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, 2019
	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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit such files). Yes [ X ]   No [   ]

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

Large accelerated filer	Accelerated filer	Non-accelerated filer	Smaller reporting company
Emerging growth company ☐

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 Par Value	GVP	The NASDAQ Capital Market

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

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, 2019 (unaudited) and December 31, 2018	3
	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2019, and March 31, 2018	4
	Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019, and March 31, 2018	5
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019, and March 31, 2018	6
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and March 31, 2018	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
	SIGNATURES	33

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, 2019			December 31, 2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,346		$	12,123
Contract receivables, net		18,636			21,077
Prepaid expenses and other current assets		1,953			1,800
Total current assets		31,935			35,000
Equipment, software, and leasehold improvements		5,516			5,293
Accumulated depreciation		(4,320	)		(4,228	)
Equipment, software, and leasehold improvements, net		1,196			1,065
Software development costs, net		596			615
Goodwill		16,709			13,170
Intangible assets, net		8,999			6,080
Deferred tax assets		7,589			5,461
Operating lease - right of use assets, net		4,331			-
Other assets		69			49
Total assets	$	71,424		$	61,440
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, net of debt issuance costs and original issue discount	$	4,763		$	1,902
Accounts payable		1,573			1,307
Accrued expenses		1,577			2,646
Accrued compensation		2,702			3,649
Billings in excess of revenue earned		7,511			10,609
Accrued warranty		1,123			981
Income taxes payable		1,382			1,176
Other current liabilities		1,148			60
Total current liabilities		21,779			22,330
Long-term debt, less current portion, net of debt issuance costs and original issue discount		17,341			6,610
Operating lease liabilities		3,703			-
Other liabilities		1,333			1,371
Total liabilities		44,156			30,311
Commitments and contingencies
Stockholders' equity:
Preferred stock $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock $0.01 par value; 60,000,000 shares authorized, 21,595,215 shares issued, 19,996,304 shares outstanding as of March 31, 2019; 60,000,000 shares authorized, 21,485,445 shares issued, 19,886,534 shares outstanding as of December 31, 2018		216			214
Additional paid-in capital		78,578			78,118
Accumulated deficit		(46,805	)		(42,569	)
Accumulated other comprehensive loss		(1,722	)		(1,635	)
Treasury stock at cost, 1,598,911 shares on March 31, 2019 and December 31, 2018		(2,999	)		(2,999	)
Total stockholders' equity		27,268			31,129
Total liabilities and stockholders' equity	$	71,424		$	61,440

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

3

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

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

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

4

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

	Three months ended March 31,
	2019				2018
Net loss		$	(4,236	)		$	(1,496	)
Cumulative translation adjustment			(87	)			(45	)
Comprehensive loss		$	(4,323	)		$	(1,541	)

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, 2019		21,485	$	214	$	78,118		$	(42,569	)	$	(1,635	)		(1,599	)	$	(2,999	)	$	31,129
Stock-based compensation expense		-		-		570			-			-			-			-			570
Common stock issued for options exercised		2		1		41			-			-			-			-			42
Common stock issued for RSUs vested		108		1		(1	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(150	)		-			-			-			-			(150	)
Foreign currency translation adjustment		-		-		-			-			(87	)		-			-			(87	)
Net loss		-		-		-			(4,236	)		-			-			-			(4,236	)
Balance, March 31, 2019		21,595	$	216	$	78,578		$	(46,805	)	$	(1,722	)		(1,599	)	$	(2,999	)	$	27,268

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

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

6

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

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

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

7

GSE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

GSE is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the power and process industries. References in this report to “GSE,” the “Company,” “we” and “our” are to GSE Systems and its subsidiaries, collectively.

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the Company, GSE, we, us, or our) and are unaudited. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2018 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 27, 2019.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. The Company’s most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired including impairment test, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock-based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.

Revenue recognition

The Company derives its revenue through three broad revenue streams: 1) System Design and Build (SDB), 2) Software, and 3) Training and Consulting services. We recognize revenue from SDB and software contracts mainly through the Performance Improvement Solutions segment and the training and consulting service contracts through both the Performance Improvement Solutions ("Performance") segment and Nuclear Industry Training and Consulting ("NITC")segment.

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

In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

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

Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer.  Revenue from the sale of subscription-based standalone software licenses, which do not require significant modification or customization, is recognized ratably over the term of such licenses following delivery to the customer.  Delivery is considered to have occurred when the customer receives a copy of the software and is able to use and benefit from the software.

A software license sale contract with multiple deliverables typically includes the following elements: license, installation and training services and PCS. The total transaction price of a software license sale contract is typically fixed, and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue is recognized when the installation and training is completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.

