Cause.   The  Executive's employment hereunder may be terminated without cause by either the Company or the Executive at any time upon at least 30 days' prior written notice.  The giving by the Company of notice of its intent not to extend the Term pursuant to Section 3 shall be deemed, at the option of the Executive, to be a termination of his employment without cause ("Deemed Termination").  Executive may exercise that option by giving written notice thereof to the Company within 30 days of his receipt of the notice of non-renewal.

e. Notice of Termination. Any termination of Executive's employment (other than termination pursuant to Section 8(a)) shall be communicated by a Notice of Termination given by the terminating party to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated.

f. Date of Termination.  "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 8(b), 30 days after Notice of Termination is given (provided that Executive shall not have returned to the performance of his duties on a full-time basis during such 30-day period), (iii) if a Deemed Termination occurs, upon the date of Executive's notice to the Company of exercise of his option to treat such event as a termination without Cause, and (iv) if Executive's employment is terminated for any other reason, the date specified in the Notice of Termination, which shall not be earlier than the date on which the Notice of Termination is given.

9.Compensation upon Termination or During Disability.

a. Disability.  During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), Executive shall continue to receive his full salary at the rate then in effect for such period until his employment is terminated pursuant to Section 8(b), provided that payments so made to Executive during the disability period shall be reduced by the sum of the amounts, if any, payable to Executive at or prior to the time of any such payment under disability benefit plans of the Company and which were not previously applied to reduce any such payment, and the Company shall have no further obligation to the Executive.

b. For Cause.  If Executive's employment is terminated for Cause, the Company shall pay Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligation to the Executive.

c. Any other Reason.  If Executive's employment shall be terminated by the Company for a reason other than Death, Disability or Cause, or if Executive terminates his employment for Good Reason (defined below), upon Executive's execution of a release of claims in favor of the Company, its affiliates and their respective officers and directors in a form provided by the Company (the "Release") and such Release becoming effective within 21 days following the Termination Date:

i. the Company will continue to pay the Executive his Base Salary for a period of six months, payable at such intervals as salaries are paid generally to other executive officers of the Company;

ii. the Executive shall continue to be eligible to participate in all medical, dental, vision and 401(k) plan benefits, including company match (collectively, "Benefits"), on the same terms and at the same level of participation and company contribution to the cost thereof, as in effect at the time of termination of employment for a period of six months following termination to the extent Executive remains eligible under the applicable employee benefit plans and to the extent Executive's eligibility is not contrary to, or does not negate, the tax favored status of the plans or of the benefits payable under the plan.  If Executive is unable to continue to participate in any employee benefit plan or program provided for under this Agreement, Executive shall be compensated in respect of such inability to participate through payment by GSE to Executive, in advance, of an amount equal to the annual cost that would have been incurred by GSE if the Executive were able to participate in such plan or program.

iii.   Executive shall receive a prorated Bonus equal to the product of (I) the Bonus, if any, that the Executive would have earned for the calendar year in which the Date of Termination occurred had he been employed as of the last day of such year, based on the Company's actual results of operations for such year and (II) a fraction, the numerator of which is the number of days the Executive was employed by the Company during the year of termination and the denominator of which is the number of days in such year. The prorated Bonus shall be paid on the date that annual bonuses are paid to similarly situated employees, but in no event later than the date which not later than two and one-half (2 ½) months following the end of the calendar year in which the Date of Termination occurs.

d. "Good Reason" shall mean the occurrence of any of the following: (a) Executive's duties, responsibilities or authority are materially reduced as compared to those of Executive's current position without his consent; (b) Executive's Base Salary (as the same may be increased at any time hereafter) or Bonus are reduced; (c) Executive's Benefits are either discontinued or materially reduced, in the aggregate; (d) Executive's primary office or location is moved more than fifty (50) miles from Executive's current office or location; or (e) either the Company or any successor company materially breaches this Agreement.

10.Change of Control.

a. If Executive terminates his employment for Good Reason within one year following the effective date of a Change of Control, Executive shall, in lieu of any benefits provided for in Section 9, continue to receive the Base Salary and Benefits that Executive is receiving as of the effective date of the Change of Control for a period of six (6) months from the date of termination of his employment.  Such Base Salary and Benefits shall be paid at such intervals as salaries are paid generally to other executive officers of the Company.

b. In addition, the Executive shall also be entitled to receive, on the Date of Termination, an amount, payable in one lump sum, equal to 50% of the average of the Bonus amounts paid to Executive for the two years prior to the year in which the Change of Control takes place.

c. In the event of Executive's decision to terminate employment for Good Reason, Executive must give notice to Company of the existence of the conditions giving rising to the termination for Good Reason within ninety (90) days of the initial existence of the conditions.  Upon such notice, Company shall have a period of thirty (30) days during which it may remedy the conditions ("Cure Period").  If the Company fails to cure the conditions constituting the Good Reason during the Cure Period to Executive's reasonable satisfaction, Executive's termination of employment must occur within a period of ninety (90) days following the expiration of the Cure Period in order for the termination to constitute a termination pursuant to Good Reason for purposes of this Agreement.

d. For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied:

i. Any Person (other than a Person in control of the Company as of the date of this Agreement, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a company owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of voting securities of the Company) becomes the beneficial owner, directly or indirectly, of securities of the Company representing a majority of the combined voting power of the Company's then outstanding securities; or

ii. The stockholders of the Company approve: (x) a plan of complete liquidation of the Company (which includes a termination and liquidation of all Executive's rights under any arrangement governed by Section 409A of the Internal Revenue Code of 1986, as amended ("Code"); or (y) an agreement for the sale or disposition of all or substantially all the Company's assets; or (z) a merger, consolidation, or reorganization of the Company with or involving any other corporation, other than a merger, consolidation, or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least a majority of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization.

iii. For purposes of this definition of Change in Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof, and "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and regulations under the 1934 Act.

11.Successors; Binding Agreement.  This Agreement is personal to the Executive and shall not be assigned by the Executive. Any purported assignment by the Executive shall be null and void from the initial date of the purported assignment. The Company may assign this Agreement to any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, including the restrictive covenants provided for in Section 6, which Executive agrees shall be enforceable by any such successor or assign. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. This Agreement shall inure to the benefit of the Company and permitted successors and assigns.

12.No Third Party Beneficiaries.  This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement.

13.Fees and Expenses.   The Company shall pay all reasonable legal fees and related expenses (including the costs of experts, evidence, and reasonable attorney's fees) incurred by Executive as a result of a contest or dispute relating to this Agreement if such contest or dispute is settled or adjudicated on terms that are substantially in favor of Executive. In addition, the Company shall pay Executive interest, at the prevailing prime rate, on any amounts that are determined to be payable to Executive hereunder that are not paid when due.

14.Representations and Warranties of Executive.  Executive represents and warrants to the Company that (a) Executive is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) Executive is under no physical or mental disability that would hinder his performance of duties under this Agreement.

15.Life Insurance.  If requested by the Company, Executive shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Executive. Executive has no reason to believe that his life is not insurable with a reputable insurance company at rates now prevailing in the City of Baltimore for healthy men of his age.

16.Modification.  This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party.

17.Notices.  Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section).

18.Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland, without giving effect to conflict of laws.  Any action or proceeding by either of the parties to enforce this Agreement shall be brought only in a state or federal court located in the state of Maryland.  The parties hereby irrevocably submit to the exclusive jurisdiction of such courts and waive the defense of inconvenient forum to the maintenance of any such action or proceeding in such venue.

19.409A.  This Agreement is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and any exemption from Section 409A of the Code, and shall in all respects be administered in accordance with and interpreted to ensure compliance with Section 409A of the Code.  Executive's termination of employment under this Agreement shall be interpreted in a manner consistent with the separation from service rules under Section 409A of the Code.  For purposes of Section 409A of the Code, each payment made under this Agreement shall be treated as a separate payment and the right to a series of payments under this Agreement shall be treat as a right to a series of separate payments.  In no event shall Executive, directly or indirectly, designate the calendar year of the payment.  Furthermore, if, at the time of termination of employment with the Company, Company has stock which is publicly traded on an established securities market and Executive is a "specified employee" (as defined in Section 409A of the Code) and it is necessary to postpone the commencement of any payments or benefits otherwise payable pursuant to this Agreement as a result of such termination of employment to prevent any accelerated or additional tax under Section 409A of the Code, then Company shall postpone the commencement of the payment of such payment or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) that are not otherwise paid within the short-deferral exception under Section 409A of the Code and are in excess of the lessor of two (2) times (i) Executive's then annual compensation or (ii) the limit on compensation then set forth in Section 401(a)(17) of the Code, until the first payroll date that occurs after the date that is six months following Executive's separation from service with the Company (within the meaning of Section 409A of the Code).  The accumulated postponed amount shall be paid in a lump sum payment within ten days after the end of the six month period. Notwithstanding any provision of this Agreement to the contrary, in no event shall the timing of the Executive's execution of the Release, directly or indirectly, result in the Executive designating the calendar year of payment, and if a payment that is subject to execution of the release could be made in more than one taxable year, payment shall be made in the later taxable year.