The contracts within the training and consulting services revenue stream are either time and materials (T&M) based or fixed-price based. Under a typical T&M contract, the Company is compensated based on the number of hours of approved time provided by temporary workers and the bill rates which are fixed by type of work, as well as approved expenses incurred. Customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (ASC) 606-10-55-18, Revenue from contracts with customers, we elected to apply the "right to invoice" practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each temporary worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under a typical fixed-price contract, we recognize the revenue using the completed contract method as we are not able to reasonably estimate costs to complete and contracts typically have a term of less than one month.

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

8

2. Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2016-02, Leases (Topic 842), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest applicable period presented in the consolidated financial statements, with certain practical expedients available.

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

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

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

Accounting pronouncements not yet adopted

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

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04).  ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. We are currently evaluating the potential impact of the adoption of ASU 2017-04 on our consolidated financial statements.

3. Basic and Diluted Loss per Common Share

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

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

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

9

4. Acquisitions

2019 Acquisition

DP Engineering

On February 15, 2019, through its wholly-owned subsidiary Performance Solutions, the Company entered into a membership interest purchase agreement with Steven L. Pellerin, Christopher A. Davenport, and DP Engineering (the “DP Engineering Purchase Agreement”), to purchase 100% of the membership interests in DP Engineering for $13.5 million. The purchase price is subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5 million, potentially payable in 2020 and 2021 depending on DP Engineering’s satisfaction of certain targets for adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") in calendar years 2019 and 2020, respectively.  The acquisition was completed through the drawdown of $14.3 million (including transaction costs) of the term loan. An escrow of approximately $1.7 million was funded at the closing and is available to GSE to satisfy indemnification claims for 18 months after the closing.

DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages, which is in line with our Performance  segment.  Located in Fort Worth, Texas, DP Engineering is well-regarded as a leading service provider to the nuclear power industry, having been designated an “engineer of choice” by two large power generation companies.  The Company's allocation of the purchase price remains preliminary and the net assets are subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.

Based on preliminary forecasted adjusted EBITDA of DP Engineering for year 2019 and 2020, as of the acquisition date, the estimated fair value of the total earn-out amount was $1.2 million.

The following table summarizes the calculation of adjusted purchase price as of the acquisition date (in thousands):

Base purchase price per agreement	$	13,500
Pre closing working capital adjustment		155
Fair value of contingent consideration		1,200
Total purchase price	$	14,855

The following table summarizes the consideration paid to acquire DP Engineering and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, contingent consideration, accrued compensation and the residual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of DP Engineering, net of cash acquired" line caption.

(in thousands)

Total purchase price	$	14,855
Purchase price allocation:
Cash		134
Contract receivables		2,934
Prepaid expenses and other current assets		209
Property, and equipment, net		210
Intangible assets		6,798
Other assets		1,806
Accounts payable and accrued expenses		(1,375	)
Other liabilities		(1,494	)
Total identifiable net assets		9,222
Goodwill		5,633
Net assets acquired	$	14,855

The fair value of the assets acquired includes gross trade receivables of $2.9 million, of which the Company expects to collect in full. GSE did not acquire any other class of receivable as a result of the acquisition of DP Engineering.

DP Engineering contributed revenue of $1.6 million to GSE for the period from February 15, 2019 to March 31, 2019.

The goodwill is primarily attributable to value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modification during plant outages, and the workforce of the acquired business and the significant synergies expected to arise after the acquisition of DP Engineering. The total amount of goodwill is expected to be tax deductible. All of the $5.6 million of goodwill was assigned to our Performance segment. As discussed above, the goodwill amount is provisional pending receipt of the final valuations of various assets and liabilities and is subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.

The Company identified other intangible assets of $6.8 million, including customer contracts and relationships, tradename, and non-compete agreements, with amortization periods of five to fifteen years. Please see Note 9 for further analysis on the carrying amount change due to impairment on goodwill and definite-lived intangible assets at March 31, 2019.

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

Intangible Assets	Weighted average amortization period		Fair Value
	(in years)		(in thousands)
Customer relationships		15	$	4,898
Tradename		10		1,172
Non-compete agreements		5		728
Total			$	6,798

10

2018 Acquisition

True North

On May 11, 2018, GSE, through its wholly-owned subsidiary Performance Solutions, entered into a membership interest purchase agreement with Donald R. Horn, Jenny C. Horn, and True North Consulting LLC (the "True North Purchase Agreement") to purchase 100% of the membership interests in True North Consulting LLC (True North) for $9.75 million. The purchase price was subject to customary pre- and post-closing working capital adjustments, resulting in total consideration of $9.9 million. The True North Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions subject to certain limitations. An escrow of $1.5 million was funded from the cash paid to the sellers of True North at the closing and is available to GSE to promote retention of key personnel and satisfy indemnification claims for 18 months after the closing. The acquisition of True North was completed on an all-cash transaction basis. In connection with the acquisition, we issued a $10.3 million term loan to finance the transaction (including the transaction costs). See note 14, for further details of the loan.