20.Survival.  Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.

21.Acknowledgment of Full Understanding.  THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS FULLY READ, UNDERSTANDS AND VOLUNTARILY ENTERS INTO THIS AGREEMENT. THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS HAD AN OPPORTUNITY TO ASK QUESTIONS AND CONSULT WITH AN ATTORNEY OF HIS CHOICE BEFORE SIGNING THIS AGREEMENT.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.

GSE SYSTEMS, INC.

By: Kyle J. Loudermilk

Bahram Meyssami, Executive

Exhibit A – Duties of the Chief Technology Officer

· Oversee and actively manage the staff of the entire Technology organization.

· Work with key stakeholders within (sales, Executive Team) and beyond the Company (customers) to understand the requirements for delivering Technology and Products to advance the Company goals in driving revenue and profitability growth.

· Be responsible for the technical means and methods of developing and delivering Technology and Products to the marketplace.

· Identify opportunities and risks for the business.

· Monitor technology and trends that could impact the Company.

· Participate in management decisions about corporate strategy, execution and governance.

· Communicate the Company's technology strategy to partners, management, investors and employees. 

· Maintain current information about technology standards and compliance regulations. 

EX-10.2

Exhibit 10.2

Restricted Share Unit Agreement

This Restricted Share Unit Agreement (this "Agreement") is made and entered into as of December 1, 2015 (the "Grant Date") by and between GSE Systems, Inc., a Delaware corporation, (the "Company") and Bahram Meyssami (the "Grantee").

WHEREAS, the Company has adopted the GSE Systems, Inc. 1995 Long-Term Incentive Plan, as amended and restated effective March 6, 2014 (the "Plan"), pursuant to which Restricted Share Units may be granted;

WHEREAS, as of the date hereof,  the Company and the Grantee have entered into an employment agreement (the "Employment Agreement") pursuant to which Grantee shall be employed as the Company's Chief Technology Officer; and

WHEREAS, the Company has determined that it is in the best interests of the Company and its stockholders to grant the award of Restricted Share Units provided for herein.

NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:

1.Grant of Performance Restricted Share Units. Pursuant to Section 6 of the Plan, the Company hereby grants to the Grantee an Award for a target number of Restricted Share Units.  Each Restricted Share Unit ("RSU") represents the right to receive one share of Common Stock (as defined in Exhibit 1), subject to the terms and conditions set forth in this Agreement and the Plan. The number of RSUs that actually vest for the Performance Period will be determined by the level of achievement of the Performance Goals in accordance with Exhibit 1 attached hereto. Capitalized terms that are used but not defined herein have the meanings ascribed to them in the Plan.

2.Performance Period. For purposes of this Agreement, the term "Performance Period" shall be the period commencing on the date on which Grantee signs his Employment Agreement with the Company and ending on November 30, 2021.

3.Performance Goals.

3.1The number of RSUs vested will be determined based on the level of achievement of the Performance Goals in accordance with Exhibit 1. All determinations of whether Performance Goals have been achieved, the number of RSUs vested, and all other matters related to this Section 3 shall be made by the Board of Directors, in their sole discretion.

3.2Promptly following completion of a Performance Goal, the Board of Directors  will review and certify in writing (a) whether, when and to what extent, the Performance Goal has been achieved, and (b) the number of RSUs that vest, if any, subject to compliance with the requirements of Section 4. Such certification shall be final, conclusive and binding on the Grantee, and on all other persons, to the maximum extent permitted by law.

4.Vesting of RSUs. The RSUs are subject to forfeiture until they vest. Except as otherwise provided herein, the RSUs will vest and become nonforfeitable as of the day the Performance Goal is satisfied as certified by the Board of Directors in accordance with Section 3.2.  The number of RSUs that vest and become payable under this Agreement shall be determined by the Board of Directors based on the level of achievement of the Performance Goals set forth in Exhibit 1.  Notwithstanding anything herein to the contrary, any unvested RSUs will expire on November 30, 2021.

5.Termination of Employment.

5.1Except as otherwise expressly provided in this Agreement or the Employment Agreement, if the Grantee's employment under the terms of his Employment Agreement terminates for any reason at any time before all of his or her RSUs have vested, the Grantee's unvested RSUs shall be automatically forfeited upon such termination of employment, and neither the Company nor any Affiliate shall have any further obligations to the Grantee under this Agreement.

5.2Notwithstanding Section 5.1, if the Grantee's employment is terminated on or before November 30, 2016 (i) by the Company for any reason other than death, Disability (as defined in the Employment Agreement) or Cause (as defined in the Employment Agreement) or (ii) by the Grantee for Good Reason (as defined in the Employment Agreement), then 75% of the unvested RSUs shall vest.

5.3Notwithstanding Section 5.1, if the Grantee's employment is terminated on or after November 30, 2016 but before November 30, 2017 (i) by the Company for any reason other than death, Disability or Cause or (ii) by the Grantee for Good Reason, then 65% of the unvested RSUs shall vest.

5.4Notwithstanding Section 5.1, if the Grantee's employment terminates on or before November 30, 2018 (ii) by the Company for any reason other than death, Disability or Cause or (ii) by the Grantee for Good Reason; and if the VWAP (as defined in Exhibit 1) of the Common Stock is greater than $2.50 for the ten trading day period ending on the trading day immediately prior to the date of the aforementioned termination of employment, then 50% of the unvested RSUs shall vest.

6.Effect of a Change in Control. If there is a Change in Control (as defined in the Employment Agreement), this Section 6 shall determine the vesting of any unvested RSUs.

6.1If a Change in Control described in Section 10(d)(ii) of the Employment Agreement occurs (a "10(d)(ii) Event") or if a Change in Control described in Section 10(d)(i) of the Employment Agreement occurs and is followed by a termination by the Grantee of his employment for Good Reason pursuant to the Employment Agreement (a "10(d)(i) Event"), then the Grantee's RSU's shall vest as follows:

(a)If the Change of Control occurred prior to November 30, 2018, all unvested RSUs shall vest on the effective date of the Change in Control with respect to a 10(d)(ii) Event, or on the effective date of termination for Good Reason with respect to a 10(d)(i) Event.

(b)If the Change of Control occurred on or after November 30, 2018, and if the VWAP of the Common Stock is greater than $2.50 for the ten trading day period ending on the trading day immediately prior to the effective date of the Change in Control, 50% of the unvested RSUs shall vest on the effective date of the Change in Control with respect to a 10(d)(ii) Event, or on the effective date of termination for Good Reason with respect to a 10(d)(i) Event.

(c)If the Change of Control occurred on or after November 30, 2018, and if the VWAP of the Common Stock is less than or equal to $2.50 for the ten trading day period ending on the trading day immediately prior to the effective date of the Change in Control, none of the unvested RSUs shall vest.

6.2If any other Change in Control event occurs, vesting of RSUs shall be determined solely in accordance with Section 5.

7.Payment of RSUs. Payment in respect of the RSUs vested for the Performance Period shall be made in shares of Common Stock and shall be issued to the Grantee as soon as practicable following the vesting date and, in any event, within 30 days following the vesting date.  The Company shall (a) issue and deliver to the Grantee the number of shares of Common Stock equal to the number of vested RSUs, and (b) enter the Grantee's name on the books of the Company as the stockholder of record with respect to the shares of Common Stock delivered to the Grantee.

8.Transferability. Subject to any exceptions set forth in this Agreement or the Plan, the RSUs or the rights relating thereto may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Grantee.

9.Rights as Stockholder; Dividend Equivalents.

9.1The Grantee shall not have any rights of a stockholder with respect to the shares of Common Stock underlying the RSUs, including, but not limited to, voting rights and the right to receive or accrue dividends or dividend equivalents.

9.2Upon and following the vesting of the RSUs and the issuance of shares, the Grantee shall be the record owner of the shares of Common Stock underlying the RSUs unless and until such shares are sold or otherwise disposed of, and as record owner shall be entitled to all rights of a stockholder of the Company (including voting and dividend rights).

9.3Grantee is aware that the Company has a policy governing the trades of its insiders and, in accordance therewith, Grantee acknowledges that he has been advised to consider execution of a Rule 10b5-1 plan to provide for any future transactions in the Company's securities that he may desire to make in order to meet his personal planning needs.  The Company will assist the Grantee in the preparation of a Rule 10b-5-1 plan, at the Company's expense, upon Grantee's request.

10.No Right to Continued Service. Neither the Plan nor this Agreement shall confer upon the Grantee any right to be retained in any position, as an Employee, Consultant or Director of the Company. Further, nothing in the Plan or this Agreement shall be construed to limit the discretion of the Company to terminate the Grantee's employment  at any time, with or without Cause.