True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complementary talent pool to our employee base.

The following table summarizes the consideration paid to acquire True North and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. The Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, accrued compensation and the residual amount allocated to goodwill.

(in thousands)

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

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

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

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

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

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

Unaudited Pro Forma Financial Information

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

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

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

For the three months ended March 31, 2019, the Company has incurred $0.6 million of transaction costs related to the acquisition of DP Engineering. Due to a triggering event occurred after the acquisition as depicted in Note 9, an impairment test was conducted, which resulted in substantially writing down the estimated fair value of goodwill and definite-lived intangible assets initially recognized upon the acquisition. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma loss for the three months ended March 31, 2019, in the table above.

The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 1, 2018, nor is it intended to be an indication of future operating results.

11

5. Restructuring Activities

On December 27, 2017, the board of GSE Systems approved an international restructuring plan to streamline and optimize the Company's global operations. Beginning in December 2017, GSE has been in the process of consolidating its engineering services and R&D activities to Maryland and ceasing an unprofitable non-core business in the United Kingdom (UK). As a result, the Company closed its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improve Company productivity by eliminating duplicate employee functions, increasing GSE's focus on its core business, improving efficiency and maintaining the full range of engineering capabilities while reducing costs and organizational complexity.

GSE eliminated approximately 40 positions since 2017 due to these changes, primarily in Europe and India, and will undertake other cost-savings measures. The restructuring plan is expected to be completed by the end of 2019. As a result of these efforts, GSE expects to record a total restructuring charge of approximately $2.2 million, primarily related to workforce reductions, contract termination costs and asset write-offs due to the exit activities. As of March 31, 2019, we had recorded total restructuring charges totaling $2.0 million since 2017. We incurred no costs during the three months ended March 31, 2019. We recognized $1.3 million of restructuring cost for the year ended December 31, 2018. In addition to the total recognized restructuring costs, the Company has an estimated $1.7 million of cumulative translation adjustments that will be charged against net loss and an estimated $1.0 million of tax benefits that will be realized upon liquidation of these foreign entities. GSE expects to recognize the remaining restructuring costs, currency translation adjustments and tax benefits by the end of 2019.

For the three months ended March 31, 2019,  we made payments related to our restructuring for employee termination benefits for the amount of $52,000 that have been previously accrued. The accrued employee termination benefits were included in "accrued compensation", and the accrued lease termination costs were included in "accrued expenses" in the consolidated balance sheets.

6. Contingent Consideration

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, Business Combinations, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

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

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

7. Contract Receivables

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

The components of contract receivables are as follows:

(in thousands)	March 31,			December 31,
	2019			2018
Billed receivables	$	10,205		$	15,998
Unbilled receivables		8,859			5,506
Allowance for doubtful accounts		(428	)		(427	)
Total contract receivables, net	$	18,636		$	21,077

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

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

As of March 31, 2019, the Company had two customers that accounted for 18.7% and 20.2% of its consolidated contract receivables, respectively. As of December 31, 2018, the Company had one customer that accounted for 16.8% of its consolidated contract receivables.

8. 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 $110,000 and $105,000 for the three months ended March 31, 2019 and 2018, respectively.  Total amortization expense was approximately $129,000 and $118,000 for the three months ended March 31, 2019 and 2018, respectively.

12

9. Goodwill and Intangible Assets

Goodwill

The Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company tests goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, which are the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includes Hyperspring and Absolute).

On February 15, 2019, we acquired DP Engineering (as depicted in Note 4) and preliminarily recorded goodwill and identified intangible assets as part of the acquisition. On February 23, 2019, an unexpected event occurred at one of DP Engineering's significant customers and all pending work for that customer was suspended pending a root cause analysis on February 28, 2019. While that analysis is now complete, and virtually all of the suspended projects have been restarted, the customer has indicated that DP Engineering will be suspended from obtaining new projects for up to six months from the date of original notice of suspension or approximately September 2019. While the Company and DP Engineering are working to rehabilitate the customer relationship, the Company determined that the notice of suspension was a triggering event necessitating an interim goodwill impairment test.

On May 10, 2019, the Company determined that a material impairment had occurred, requiring an interim assessment for impairment to be completed related to both $5.6 million of goodwill recorded and $6.8 million of definite-lived intangible assets in the acquisition.

The impairment test was based on income based approach with discounted cash flow method and market based approach with guideline public company method and merger and acquisition method.