11.Adjustments. If any change is made to the outstanding Common Stock or the capital structure of the Company, if required, the RSUs shall be adjusted or terminated in any manner as contemplated by Section 7 of the Plan.

12.Tax Liability and Withholding.

12.1The Grantee shall be required to pay to the Company, and the Company shall have the right to deduct from any compensation paid to the Grantee pursuant to the Plan, the amount of any required withholding taxes in respect of the RSUs and to take all such other action as the Board of Directors deems reasonably necessary to satisfy all obligations for the payment of such withholding taxes. The Board of Directors may permit the Grantee to satisfy any federal, state or local tax withholding obligation by any of the following means, or by a combination of such means:

(a)tendering a cash payment;

(b)authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable or deliverable to the Grantee as a result of the vesting of the RSUs; provided, however, that no shares of Common Stock shall be withheld with a value exceeding the minimum amount of tax required to be withheld by law; or

(c)delivering to the Company previously owned and unencumbered shares of Common Stock.

12.2Notwithstanding any action the Company takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related withholding ("Tax-Related Items"), the ultimate liability for all Tax-Related Items is and remains the Grantee's responsibility, and the Company (a) makes no representation or undertakings regarding the treatment of any Tax-Related Items in connection with the grant, vesting or settlement of the RSUs or the subsequent sale of any shares, and (b) does not commit to structure the RSUs to reduce or eliminate the Grantee's liability for Tax-Related Items.  Within 5 days of any vesting date of an RSU, the Company has the right, but not the obligation, to purchase from Grantee a number of the vested shares of common stock underlying such vested RSU equal to 33% of the value of the vested common stock, using the VWAP of the Common Stock for the five trading day period, ending on the trading date prior to the vesting event, as reported on the NYSE MKT or, if the Company's common stock is not then listed on the NYSE MKT, as reported by such other exchange as shall then have the Company's common stock listed.

13.Compliance with Law. The issuance and transfer of shares of Common Stock in connection with the RSUs shall be subject to compliance by the Company and the Grantee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company's shares of Common Stock may be listed. No shares of Common Stock shall be transferred unless and until any then applicable requirements of state and federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. The Company will ensure that a sufficient number of shares of its common stock are registered on Form S-8 prior to the vesting of any RSU.

14.Notices. Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed to the Senior Vice President and General Counsel of the Company at the Company's principal corporate offices. Any notice required to be delivered to the Grantee under this Agreement shall be in writing and addressed to the Grantee at the Grantee's address as shown in the records of the Company. Either party may designate another address in writing (or by such other method approved by the Company) from time to time.

15.Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of Maryland without regard to conflict of law principles.

16.Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Grantee or the Company to the Board of Directors for review. The resolution of such dispute by the Board of Directors shall be final and binding on the Grantee and the Company.

17.RSUs Subject to Plan. This Agreement is subject to the Plan as approved by the Company's stockholders. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

18.Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon the Grantee and the Grantee's beneficiaries, executors and administrators.

19.Severability. The invalidity or unenforceability of any provision of the Plan or this Agreement shall not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement shall be severable and enforceable to the extent permitted by law.

20.Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. The grant of the RSUs in this Agreement does not create any contractual right or other right to receive any RSUs or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Board of Directors of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of the Grantee's employment with the Company.

21.Amendment. The Board of Directors has the right to amend, alter, suspend, discontinue or cancel the RSUs, prospectively or retroactively; provided, that, no such amendment shall adversely affect the Grantee's material rights under this Agreement without the Grantee's consent.

22.Section 162(m). All payments under this Agreement are intended to constitute "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. This Award shall be construed and administered in a manner consistent with such intent.

23.Section 409A. This Agreement is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and any exemption from Section 409A of the Code, and shall in all respects be administered in accordance with and interpreted to ensure compliance with Section 409A of the Code.  Grantee's termination of employment events under this Agreement shall be interpreted in a manner consistent with the separation from service rules under Section 409A of the Code.  Furthermore, if, at the time of termination of employment with the Company, Company has stock which is publicly traded on an established securities market and Grantee is a "specified employee" (as defined in Section 409A of the Code) and it is necessary to postpone the vesting or distribution of Common Stock otherwise payable pursuant to this Agreement as a result of such termination of employment to prevent any accelerated or additional tax under Section 409A of the Code, then Company shall postpone the commencement of the payment of such payment or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Grantee) that are not otherwise paid within the short-deferral exception under Section 409A of the Code and are in excess of the lessor of two (2) times (i) Grantee's then annual compensation or (ii) the limit on compensation then set forth in Section 401(a)(17) of the Code, until the first payroll date that occurs after the date that is six months following Grantee's separation from service with the Company (within the meaning of Section 409A of the Code).  The accumulated postponed distribution of shares of Common Stock shall be made within ten days after the end of the six month period.

24.No Impact on Other Benefits. The value of the Grantee's RSUs is not part of his or her normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit.

25.Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Counterpart signature pages to this Agreement transmitted by facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.

26.Acceptance. The Grantee hereby acknowledges receipt of a copy of the Plan and this Agreement. The Grantee has read and understands the terms and provisions thereof, and accepts the RSUs subject to all of the terms and conditions of the Plan and this Agreement. The Grantee acknowledges that there may be adverse tax consequences upon the vesting or settlement of the RSUs or disposition of the underlying shares and that the Grantee has been advised to consult a tax advisor prior to such vesting, settlement or disposition.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

GSE SYSTEMS, INC.

By:Name:Kyle J. LoudermilkTitle:President and Chief Executive Officer

_____________________ Bahram Meyssami

EXHIBIT 1

Performance Period

The Performance Period shall be the period commencing on the date the Grantee signs his Employment Agreement with the Company and ending on November 30, 2021.

Performance Measures

The number of RSUs vested shall be determined by reference to the Volume Weighted Average Price ("VWAP") of the Company's common stock, calculated to two decimal places, using all trades completed on a trading day as reported by the NYSE MKT or, if the Company's common stock is not then listed on the NYSE MKT, by such other exchange on which the Company lists its common stock. For example, if the Company's common stock traded three times on a single trading date in the following amounts (20 shares traded at $2.50, 55 shares traded at $2.51 and 100 shares traded at $2.48), the VWAP for that day would be $2.49.

Determining RSUs Earned

Except as otherwise provided in the Plan or this Agreement, upon execution of his Employment Agreement, the Grantee will receive 200,000 RSUs which will vest as follows:

1.  48,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $2.50 for a 90 consecutive trading day period.

3.  An additional 48,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $3.25 for a 90 consecutive trading day period.

4.  An additional 48,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $4.25 for a 90 consecutive trading day period.

5.  The remaining 56,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $6.00 for a 90 consecutive trading day period.

EX-10.3

Exhibit 10.3

AMENDMENT TO RESTRICTED SHARE UNIT AGREEMENT

THIS AMENDMENT to Restricted Share Unit Agreement, made as of July 1, 2016, is by and between GSE SYSTEMS, INC., a Delaware corporation (the "Company"), and Bahram Meyssami, an employee of the Company (the "Grantee").

BACKGROUND

WHEREAS, on December 1, 2015, the Company and the Grantee made and entered into the Restricted Share Unit Agreement (the "Restricted Share Unit Agreement"), pursuant to which a certain number of restricted share units ("RSUs") vest if the Volume Weighted Average Price ("VWAP") of the Company's Common Stock as quoted on the NYSE MKT exceeds a specified target for a 90 consecutive trading day period; and

WHEREAS, the parties now desire to amend the Restricted Share Units Agreement to reduce the period during which the VWAP target must be attained for the RSUs to vest from 90 consecutive trading days to 30 consecutive trading days.

NOW, THEREFORE, in consideration of the premises, the mutual promises, covenants, and conditions herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.The Section titled "Determining RSUs Earned" in Exhibit 1 of the Restricted Share Unit Agreement is hereby amended in its entirety to read as follows:

Determining RSUs Earned

Except as otherwise provided in the Plan, upon execution of the Employment Agreement, the Grantee will receive 200,000 RSUs which will vest as follows:

1.  48,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $2.50 for a 30 consecutive trading day period.

2.  48,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $3.25 for a 30 consecutive trading day period.

3.  48,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $4.25 for a 30 consecutive trading day period.

4.  56,000 RSUs will vest if the VWAP of the Common Stock as quoted on the NYSE MKT exceeds $6.00 for a 30 consecutive trading day period.

2.In all other respects, the Restricted Share Unit Agreement is hereby ratified and affirmed.

IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the date first above written.

GSE SYSTEMS, INC.   By: _____________________________________ Daniel Pugh Senior Vice President, General Counsel and Risk Management Officer EXECUTIVE   _____________________________________ Bahram Meyssami

EX-31.1

Exhibit 31.1

Certification of the Chief Executive Officer

I, Kyle J. Loudermilk, certify that:

1. I have reviewed this quarterly report on Form 10-Q of GSE Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting;

Date:  May 15, 2017	/s/ Kyle J. Loudermilk
	Kyle J. Loudermilk
	Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of the Chief Financial Officer

I, Emmett A. Pepe, certify that:

1. I have reviewed this quarterly report on Form 10-Q of GSE Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting;

Date:  May 15, 2017	/s/ Emmett A. Pepe
	Emmett A. Pepe
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of GSE Systems, Inc. (the "Company") for the quarter ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kyle J. Loudermilk, Chief Executive Officer of the Company, and I, Emmett A. Pepe, Senior Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  May 15, 2017	/s/ Kyle J. Loudermilk	/s/ Emmett A. Pepe
	Kyle J. Loudermilk	Emmett A. Pepe
	Chief Executive Officer	Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	May 13, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	GSE SYSTEMS INC
Entity Central Index Key	0000944480
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		19,183,968
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2017

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 21,625	$ 21,747
Restricted cash	1,140	1,140
Contract receivables, net	13,897	18,863
Prepaid expenses and other current assets	4,024	2,052
Total current assets	40,686	43,802
Equipment, software, and leasehold improvements	6,845	6,759
Accumulated depreciation	(5,648)	(5,527)
Equipment, software, and leasehold improvements, net	1,197	1,232
Software development costs, net	894	982
Goodwill	5,612	5,612
Intangible assets, net	402	454
Other assets	72	1,574
Total assets	48,863	53,656
Current liabilities:
Accounts payable	587	923
Accrued expenses	2,389	2,437
Accrued compensation	2,015	2,624
Billings in excess of revenue earned	18,192	21,444
Accrued warranty	1,209	1,137
Current contingent consideration	1,508	2,105
Other current liabilities	750	716
Total current liabilities	26,650	31,386
Other liabilities	1,261	1,149
Total liabilities	27,911	32,535
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value, 2,000,000 shares authorized, no shares issued and outstanding	0	0
Common stock $0.01 par value, 30,000,000 shares authorized, 20,777,168 and 20,433,608 shares issued and 19,178,257 and 18,834,697 shares outstanding	208	204
Additional paid-in capital	75,120	75,120
Accumulated deficit	(49,693)	(49,427)
Accumulated other comprehensive loss	(1,684)	(1,777)
Treasury stock at cost, 1,598,911 shares	(2,999)	(2,999)
Total stockholders' equity	20,952	21,121
Total liabilities and stockholders' equity	$ 48,863	$ 53,656

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
Stockholders' equity:
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	2,000,000	2,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	30,000,000	30,000,000
Common stock, shares issued (in shares)	20,777,168	20,433,608
Common stock, shares outstanding (in shares)	19,178,257	18,834,697
Treasury stock (in shares)	1,598,911	1,598,911

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Revenue	$ 16,342	$ 12,976
Cost of revenue	12,220	9,352
Write-down of capitalized software development costs	0	0
Gross profit	4,122	3,624
Operating expenses:
Selling, general and administrative	3,592	2,757
Research and development	402	354
Restructuring charges	45	125
Depreciation	76	100
Amortization of definite-lived intangible assets	64	73
Total operating expenses	4,179	3,409
Operating income (loss)	(57)	215
Interest income, net	27	27
(Loss) gain on derivative instruments, net	(160)	(118)
Other income (expense), net	(3)	102
Income (loss) before income taxes	(193)	226
Provision for income taxes	73	88
Net income (loss)	$ (266)	$ 138
Basic earnings (loss) per common share	$ (0.01)	$ 0.01
Diluted earnings (loss) per common share	$ (0.01)	$ 0.01

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) [Abstract]
Net income (loss)	$ (266)	$ 138
Foreign currency translation adjustment	93	49
Comprehensive income (loss)	$ (173)	$ 187

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - 3 months ended Mar. 31, 2017 - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Loss [Member]	Treasury Stock [Member]	Total
Balance at Dec. 31, 2016	$ 204	$ 75,120	$ (49,427)	$ (1,777)	$ (2,999)	$ 21,121
Balance (in shares) at Dec. 31, 2016	20,433,608				(1,598,911)	18,834,697
Stock-based compensation expense		614				$ 614
Common stock issued for options exercised (in shares)	31,726
Common stock issued for options exercised	$ 1	61				62
Common stock issued for RSUs vested (in shares)	311,834
Common stock issued for RSUs vested	$ 3	(3)				0
Vested RSU shares withheld to pay taxes						(672)
Foreign currency translation adjustment				93		93
Net income			(266)			(266)
Balance at Mar. 31, 2017	$ 208	$ 75,120	$ (49,693)	$ (1,684)	$ (2,999)	$ 20,952
Balance (in shares) at Mar. 31, 2017	20,777,168				(1,598,911)	19,178,257

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities:
Net income (loss)	$ (266)	$ 138
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Write-down of capitalized software development costs	0	0
Depreciation	76	100
Amortization of definite-lived intangible assets	64	73
Amortization of capitalized software development costs	117	81
Change in fair value of contingent consideration, net	254	(69)
Stock-based compensation expense	596	247
Loss on derivative instruments, net	160	118
Deferred income taxes	0	36
Loss on sales of equipment, software, and leasehold improvements	0	(1)
Changes in assets and liabilities:
Contract receivables	4,937	334
Prepaid expenses and other assets	(523)	(515)
Accounts payable, accrued compensation and accrued expenses	(1,184)	1,226
Billings in excess of revenue earned	(3,279)	(492)
Accrued warranty	67	(101)
Other liabilities	325	465
Cash provided by operating activities	1,344	1,640
Cash flows from investing activities:
Proceeds from sale of equipment, software and leasehold improvements	0	31
Capital expenditures	(44)	(18)
Capitalized software development costs	(29)	(131)
Restrictions of cash as collateral under letters of credit	0	(2)
Releases of cash as collateral under letters of credit	0	1
Cash used in investing activities	(73)	(119)
Cash flows from financing activities:
Proceeds from issuance of common stock on the exercise of stock options	62	4
Payments on contingent consideration	(851)	(1,421)
RSUs withheld to pay taxes	(672)	0
Cash used in financing activities	(1,461)	(1,417)
Effect of exchange rate changes on cash	68	37
Net increase (decrease) in cash and cash equivalents	(122)	141
Cash and cash equivalents at beginning of year	21,747	21,747
Cash and cash equivalents at end of period	$ 21,625	$ 11,225

XML

Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2017

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the "Company," "GSE," "we," "us," or "our") and are unaudited.  In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted.  The results of operations for interim periods are not necessarily an indication of the results for the full year.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 28, 2017.  Certain reclassifications have been made to prior period amounts to conform to the current presentation.  Subcontractor payables have been reclassified on the Consolidated Balance Sheets from Accounts payable to Accrued expenses.  In addition, the Company reclassified research and development costs from Selling, general and administrative expenses and presented them as a separate caption within operating expenses on the consolidated statement of operations.  The Company also reclassified the current portion of deferred taxes to noncurrent within other assets and other liabilities on the consolidated balance sheets.

The Company has two reportable segments as follows:

● Performance Improvement Solutions (approximately 59% of revenue)

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

● Nuclear Industry Training and Consulting (approximately 41% of revenue)

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

Financial information about the two business segments is provided in Note 15 of the accompanying consolidated financial statements.

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

Revenue recognition

The Company recognizes revenue through fixed price contracts for the sale of uniquely designed/customized systems containing hardware, software and other materials which generally apply to the Performance Improvement Solutions segment and time and material contracts for Nuclear Industry Training and Consulting support and service agreements.

In accordance with Accounting Standards Codification (ASC) 605-35, Construction-Type and Production-Type Contracts (ASC 605), the Performance Improvement Solutions segment accounts for revenue under fixed-price contracts using the percentage-of-completion method.  This methodology recognizes revenue and earnings as work progresses on the contract and is based on costs incurred to date compared to total estimated cost to complete the project.  Estimated contract earnings are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which the change is identified.  Estimated losses are charged against earnings in the period such losses are identified.  We recognize revenue arising from contract claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is a legal basis of the claim.

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 our revenue recognition as a significant change in the estimates can cause our revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

As we recognize revenue under the percentage-of-completion method, we provide an accrual for estimated future warranty costs based on historical and projected claims experience.  Our long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.

Our system design contracts do not normally provide for post contract support (PCS) in terms of software upgrades, software enhancements or telephone support.  To obtain PCS, the customers must normally purchase a separate contract.  Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases.  We recognize revenue from these contracts ratably over the term of the agreements.

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

We also recognize revenue from the sale of software licenses from contracts with multiple deliverables.  These software license sales are evaluated under ASC 985-605, Software Revenue Recognition.  Contracts with multiple element arrangements typically include, but are not limited to, components such as installation, training, licenses, and PCS listed in the contract.  The Company concluded that vendor specific objective evidence does not exist for all elements of its software license sales.  If a PCS or professional services element exists in the software license arrangement, revenue is recognized ratably over the longest service period.  If no PCS or professional services element exists in the arrangement, revenue is deferred until the last undelivered element is delivered.