The preliminary result of the interim impairment testing indicated that the current estimated fair value of goodwill recorded from the acquisition of DP Engineering had declined below its initial estimated fair value at the acquisition date. As a result, the Company recognized an impairment charge of $2.1 million to write down the goodwill on DP Engineering. The fair value of goodwill recognized from the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment based upon the preliminary purchase price allocation. The Company determined that the impact of the suspension of obtaining new contracts from that customer resulted in a material downward revision to DP Engineering's revenue and profitability forecasts when compared to the acquisition date valuation. The impairment charge on goodwill was recorded within "Loss on impairment" in our consolidated statements of operations.

Changes in the net carrying amount of goodwill from December 31, 2018 through March 31, 2019 were due to the acquisition of DP Engineering, and were comprised of the following items:

(in thousands)

	Performance Improvement Solutions			Nuclear Industry Training and Consulting		Total
Balance, January 1, 2019	$	4,739		$	8,431	$	13,170
Acquisition		5,633			-		5,633
Dispositions		-			-		-
Goodwill impairment loss		(2,094	)		-		(2,094	)
Balance, March 31, 2019	$	8,278		$	8,431	$	16,709

Intangible Assets Subject to Amortization

Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for 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.

As discussed in Note 4, Acquisitions, we recognized definite-lived intangible assets of $6.8 million upon acquisition of DP Engineering on February 15, 2019, including customer contracts and relationships, trademarks and non-compete agreements, with amortization periods of five to fifteen years. Amortization of our definite-lived intangible assets is recognized on a straight-line basis over the estimate useful life of the associated assets.

As described above, following a February 23, 2019 event occurred at a customer location and subsequent receipt of a suspension notice on February 28, 2019, the Company has concluded that DP Engineering's relationship with a significant customer has been adversely impacted. The DP Engineering customer contracts and relationships were the major definite-lived intangible assets that were recognized upon the acquisition of DP Engineering. Accordingly, the Company determined that, in addition to the above describe testing of a potential impairment of goodwill, an interim definite-lived intangible asset impairment test was also necessary.

Therefore, the impairment test of the definite-lived intangible assets recognized upon the acquisition of DP Engineering was also conducted.

The interim impairment test was based on the present value of revised cash flow projected for five to fifteen years. The result of the impairment test indicated that the current estimated fair value of noted definite-lived intangible assets had declined below their initial estimated fair value. As a result, the Company recognized an impairment charge of $3.4 million. The fair value of definite-lived intangible assets recognized upon the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment according to purchase price allocation. The impairment charge of $3.4 million on definite-lived intangible assets were recorded within "Loss on impairment" in our consolidated statements of operations.

13

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

(in thousands)

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

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

Amortization expense related to definite-lived intangible assets totaled $0.5 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years:

(in thousands)
Years ended December 31:
2019 (remainder)	$	1,536
2020		1,973
2021		1,470
2022		1,152
2023		868
Thereafter		2,000
Total	$	8,999

14

10. Fair Value of Financial Instruments

ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1:  inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2:  inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  A Level 2 input must be observable for substantially the full term of the asset or liability. The Monte Carlo model was used to calculate the fair value of level 2 instrument liability award. The inputs used are current stock price, expected term, risk-free rate, number of trials, volatility and interest rates.

Level 3:  inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The contingent consideration was based on EBITDA.

At March 31, 2019, and December 31, 2018, the Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate fair value based upon their short-term nature.

As of March 31, 2019, the Company had four standby letters of credit totaling $1.9 million which represent performance bonds on three contracts.

For the three months ended March 31, 2019, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at March 31, 2019.

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

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

Money market funds at both March 31, 2019 and December 31, 2018 are included in cash and cash equivalents in the respective consolidated balance sheets.

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

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

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

(in thousands)
Balance, January 1, 2019	$	-
Issuance of contingent consideration in connection with acquisitions		1,200
Change in fair value		(1,200	)
Balance, March 31, 2019	$	-

15

11. Derivative Instruments

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

Foreign Currency Risk Management

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

As of March 31, 2019, the Company had foreign exchange contracts outstanding of approximately 3.2 million Euro. The contracts expire on various dates through December 2020. At December 31, 2018, the Company had contracts outstanding of approximately 3.2 million Euro at fixed rates.

Interest Rate Risk Management

As discussed in Note 13, the Company entered into a term loan to finance the acquisition of True North in May 2018. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company. As part of our overall risk management policies, in June 2018, the Company entered into a pay-fixed, receive-floating interest rate swap contract with a notional amount of $9.0 million to reduce the impact associated with interest rate fluctuations. The notional value amortizes monthly in equal amounts based on the five-year principal repayment terms. The terms of the swap require the Company to pay interest on the basis of a fixed rate of 3.02%, and the Company will receive interest on the basis of one-month USD-LIBOR-BBA-Bloomberg.