We recognize revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts.  Revenue on time and material contracts is recognized as services are rendered and performed.  Under a typical time-and-materials billing arrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly.  Any unbilled amounts are typically billed the following month.  Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.  However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs.

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2017

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements Not Yet Adopted

2. Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11).  ASU 2015-11 requires that an entity measure inventory at the lower of cost and net realizable value.  This ASU does not apply to inventory measured using last-in, first-out.  ASU 2015-11 was effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  We adopted ASU 2015-11 effective January 1, 2017.  The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based Accounting (ASU 2016-09).  The new guidance is intended to simplify the accounting for share based payment award transactions.  The amendments in the update include the following aspects for share based accounting: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes.  The adoption of ASU 2016-09 was required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years.  We adopted ASU 2016-09 effective January 1, 2017. The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

Accounting pronouncements not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company for the fiscal year ending December 31, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated financial statements and our method of adoption.  The adoption is expected to impact our revenue recognition and related disclosures.  For example, our revenue from software arrangements with multiple elements including services are currently recognized ratably due to the lack of vendor-specific objective evidence (VSOE) of fair value.  We will be required to separate these performance obligations under these arrangements and recognize them as delivered.

In February 2016, the FASB issued ASU No. 2016-02, Leases.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available.  We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.

In 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.  Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-15 on our consolidated financial statements.

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.  Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-18 on our consolidated financial statements.

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

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Basic and Diluted Earnings (Loss) Per Common Share

3 Months Ended

Mar. 31, 2017

Basic and Diluted Earnings (Loss) Per Common Share [Abstract]

Basic and Diluted Earnings (Loss) Per Common Share

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

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

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

(in thousands, except for share amounts)	Three months ended
	March 31,
	2017			2016
Numerator:
Net (loss) income	$	(266	)	$	138
Denominator:
Weighted-average shares outstanding for basic (loss) income per share		19,094,382			17,912,045
Effect of dilutive securities:
Stock options and restricted stock units		-			221,697
Adjusted weighted-average shares outstanding and assumed conversions for diluted (loss) income per share		19,094,382			18,133,742
Shares related to dilutive securities excluded because inclusion would be anti-dilutive		564,833			752,042

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Contingent Consideration

3 Months Ended

Mar. 31, 2017

Contingent Consideration [Abstract]

Contingent Consideration

4. 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.

As of March 31, 2017, and December 31, 2016, the contingent consideration totaled $1.5 million and $2.1 million, respectively.  During the three months ended March 31, 2017 and 2016, the Company made payments of $0.9 million and $1.4 million, respectively, related to the liability-classified contingent consideration arrangement.

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Contract Receivables

3 Months Ended

Mar. 31, 2017

Contract Receivables [Abstract]

Contract Receivables

5. Contract Receivables

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

The components of contract receivables are as follows:

(in thousands)	March 31,			December 31,
	2017			2016
Billed receivables	$	5,971		$	13,325
Recoverable costs and accrued profit not yet billed		7,944			5,555
Allowance for doubtful accounts		(18	)		(17	)
Total contract receivables, net	$	13,897		$	18,863

During April 2017, the Company invoiced $1.6 million of the unbilled amounts related to the balance at March 31, 2017.

As of March 31, 2017, the Company had one customer that accounted for 21% of the Company's consolidated contract receivables.  As of December 31, 2016, the Company did not have any customers that accounted for more than 10% of the Company's consolidated contract receivables.

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Prepaid Expenses and Other Current Assets

3 Months Ended

Mar. 31, 2017

Prepaid Expenses and Other Current Assets [Abstract]

Prepaid Expenses and Other Current Assets

6.  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(in thousands)	March 31,		December 31,
	2017		2016
Inventory	$	2,158	$	-
Income taxes receivable		380		446
Prepaid expenses		583		422
Other current assets		903		1,184
Total prepaid expenses and other current assets	$	4,024	$	2,052

At March 31, 2017, prepaid expenses and other current assets are comprised primarily of inventory that is being purchased to support the construction of three major nuclear simulation projects related to a significant contract that was executed during the first quarter of 2016. Inventory is recorded at the lower of cost or market value in accordance with ASC 330, Inventory.  At December 31, 2016, inventory related to the simulation projects was classified as a long-term asset within other assets on the consolidated balance sheet. The earliest completion date of these projects is expected to occur in the first quarter of 2018.

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Software Development Costs

3 Months Ended

Mar. 31, 2017

Software Development Costs [Abstract]

Software Development Costs

7. Software Development Costs, Net

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

Software development costs capitalized were approximately $29,000 and $131,000 for the three months ended March 31, 2017 and 2016, respectively.  Total amortization expense was approximately $117,000 and $81,000 for the three months ended March 31, 2017 and 2016, respectively.

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Goodwill and Intangible Assets

3 Months Ended

Mar. 31, 2017

Goodwill and Intangible Assets [Abstract]

Goodwill and Intangible Assets

8. Goodwill and Intangible Assets

The Company's intangible assets include amounts recognized in connection with business acquisitions, including goodwill, customer relationships, contract backlog, and software.

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).  As of March 31, 2017, and December 31, 2016, goodwill of $5.6 million related to the Nuclear Industry Training and Consulting segment.  No events or circumstances occurred during the current reporting period that would indicate impairment of such goodwill.

Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for contract backlog and contractual customer relationships which are recognized in proportion to the related projected revenue streams.  Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise.  The Company does not have any intangible assets with indefinite useful lives, other than goodwill. There were no indications of impairment of intangible assets other than goodwill during the current reporting period.

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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2017

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

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.

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

The Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2017, and December 31, 2016, based upon the short-term nature of the assets and liabilities.

For the three months ended March 31, 2017, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at March 31, 2017.

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

(in thousands)	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	$	12,145	$	-		$	-		$	12,145
Foreign exchange contracts		-		71			-			71
Total assets	$	12,145	$	71		$	-		$	12,216
Foreign exchange contracts	$	-	$	(36	)	$	-		$	(36	)
Contingent consideration		-		-			(1,508	)		(1,508	)
Total liabilities	$	-	$	(36	)	$	(1,508	)	$	(1,544	)

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

(in thousands)	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	$	16,435	$	-		$	-		$	16,435
Foreign exchange contracts		-		141			-			141
Total assets	$	16,435	$	141		$	-		$	16,576
Foreign exchange contracts	$	-	$	(20	)	$	-		$	(20	)
Contingent consideration		-		-			(2,105	)		(2,105	)
Total liabilities	$	-	$	(20	)	$	(2,105	)	$	(2,125	)

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the three months ended March 31, 2017:

(in thousands)
Balance, January 1, 2017	$	2,105
Payments made on contingent liabilities		(851	)
Change in fair value		254
Balance, March 31, 2017	$	1,508

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Derivative Instruments

3 Months Ended

Mar. 31, 2017

Derivative Instruments [Abstract]

Derivative Instruments

10. Derivative Instruments

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

As of March 31, 2017, the Company had foreign exchange contracts outstanding of approximately 281.4 million Japanese Yen, 0.2 million Euro, 0.4 million Australian Dollars, and 0.3 million Canadian Dollars at fixed rates.  The contracts expire on various dates through December 2018.  At December 31, 2016, the Company had contracts outstanding of approximately 281.4 million Japanese Yen, 0.1 million Euro, 0.6 million Australian Dollars, and 0.5 million Canadian Dollars at fixed rates.

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

	March 31,			December 31,
(in thousands)	2017			2016
Asset derivatives
Prepaid expenses and other current assets	$	27		$	57
Other assets		44			84
		71			141
Liability derivatives
Other current liabilities		(36	)		(20	)
		(36	)		(20	)
Net fair value	$	35		$	121

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

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

For the three months ended March 31, 2017 and 2016, the Company recognized a net loss on its derivative instruments as outlined below:

	Three months ended March 31,
(in thousands)	2017			2016
Foreign exchange contracts - change in fair value	$	(86	)	$	(183	)
Remeasurement of related contract receivables,  and billings in excess of revenue earned		(74	)		65
Loss on derivative instruments, net	$	(160	)	$	(118	)

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2017

Stock-Based Compensation [Abstract]

Stock-Based Compensation

11. Stock-Based Compensation

The Company recognizes share-based payment expense for all equity-based awards issued to employees, directors and non-employees that are expected to vest.  Share-based payment expense is based on the fair value of awards as of the grant date.  The Company recognized $614,000 and $247,000 of share-based payment expense related to equity awards for the three months ended March 31, 2017 and 2016, respectively, under the fair value method. Offsetting this expense during the three months ended March 31, 2017, was a reduction in the fair value of cash-settled RSUs totaling approximately $18,000.

During the three months ended March 31, 2017, the Company granted 223,802 time-based restricted stock units (RSUs) to employees with an aggregate fair value of $783,000, of which a portion will vest quarterly in equal amounts over the course of eight quarters and the remainder will vest annually in equal amounts over the course of three years.  During the three months ended March 31, 2016, the Company granted 129,824 time-based RSUs to employees with an aggregate fair value of $286,000, which will vest quarterly in equal amounts over the course of eight quarters.  The fair value of the time-based RSUs is expensed ratably over the requisite service period, which ranges from two to three years.

During the three months ended March 31, 2017, the Company did not grant performance-based RSUs.  The Company granted 160,000 performance-based RSUs with an aggregate fair value of $282,000 during the three months ended March 31, 2016.  These RSUs vest upon the achievement of specific performance measures.  The fair value of the performance-based RSUs is expensed ratably over the requisite service period, which ranges between one and four years.

The Company did not grant stock options during the three months ended March 31, 2017 and granted 40,000 stock options for the three months ended March 31, 2016.  The aggregate fair value of the granted options at the grant date was $46,000.

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Long-Term Debt

3 Months Ended

Mar. 31, 2017

Long-Term Debt [Abstract]

Long-Term Debt

12. Debt

Line of Credit

Citizens Bank

The Company entered into a new three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank on December 29, 2016, to fund general working capital needs, including acquisitions.  Working capital advances bear interest of LIBOR plus 2.25% per annum and letter of credit fees are 1.25% per annum.  The Company is not required to maintain a restricted cash collateral account at Citizens Bank for outstanding letters of credit and working capital advances. 

The maximum availability under the RLOC is subject to a borrowing base equal to 80% of eligible accounts receivable, and is reduced for any issued and outstanding letters of credit and working capital advances.  At March 31, 2017, there were no outstanding borrowings on the RLOC and six letters of credit totaling $1.7 million.  The amount available at March 31, 2017, after consideration of the borrowing base, letters of credit and working capital advances was approximately $1.8 million.

The credit facility agreement is subject to standard financial covenants and reporting requirements. At March 31, 2017, the Company was in compliance with its financial covenants.

BB&T Bank

At March 31, 2017, we had four letters of credit with BB&T totaling $1.0 million, which we expect to terminate during the second quarter of 2017.  At March 31, 2017, and December 31, 2016, the cash collateral account with BB&T totaled $1.1 million and was classified as restricted cash on the consolidated balance sheets.

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Product Warranty

3 Months Ended

Mar. 31, 2017

Product Warranty [Abstract]

Product Warranty

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 long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.  The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.2 million, while the remaining $0.4 million is classified as long-term within other liabilities.  The activity in the accrued warranty accounts is as follows:

(in thousands)
Balance, January 1, 2017	$	1,478
Current period provision		235
Current period claims		(62	)
Currency adjustment		2
Balance, March 31, 2017	$	1,653

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Income Taxes

3 Months Ended

Mar. 31, 2017

Income Taxes [Abstract]

Income Taxes

14. Income Taxes

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

	Three months ended March 31,
($ in thousands)	2017				2016
Provision for income taxes		$	73			$	88
Effective tax rate			(37.8	%)			38.6	%

The Company's movement in effective tax rate for 2017 as compared to 2016 resulted mainly from an increase in pre-tax loss in the U.S.  The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter.  Tax expense in both years is comprised mainly of foreign income tax expense, Alternative Minimum Tax, state taxes, and deferred tax expense relating to the tax amortization of goodwill.

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 1997 forward.  The Company is subject to foreign tax examinations by tax authorities for years 2010 forward for Sweden, 2012 forward for China, and 2014 forward for both India and the UK.

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

The Company recognizes deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized.  The Company has evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its U.S., Swedish, U.K., and Chinese net deferred assets as of March 31, 2017.  The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in India.  In 2016, the Company paid income taxes in India and expects to do so again in 2017.

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Segment Information

3 Months Ended

Mar. 31, 2017

Segment Information [Abstract]

Segment Information

15. 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 training applications include turnkey and custom training services, while engineering services include plant design verification and validation. The Company provides these services across all market segments.  Contracts typically range from 9 months to 24 months.  The Company and its predecessors have been providing these services since 1976.

The Nuclear Industry Training and Consulting segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities.  This business is managed through our Hyperspring subsidiary.  The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.  Hyperspring has been providing these services since 2005.

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 (loss) before income taxes:

(in thousands)	Three months ended
	March 31,
	2017			2016
Revenue:
Performance Improvement Solutions	$	9,670		$	8,843
Nuclear Industry Training and Consulting		6,672			4,133
	$	16,342		$	12,976
Operating income (loss):
Performance Improvement Solutions	$	(738	)	$	(42	)
Nuclear Industry Training and Consulting		935			188
Change in fair value of contingent consideration, net		(254	)		69
Operating (loss) income		(57	)		215
Interest income, net		27			27
Loss on derivative instruments, net		(160	)		(118	)
Other (expense) income, net		(3	)		102
(Loss) income before income taxes	$	(193	)	$	226

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Commitments and Contingencies [Abstract]

Commitments and Contingencies

16. Commitments and Contingencies

Westinghouse Electric Company ("Westinghouse") filed for Chapter 11 Bankruptcy protection on March 29, 2017.  Westinghouse is a customer in our Performance Improvement Solutions segment.  At March 31, 2017, the Company had approximately $0.5 million in billed and unbilled pre-petition receivables attributable to Westinghouse. The Company has assessed the recoverability of these amounts and concluded that the likelihood of loss is not probable, and therefore, none of the outstanding amounts have been reserved at March 31, 2017.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the "Company," "GSE," "we," "us," or "our") and are unaudited.  In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted.  The results of operations for interim periods are not necessarily an indication of the results for the full year.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 28, 2017.  Certain reclassifications have been made to prior period amounts to conform to the current presentation.  Subcontractor payables have been reclassified on the Consolidated Balance Sheets from Accounts payable to Accrued expenses.  In addition, the Company reclassified research and development costs from Selling, general and administrative expenses and presented them as a separate caption within operating expenses on the consolidated statement of operations.  The Company also reclassified the current portion of deferred taxes to noncurrent within other assets and other liabilities on the consolidated balance sheets.

The Company has two reportable segments as follows:

● Performance Improvement Solutions (approximately 59% of revenue)

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

● Nuclear Industry Training and Consulting (approximately 41% of revenue)

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

Financial information about the two business segments is provided in Note 15 of the accompanying consolidated financial statements.

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

Revenue Recognition

Revenue recognition

The Company recognizes revenue through fixed price contracts for the sale of uniquely designed/customized systems containing hardware, software and other materials which generally apply to the Performance Improvement Solutions segment and time and material contracts for Nuclear Industry Training and Consulting support and service agreements.

In accordance with Accounting Standards Codification (ASC) 605-35, Construction-Type and Production-Type Contracts (ASC 605), the Performance Improvement Solutions segment accounts for revenue under fixed-price contracts using the percentage-of-completion method.  This methodology recognizes revenue and earnings as work progresses on the contract and is based on costs incurred to date compared to total estimated cost to complete the project.  Estimated contract earnings are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which the change is identified.  Estimated losses are charged against earnings in the period such losses are identified.  We recognize revenue arising from contract claims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is a legal basis of the claim.

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 our revenue recognition as a significant change in the estimates can cause our revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

As we recognize revenue under the percentage-of-completion method, we provide an accrual for estimated future warranty costs based on historical and projected claims experience.  Our long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.

Our system design contracts do not normally provide for post contract support (PCS) in terms of software upgrades, software enhancements or telephone support.  To obtain PCS, the customers must normally purchase a separate contract.  Such PCS arrangements are generally for a one-year period renewable annually and include customer support, unspecified software upgrades, and maintenance releases.  We recognize revenue from these contracts ratably over the term of the agreements.

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

We also recognize revenue from the sale of software licenses from contracts with multiple deliverables.  These software license sales are evaluated under ASC 985-605, Software Revenue Recognition.  Contracts with multiple element arrangements typically include, but are not limited to, components such as installation, training, licenses, and PCS listed in the contract.  The Company concluded that vendor specific objective evidence does not exist for all elements of its software license sales.  If a PCS or professional services element exists in the software license arrangement, revenue is recognized ratably over the longest service period.  If no PCS or professional services element exists in the arrangement, revenue is deferred until the last undelivered element is delivered.

We recognize revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts.  Revenue on time and material contracts is recognized as services are rendered and performed.  Under a typical time-and-materials billing arrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly.  Any unbilled amounts are typically billed the following month.  Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.  However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs.

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Recent Accounting Pronouncements (Policies)

3 Months Ended

Mar. 31, 2017

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11).  ASU 2015-11 requires that an entity measure inventory at the lower of cost and net realizable value.  This ASU does not apply to inventory measured using last-in, first-out.  ASU 2015-11 was effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  We adopted ASU 2015-11 effective January 1, 2017.  The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based Accounting (ASU 2016-09).  The new guidance is intended to simplify the accounting for share based payment award transactions.  The amendments in the update include the following aspects for share based accounting: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes.  The adoption of ASU 2016-09 was required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years.  We adopted ASU 2016-09 effective January 1, 2017. The adoption of this standard did not have a significant impact on our consolidated financial position, results of operations or cash flows.