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

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

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

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

For the three months ended March 31, 2019 and 2018, the Company recognized net gain (loss) on its derivative instruments as outlined below:

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

16

12. Stock-Based Compensation

The Company recognizes stock-based compensation expense for all equity-based awards issued to employees, directors and non-employees that are expected to vest. Stock-based compensation expense is based on the fair value of awards as of the grant date.  The Company recognized $570,000 and $595,000 of stock-based compensation expense related to equity awards for the three months ended March 31, 2019 and 2018, respectively, under the fair value method. In addition to the stock-based compensation expense recognized, the Company also recognized $27,000 and $32,000 of expense related to the change in the fair value of cash-settled restricted stock units (RSUs) during the three months ended March 31, 2019 and 2018, respectively.

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

The Company's 1995 long-term incentive program (LTIP) provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and other Company employees. Vesting of the performance-vesting restricted stock units (PRSU's) is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during designated performance period as established by the Compensation Committee of the Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are  expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.

During the three months ended March 31, 2019, the Company granted approximately three hundred fifty thousand performance-vesting RSUs to employees with an aggregate fair value of $0.9 million. During three months ended March 31, 2018, the Company did not grant any performance-vesting RSUs. The Company did not any grant stock options for the three months ended March 31, 2019 and 2018.

13. Debt

The Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs, including acquisitions. On May 11, 2018, GSE  entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) with the Bank, amending and restating the Company's existing Credit and Security Agreement with the Bank, which included a $5.0 million asset-based revolving credit facility between the Company and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (b) a $25.0 million delayed draw term loan facility available to be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Company. The credit facilities mature in five years and bear interest at one-month LIBOR plus a margin that varies depending on the overall leverage ratio of the Company and its subsidiaries. Revolving loans are interest-only with principal due at maturity, while term loans require monthly payments of principal and interest based on an amortization schedule. The Company's obligations under the Credit Agreement are guaranteed by the Company's wholly-owned subsidiaries. The credit facilities are secured by liens on all assets of the Company. Attendant to the Company's acquisition of DP Engineering, the Company and the Bank entered into a Third Amendment and Reaffirmation Agreement and a Fourth Amendment and Reaffirmation Agreement on February 15, 2019 and March 20, 2019, respectively.

RLOC

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

At March 31, 2019, there were no outstanding borrowings under the RLOC and four letters of credit totaling $1.9 million. The amount available at March 31, 2019, after consideration of letters of credit was approximately $3.1 million.

Term Loan

As discussed in Note 4, we acquired DP Engineering on February 15, 2019 for approximately $13.5 million in cash. The purchase price was subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5.0 million potentially payable in 2020 and 2021. We drew down $14.3 million to finance the acquisition of DP Engineering. The loan bears interest at the adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years.

As discussed in Note 4, we also acquired True North on May 11, 2018 for approximately $9.75 million in cash.  The purchase price was subject to customary pre and post-closing working capital adjustments. We drew down $10.3 million to finance the acquisition of True North, $0.5 million of which was repaid to the Bank on the same day. The loan bears interest at the adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. We also incurred $70,000 debt issuance costs and $75,000 loan origination fees related to the Credit Agreement. Debt issuance costs and loan origination fees are reported as a direct deduction from the carrying amount of the loan and are amortized over the term of the loan using the effective interest method.

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

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

The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions after any applicable grace period could result in the obligations under the Credit Agreement becoming immediately due and payable and termination of the credit facilities. In addition to non-compliance with covenants and restrictions, the Credit Agreement also contains other customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the Bank may declare the obligations under the Credit Agreement to be immediately due and payable and may terminate the credit facilities. At March 31, 2019, the Company was in compliance with its financial covenants.

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14. Product Warranty

The Company accrues for estimated warranty costs at the time the related revenue is recognized based on historical experience and projected claims. The Company's SDB contracts generally provide a one-year base warranty on the systems. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.1 million, while the remaining $0.6 million is classified as long-term within other liabilities. The activity in the accrued warranty accounts is as follows:

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

15. Revenue

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

The following table represents a disaggregation of revenue by type of goods or services for the three months ended March 31, 2019 and 2018, along with the reportable segment for each category:

(in thousands)

	Three months ended March 31,
	2019		2018
Performance Improvement Solutions segment
System Design and Build	$	6,442	$	7,495
Software		749		869
Training and Consulting Services		4,999		1,537
Nuclear Industry Training and Consulting segment
Training and Consulting Services		10,004		12,994
Total revenue	$	22,194	$	22,895

SDB contracts are typically fixed-priced, and we receive payments based on a billing schedule as established in our contracts. The transaction price for software contracts is generally fixed. Fees for software are normally due in advance of or shortly after delivery of the software. Fees for PCS are normally paid in advance of the service period. For Training and Consulting Services, the customers are generally billed on a regular basis, such as weekly, biweekly or monthly, for services provided. Contract liability, which we classify as billing in excess of revenue earned, relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied.