Accounting pronouncements not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company for the fiscal year ending December 31, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated financial statements and our method of adoption.  The adoption is expected to impact our revenue recognition and related disclosures.  For example, our revenue from software arrangements with multiple elements including services are currently recognized ratably due to the lack of vendor-specific objective evidence (VSOE) of fair value.  We will be required to separate these performance obligations under these arrangements and recognize them as delivered.

In February 2016, the FASB issued ASU No. 2016-02, Leases.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available.  We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that, upon adoption, the recognition of ROU assets and lease liabilities could be material.

In 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.  Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-15 on our consolidated financial statements.

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.  Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years.  We are currently evaluating the potential impact of the adoption of ASU 2016-18 on our consolidated financial statements.

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

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Basic and Diluted Earnings (Loss) Per Common Share (Tables)

3 Months Ended

Mar. 31, 2017

Basic and Diluted Earnings (Loss) Per Common Share [Abstract]

Number of Common Shares and Common Share Equivalents Used in the Determination of Basic and Diluted Income (Loss) per Share

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

(in thousands, except for share amounts)	Three months ended
	March 31,
	2017			2016
Numerator:
Net (loss) income	$	(266	)	$	138
Denominator:
Weighted-average shares outstanding for basic (loss) income per share		19,094,382			17,912,045
Effect of dilutive securities:
Stock options and restricted stock units		-			221,697
Adjusted weighted-average shares outstanding and assumed conversions for diluted (loss) income per share		19,094,382			18,133,742
Shares related to dilutive securities excluded because inclusion would be anti-dilutive		564,833			752,042

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Contract Receivables (Tables)

3 Months Ended

Mar. 31, 2017

Contract Receivables [Abstract]

Components of Contract Receivables

The components of contract receivables are as follows:

(in thousands)	March 31,			December 31,
	2017			2016
Billed receivables	$	5,971		$	13,325
Recoverable costs and accrued profit not yet billed		7,944			5,555
Allowance for doubtful accounts		(18	)		(17	)
Total contract receivables, net	$	13,897		$	18,863

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Prepaid Expenses and Other Current Assets (Tables)

3 Months Ended

Mar. 31, 2017

Prepaid Expenses and Other Current Assets [Abstract]

Schedule of Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(in thousands)	March 31,		December 31,
	2017		2016
Inventory	$	2,158	$	-
Income taxes receivable		380		446
Prepaid expenses		583		422
Other current assets		903		1,184
Total prepaid expenses and other current assets	$	4,024	$	2,052

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Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2017

Fair Value of Financial Instruments [Abstract]

Assets and Liabilities Measured at Fair Value

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

(in thousands)	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	$	12,145	$	-		$	-		$	12,145
Foreign exchange contracts		-		71			-			71
Total assets	$	12,145	$	71		$	-		$	12,216
Foreign exchange contracts	$	-	$	(36	)	$	-		$	(36	)
Contingent consideration		-		-			(1,508	)		(1,508	)
Total liabilities	$	-	$	(36	)	$	(1,508	)	$	(1,544	)

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

(in thousands)	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	$	16,435	$	-		$	-		$	16,435
Foreign exchange contracts		-		141			-			141
Total assets	$	16,435	$	141		$	-		$	16,576
Foreign exchange contracts	$	-	$	(20	)	$	-		$	(20	)
Contingent consideration		-		-			(2,105	)		(2,105	)
Total liabilities	$	-	$	(20	)	$	(2,105	)	$	(2,125	)

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Derivative Instruments (Tables)

3 Months Ended

Mar. 31, 2017

Derivative Instruments [Abstract]

Estimated Fair Value of the Contracts in the Consolidated Balance Sheets

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

	March 31,			December 31,
(in thousands)	2017			2016
Asset derivatives
Prepaid expenses and other current assets	$	27		$	57
Other assets		44			84
		71			141
Liability derivatives
Other current liabilities		(36	)		(20	)
		(36	)		(20	)
Net fair value	$	35		$	121

Net (Loss) Gain on Derivative Instruments

For the three months ended March 31, 2017 and 2016, the Company recognized a net loss on its derivative instruments as outlined below:

	Three months ended March 31,
(in thousands)	2017			2016
Foreign exchange contracts - change in fair value	$	(86	)	$	(183	)
Remeasurement of related contract receivables,  and billings in excess of revenue earned		(74	)		65
Loss on derivative instruments, net	$	(160	)	$	(118	)

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Product Warranty (Tables)

3 Months Ended

Mar. 31, 2017

Product Warranty [Abstract]

Activities in the Product Warranty Accounts

The Company accrues for estimated warranty costs at the time the related revenue is recognized based on historical experience and projected claims.  The Company's long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates to customized software embedded in the systems.  The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.2 million, while the remaining $0.4 million is classified as long-term within other liabilities.  The activity in the accrued warranty accounts is as follows:

(in thousands)
Balance, January 1, 2017	$	1,478
Current period provision		235
Current period claims		(62	)
Currency adjustment		2
Balance, March 31, 2017	$	1,653

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2017

Income Taxes [Abstract]

Schedule of Income Taxes

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

	Three months ended March 31,
($ in thousands)	2017				2016
Provision for income taxes		$	73			$	88
Effective tax rate			(37.8	%)			38.6	%

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Segment Information (Tables)

3 Months Ended

Mar. 31, 2017

Segment Information [Abstract]

Reconciliation of Revenue and Operating Results to Consolidated Income (Loss) Before Income Tax Expense

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 (loss) before income taxes:

(in thousands)	Three months ended
	March 31,
	2017			2016
Revenue:
Performance Improvement Solutions	$	9,670		$	8,843
Nuclear Industry Training and Consulting		6,672			4,133
	$	16,342		$	12,976
Operating income (loss):
Performance Improvement Solutions	$	(738	)	$	(42	)
Nuclear Industry Training and Consulting		935			188
Change in fair value of contingent consideration, net		(254	)		69
Operating (loss) income		(57	)		215
Interest income, net		27			27
Loss on derivative instruments, net		(160	)		(118	)
Other (expense) income, net		(3	)		102
(Loss) income before income taxes	$	(193	)	$	226

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Summary of Significant Accounting Policies (Details)	3 Months Ended
	Mar. 31, 2017 Segment
Summary of Significant Accounting Policies [Abstract]
Number of reportable segment	2
Term of warranty	1 year
Period of post customer support service (PCS)	1 year
Revenue [Member] | Performance Improvement Solutions [Member]
Revenue by major customers [Abstract]
Percentage of revenue contributed by major customers	59.00%
Revenue [Member] | Nuclear Industry Training and Consulting [Member]
Revenue by major customers [Abstract]
Percentage of revenue contributed by major customers	41.00%

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Summary of Significant Accounting Policies, Revisions (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Revenue	$ 16,342	$ 12,976
Cost of revenue	12,220	9,352
Write-down of capitalized software development costs	0	0
Gross profit	4,122	3,624
Operating loss	(57)	215
Loss before income taxes	(193)	226
Net loss	$ (266)	$ 138
Basic loss per common share (in dollars per share)	$ (0.01)	$ 0.01
Diluted loss per common share (in dollars per share)	$ (0.01)	$ 0.01
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS [Abstract]
Net loss	$ (266)	$ 138
Comprehensive loss	(173)	187
Cash flows from operating activities [Abstract]
Net income (loss)	(266)	138
Changes in assets and liabilities [Abstract]
Contract receivables, net	(4,937)	(334)
Prepaid expenses and other assets	523	515
Billings in excess of revenue earned	(3,279)	(492)
Net cash provided by operating activities	1,344	1,640
Net decrease in cash and cash equivalents	$ (122)	$ 141

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Basic and Diluted Earnings (Loss) Per Common Share (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Numerator [Abstract]
Net income (loss)	$ (266)	$ 138
Denominator [Abstract]
Weighted-average shares outstanding for basic earnings per share (in shares)	19,094,382	17,912,045
Effect of dilutive securities [Abstract]
Stock options and restricted stock units (in shares)	0	221,697
Adjusted weighted-average shares outstanding and assumed conversions for diluted income (loss) per share (in shares)	19,094,382	18,133,742
Shares related to dilutive securities excluded because inclusion would be anti-dilutive (in shares)	564,833	752,042

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Contingent Consideration (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Dec. 31, 2015
Contingent Consideration [Abstract]
Contingent consideration accrued, current	$ 1,508		$ 2,105	$ 2,105
Payments on contingent consideration	$ (851)	$ (1,421)