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

(in thousands)

	March 31, 2019		December 31, 2018
Billings in excess of revenue earned (BIE)	$	7,511	$	10,609
Revenue recognized in the period from amounts included in BIE at the beginning of the period	$	5,040		11,275

For an SDB contract, we generally have two main performance obligations: the training simulator build and PCS. The training simulator build generally includes hardware, software, and labor. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method. In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

For the three months ended March 31, 2019, the Company recognized revenue of $0.8 million related to performance obligations satisfied in previous periods.

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

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16. Income Taxes

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

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

The Company's income tax (benefit) provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. Tax expense in 2019 is comprised mainly of the tax impact of the loss for impairment, federal income tax expense, foreign income tax expense, and state tax expense. Tax expense in 2018 is comprised mainly of federal income tax expense, foreign income tax expense, and state tax expense.

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

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 2000 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 2015 forward for China, 2015 forward for India, and 2016 forward for the UK.

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

The Company recognizes deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. The Company has evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its India, Swedish and U.K. net deferred assets as of March 31, 2019.  The Company has determined that it will continue to assess a valuation allowance on its China deferred tax asset related to transfer pricing. The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in the U.S.

17. Leases

The Company maintains leases of office facilities and equipment. Leases generally have remaining terms of one year to six years, whereas leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The Company recognizes lease expense for minimum lease payments on a straight-line basis over the term of the lease. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease, with renewal periods generally ranging from one year to five years. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disruption to operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease.

Upon the adoption of the new lease standard ASU 2016-02, on January 1, 2019, the Company elected the package of practical expedients permitted under the transition guidance within the amended guidance, which among other things, allowed registrants to carry forward historical lease classification. Accordingly, all existing leases that were classified as operating leases by the Company historically, were classified as operating leases.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets represent the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The Company's real estate leases, which are comprised primarily of office spaces, represent a majority of the lease liability. The majority of our lease payments are fixed, although an immaterial portion of payments are variable in nature. Variable lease payments vary based on changes in facts and circumstances related to the use of the ROU and are recorded as incurred. The Company uses an incremental borrowing rate based on rates available at commencement in determining the present value of future payments.

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. The Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

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

Operating Leases	Classification	March 31, 2019
Leased Assets
Operating lease - right of use assets	Long term assets	$	4,331
Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,088
Operating lease liabilities	Long term liabilities		3,703
		$	4,791

The Company has entered into a sublease with a tenant to rent out 3,822 of square feet from the lease at its Sykesville office on April 1, 2017, with the exact same consideration as on the head lease. The sublease does not relieve the Company of its primary lease obligation. The lessor agreement was an operating lease historically. The Company does not recognize underlying assets for the sublease as a lessor of the operating lease. The net amount received from the sublease is recorded within selling, general and administrative expenses.

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

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

⁽¹⁾Includes variable lease costs which are immaterial.

⁽²⁾Include leases maturity less than twelve months from the report date.

⁽³⁾ Sublease portfolio consists of the sublease part of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

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

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

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

Lease Term and Discount Rate	Three Months Ended March 31, 2019
Weighted-average remaining lease term (years)
Operating leases	4.44
Weighted-average discount rate
Operating leases	5%

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

(in thousands)

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

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18. Segment Information

The Company has two reportable business segments. The Performance segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example engineering services include, but not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for ASME code and ASME Section XI. The Company provides these services through GSE, True North and DP Engineering across all market segments. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.

The NITC segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities. This business is managed through our Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.

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

On May 11, 2018, GSE, through our wholly-owned subsidiary GSE Performance Solutions, Inc., entered into the True North Purchase Agreement to purchase 100% of the membership interests in True North. True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complimentary talent pool to our employee base. For reporting purposes, True North is included in our Performance segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector.

Due to the impairment described in Note 9 related to DP Engineering, we recognized charges totaling $5.5 million related to the impairment of certain definite-lived intangible assets and goodwill in our Performance segment.

Our primary measure of segment performance as shown in the table below excluded loss on impairment of intangible and goodwill, and the change in fair value of contingent consideration, net, which we do not believe are representative of the ongoing operations of the Performance segment. Excluding this discrete item from our segment measure of performance allows for better period over period comparison.

The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated loss before income taxes. Inter-segment revenue is eliminated in consolidation and is not significant:

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

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19.Non-consolidated Variable Interest Entity

The Company, through its wholly owned subsidiary DP Engineering, effectively holds 48% membership interest in DP-NXA Consultants LLC (DP-NXA) upon the acquisition of DP Engineering on February 15, 2019.

DP-NXA was established to provide in industrial services that include civil, structural, architectural, electrical, fire protection, plumbing, mechanical consulting engineering services to customers. DP-NXA sub-contracts their work to its two owners, NXA Consultants LLC (NXA), which owns 52% of the entity, and DP Engineering. DP Engineering and NXA contributed $48 and $52, respectively, for 48% and 52% interest in DP-NXA. DP Engineering recorded the contributed cash as an equity investment.

Upon the acquisition of DP Engineering, the Company evaluated the nature of DP Engineering's investment in DP-NXA and determined that DP-NXA is a variable interest entity (“VIE”). The Company does not have the power to direct activities that most significantly impact DP-NXA, and therefore, cannot be DP-NXA’s primary beneficiary. Furthermore, the Company concluded that it did not hold a controlling financial interest in DP-NXA since NXA, the VIE's majority owner, makes all operation and business decisions. As a result, the Company did not consolidate the assets and liabilities of the VIE in our financial statements.

The Company's maximum exposure to loss is limited to the investment in the VIE. As of March 31, 2019, the Company has not made any additional contributions to DP-NXA and its maximum exposure to loss relating to this unconsolidated VIE was immaterial. As of March 31, 2019, the Company does not have existing guarantee in relation to DP-NXA and any third-party it contracted with.

The Company will reevaluate if DP-NXA meets the definition of a VIE upon specific reconsideration of events.

The following table presents the carrying amount and classification of the assets related to the Company’s variable interests in non-consolidated VIE and the maximum exposure to loss at March 31, 2019.

(In thousands)	March 31, 2019
Assets
Cash:
Checking account	$	155
Total assets		155
Liabilities
Credit card and other payables		1
Total liabilities		1
Total net assets		154
Maximum exposure to loss	$	154

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

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

On February 15, 2019, GSE acquired DP Engineering for $13.5 million (subject to pre- and post-closing working capital adjustments). DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages.  Located in Fort Worth, Texas, DP Engineering is well-regarded as a leading service provider to the nuclear power industry, having been designated an “engineer of choice” by two large power generation companies. The Company's allocation of the purchase price remains incomplete and the net assets are subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date. For reporting purposes, DP Engineering is included in our Performance segment due to similarities in services provided including engineering solutions and implementation of design modifications to the nuclear power sector.

Approximately one week following our acquisition of DP Engineering, an adverse event occurred at one of DP Engineering’s major customer's location that affected plant operations. In its initial analysis of the causes of that event, the customer identified a prior plant modification by DP Engineering as meriting further analysis. As is customary in the industry, pursuant to an Engineer of Choice agreement, the customer issued DP Engineering a Notice of Suspension while a root cause analysis was completed. We completed our root cause analysis and presented it to the customer on April 25, 2019. Following the initial analysis, the customer had DP Engineering restarted all existing work with the Company, however, the customer also informed DP Engineering that it was suspended from bidding new contracts for new work for up to six months. We believe this incident adversely impacted our relationship with the customer and the Company. As a result, DP Engineering has experienced a significant decline in new orders from this customer and are not able or permitted to bid on new work.  The Company determined this represented a triggering event requiring an interim assessment for impairment. As the result of impairment, we recognized the impairment charges of $2.1 million on goodwill and $3.4 million on definite-lived intangible assets related to the acquisition of DP Engineering. Due to the recentness of this acquisition, we have not finalized the allocation of our purchase price to the tangible and intangible assets of DP Engineering we purchased. As such, we may need to record additional expense once the purchase price allocation is final. As a result, on May 10, 2019, the Company determined that a material impairment had occurred, requiring an interim assessment for impairment to be completed.

On May 11, 2018, GSE acquired True North Consulting, LLC, now a wholly-owned subsidiary of GSE Performance Solutions, Inc., for $9.75 million (subject to customary pre- and post-closing working capital adjustments). True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complimentary talent pool to our employee base.

Cautionary Statement Regarding Forward-Looking Statements

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

General Business Environment

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

Performance Improvement Solutions (approximately 55% of revenue)

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

Our engineering solutions include the following: (1) in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, and thermal performance; (2) in-service inspection for specialty engineering including ASME Section XI; (3) software solutions; and (4) mechanical design, civil/structural design, electrical, instrumentation and controls design, digital controls/cyber security, and fire protection for nuclear power plant design modifications.  Our True North and DP Engineering businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements.  GSE and its predecessors have been providing these engineering solutions and services since 1995.

On February 15, 2019, through its wholly-owned subsidiary GSE Performance Solutions, Inc., the Company entered into the DP Engineering Purchase Agreement, to purchase 100% of the membership interests in DP Engineering. For reporting purposes, DP Engineering is included in our Performance segment due to similarities in services provided including engineering solutions and implementation of design modifications to nuclear power sector.