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Contract Receivables (Details) $ in Thousands	1 Months Ended	3 Months Ended	12 Months Ended
	Apr. 30, 2016 USD ($)	Mar. 31, 2017 USD ($) Customer	Dec. 31, 2015	Dec. 31, 2016 USD ($) Customer
Contract Receivables [Abstract]
Maximum term of contract receivables		12 months
Components of contract receivables [Abstract]
Billed receivables		$ 5,971		$ 13,325
Recoverable costs and accrued profit not yet billed		7,944		5,555
Allowance for doubtful accounts		(18)		(17)
Total contract receivables, net		$ 13,897		$ 18,863
Unbilled contract receivables billed during October 2016	$ 1,600
Contract Receivable [Member]
Concentration Risk [Line Items]
Number of customers accounting for contract receivables | Customer		1		0
Percentage of contract receivables accounted by major customers		11.30%	10.00%

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Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Prepaid Expenses and Other Current Assets [Abstract]
Inventory	$ 2,158	$ 0
Income tax receivable	380	446
Prepaid expenses	583	422
Other current assets	903	1,184
Total prepaid expenses and other current assets	$ 4,024	$ 2,052

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Software Development Costs (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Software Development Costs [Abstract]
Economic life of product	3 years
Additions	$ 29	$ 131
Capitalized software amortization	$ 117	$ 81

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Goodwill and Intangible Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Goodwill and Intangible Assets [Abstract]
Goodwill	$ 5,612	$ 5,612

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Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Assets and liabilities measured at fair value [Abstract]
Money market funds	$ 12,145	$ 16,435
Foreign exchange contracts - Assets	71	141
Total assets	12,216	16,576
Foreign exchange contracts - Liabilities	36	20
Contingent consideration	1,508	2,105
Total liabilities	1,544	2,125
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Balance, January 1, 2017	2,105
Payments made on contingent liabilities	(851)
Change in fair value	254
Balance, March 31, 2017	1,508
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets and liabilities measured at fair value [Abstract]
Money market funds	12,145	16,435
Foreign exchange contracts - Assets	0	0
Total assets	12,145	16,435
Foreign exchange contracts - Liabilities	0	0
Contingent consideration	0	0
Total liabilities	0	0
Significant Other Observable Inputs (Level 2) [Member]
Assets and liabilities measured at fair value [Abstract]
Money market funds	0	0
Foreign exchange contracts - Assets	71	141
Total assets	71	141
Foreign exchange contracts - Liabilities	36	20
Contingent consideration	0	0
Total liabilities	36	20
Significant Unobservable Inputs (Level 3) [Member]
Assets and liabilities measured at fair value [Abstract]
Money market funds	0	0
Foreign exchange contracts - Assets	0	0
Total assets	0	0
Foreign exchange contracts - Liabilities	0	0
Contingent consideration	1,508	2,105
Total liabilities	$ 1,508	$ 2,105

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Derivative Instruments, Foreign Exchange Contracts (Details) - Foreign Exchange Contract [Member] € in Millions, ¥ in Millions, CAD in Millions, AUD in Millions	3 Months Ended
	Mar. 31, 2017 CAD	Mar. 31, 2017 EUR (€)	Mar. 31, 2017 JPY (¥)	Mar. 31, 2017 AUD	Dec. 31, 2016 CAD	Dec. 31, 2016 EUR (€)	Dec. 31, 2016 JPY (¥)	Dec. 31, 2016 AUD
Derivative [Line Items]
Foreign exchange contract outstanding	CAD 0.3	€ 0.2	¥ 281.4	AUD 0.4	CAD 0.5	€ 0.1	¥ 281.4	AUD 0.6
Expiration date of contract	Dec. 31, 2018

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Derivative Instruments, Fair Values Derivatives, Balance Sheet Location (Details) - Foreign Exchange Contract [Member] - Not Designated as Hedging Instrument [Member] - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Asset derivatives	$ 71	$ 141
Liability derivatives	36	20
Net fair value	35	121
Prepaid Expenses and Other Current Assets [Member]
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Asset derivatives	27	57
Other Assets [Member]
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Asset derivatives	44	84
Other Current Liabilities [Member]
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Liability derivatives	$ 36	$ 20

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Derivative Instruments, Gain (Loss) On Derivative Instruments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Foreign exchange contracts- change in fair value	$ (86)	$ (183)
Remeasurement of related contract receivables, billings in excess of revenue earned, and subcontractor accruals	(74)	65
(Loss) gain on derivative instruments, net	$ (160)	$ (118)

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Stock-Based Compensation (Details)	3 Months Ended
	Mar. 31, 2017 USD ($) Quarter shares	Mar. 31, 2016 USD ($) Quarter shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 614,000	$ 247,000
Granted performance-based RSUs (in shares) | shares	0	160,000
Aggregate fair value for performance-based RSUs	$ 0	$ 282,000
Granted time-based RSUs (in shares) | shares	223,802	129,824
Aggregate fair value for time-based RSUs	$ 783,000	$ 286,000
Shares granted under stock options (in shares) | shares	0	40,000
Fair value of shares granted under stock option plan	$ 0	$ 46,000
Restricted Stock Units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of quarters RSU's will vest quarterly | Quarter	8	8
Period in which RSU's will vest annually in equal amounts	3 years
Restricted Stock Units [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Requisite service period	1 year	2 years
Restricted Stock Units [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Requisite service period	4 years	3 years

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Long-Term Debt (Details)	3 Months Ended
	Mar. 31, 2017 USD ($) Letter	Dec. 31, 2016 USD ($)
Long-Term Debt [Abstract]
Long-term debt	$ 0	$ 0
Performance Bond [Abstract]
Restricted cash, current	$ 1,140,000	1,140,000
Citizen's Bank [Member] | Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Line of credit facility term	3 years
Principal amount of the line of credit	$ 5,000,000
Percentage of letter of credit fees per annum	1.25%
Percentage of borrowing base equal to eligible accounts receivable	80.00%
Outstanding borrowings	$ 0
Number of letters of credit | Letter	6
Letters of credit, amount outstanding	$ 1,700,000
Line of Credit Facility, Remaining Borrowing Capacity	1,800,000
Fair value of amount outstanding	$ 0
Performance Bond [Abstract]
Number of standby letters of credit | Letter	6
Citizen's Bank [Member] | Revolving Credit Facility [Member] | London Interbank Offered Rate (LIBOR) [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate	2.25%
BB&T Bank [Member] | Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Number of letters of credit | Letter	4
Letters of credit, amount outstanding	$ 1,000,000
Restricted Cash and Cash Equivalents	$ 1,100,000	1,100,000
Performance Bond [Abstract]
Number of standby letters of credit | Letter	4
Restricted cash and investments	$ 1,100,000	$ 1,100,000

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Product Warranty (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($)
Product warranty provision [Abstract]
Warranty terms for long-term contracts	1 year
Activities in product warranty account [Abstract]
Balance, January 1, 2017	$ 1,478
Warranty provision	235
Warranty claims	(62)
Currency adjustment	2
Balance, March 31, 2017	1,653
Accrued warranty, current	1,209
Accrued warranty, noncurrent	$ 444
Minimum [Member]
Product warranty provision [Abstract]
Warranty provision terms	1 year
Maximum [Member]
Product warranty provision [Abstract]
Warranty provision terms	5 years

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Income Taxes [Abstract]
Federal corporate income tax rate	35.00%
Provision for income taxes	$ 73	$ 88
Effective tax rate	(37.80%)	38.60%
Minimum [Member]
Income Tax Examination [Line Items]
Probability of uncertain tax position to be recognized	50.00%
Percentage of tax position realized upon ultimate settlement	50.00%
Sweden [Member] | Minimum [Member]
Income Tax Examination [Line Items]
Income tax examination, year under examination	2010
China [Member] | Minimum [Member]
Income Tax Examination [Line Items]
Income tax examination, year under examination	2012
India [Member] | Minimum [Member]
Income Tax Examination [Line Items]
Income tax examination, year under examination	2014
UK [Member] | Minimum [Member]
Income Tax Examination [Line Items]
Income tax examination, year under examination	2014
Federal [Member] | Minimum [Member]
Income Tax Examination [Line Items]
Income tax examination, year under examination	1997
State [Member] | Minimum [Member]
Income Tax Examination [Line Items]
Income tax examination, year under examination	1997

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Segment Information (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) Segment	Mar. 31, 2016 USD ($)
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Number of reportable business segments | Segment	2
Segment Reporting Information, Profit (Loss) [Abstract]
Total revenue	$ 16,342	$ 12,976
Change in fair value of contingent consideration, net	(254)	69
Operating income (loss)	(57)	215
Interest income, net	27	27
(Loss) gain on derivative instruments, net	(160)	(118)
Other income (expense), net	(3)	102
Income (loss) before income taxes	$ (193)	226
Minimum [Member]
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Contract term	9 months
Maximum [Member]
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Contract term	24 months
Performance Improvement Solutions [Member]
Segment Reporting Information, Profit (Loss) [Abstract]
Total revenue	$ 9,670	8,843
Operating income (loss)	(738)	(42)
Nuclear Industry Training and Consulting [Member]
Segment Reporting Information, Profit (Loss) [Abstract]
Total revenue	6,672	4,133
Operating income (loss)	$ 935	$ 188