On May 11, 2018, GSE, through GSE Performance Solutions, Inc., entered into the True North Purchase Agreement to purchase 100% of the membership interests in True North. For reporting purposes, True North is included in our Performance Improvement Solutions segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector.

Nuclear Industry Training and Consulting (approximately 45% of revenue)

Nuclear Industry Training and Consulting provides highly specialized, expert-professionals to the nuclear power industry. These employees work at our clients' facilities under client direction. Examples of these highly skilled positions are senior reactor operations instructors, procedure writers, project managers, work management specialists, planners and training material developers. This business is managed through the Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate the business line from the rest of the Company's product and service portfolio. GSE and its predecessors have been providing these training and consulting services since 1997.

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Business Strategy

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

Pursue roll-up acquisition strategy. We have complemented our organic growth strategy through selective acquisitions including, but not limited to, the following: engineering; training, staffing and consulting service businesses for the power industry, with a particular focus on nuclear power; and software utilized in the power industry, both domestic and international. We have been focusing our efforts on acquisitions that would enhance our existing portfolio of products and services, strengthen our relationships with our existing customers, and potentially expand our footprint to include new customers in our core served industries. We have made three acquisitions since 2017 and believe the opportunity exists to acquire more businesses that are complementary to ours, allowing us to accelerate our growth strategy.

In February 2019, we acquired DP Engineering, a specialized provider of high-value engineering services and solutions to the nuclear power industry. In May 2018, we acquired True North, a leading provider of specialty engineering solutions to the nuclear power industry and in September 2017, we acquired Absolute, a provider of technical consulting and staffing solutions to the global nuclear power industry. The acquisitions of Absolute, True North and DP Engineering are expected to strengthen the Company's global leadership in the nuclear services area. The acquisitions added new capabilities to the GSE solution offering and bring new highly complementary customers to GSE, while at the same time deepening GSE relationships with existing clients. These acquisitions, together with our earlier acquisition of Hyperspring in November 2014, are a significant proof point of the thesis that GSE is a compelling platform for consolidating a fragmented vendor ecosystem for nuclear power. We believe the acquisitions add significant scale and focus to the business, while positioning GSE as a "go to" provider of technical and consulting solutions to the power industry, in particular nuclear power.

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

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

Research and development (R&D).We invest in R&D to deliver unique solutions that add value to our end-user markets. We have delivered nuclear core and Balance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry's need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP^® and RELAP5-HD^® solutions. Our entire 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 pragmatic and measured investments in R&D that first and foremost are driven by the market and complement 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 that is easier to use, at lower total cost of ownership than any alternative available to customers. GSE has pioneered a number of industry standards and intends to continue to be one of the most innovative companies in our industry.

Strengthen and develop our talent while delivering high-quality solutions. Our experienced employees and management team are our most valuable resources. Attracting, training, and retaining top talent is critical to our success. To achieve our talent goals, we intend to remain focused on providing our employees with entrepreneurial opportunities to increase client contact within their areas of expertise and to expand and deepen our service offerings. We will also continue to provide our employees with training, personal and professional growth opportunities, performance-based incentives including opportunities for stock ownership, bonuses and competitive benefits as benchmarked to our industry and locations. We have developed a strong reputation for quality services based upon our industry-recognized depth of experience, ability to attract and retain quality professionals, and exceptional expertise across multiple service sectors. We have received numerous industry certificates and awards over the years for outstanding service.

Cyber security. Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems, and maintenance of backup and protective systems), cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third parties, civil or regulatory liability for loss of sensitive or protected information such as personal data, incident response costs, diminution in the value of our investment in research, development and engineering, loss of intellectual property, and increased cyber security protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

Employees.  As of March 31, 2019, we had approximately 521 employees, which includes approximately 286 in our Performance Improvement segment and approximately 235 in our Nuclear Industry Training and Consulting segment. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.

Backlog.  As of March 31, 2019, we had approximately $68.9 million of total gross revenue backlog, which included $47.9 million of Performance Improvement Solutions backlog and $21.0 million of Nuclear Industry Training and Consulting backlog.With respect to our backlog, it includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. Our backlog includes future expected revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client.  We calculate backlog without regard to possible project reductions or expansions or potential cancellations unless and until such changes may occur.

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

24

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 that provide a structured program focused on continuous skills improvement for experienced employees to engineering services, including plant design verification and validation, ASME code compliance, and design plant modification work. We provide the right solutions to solve our clients' most pressing needs.

For workforce development and training, students and instructors alike must have a high degree of confidence that their power plant simulator truly reflects plant behavior across the entire range of operations. To earn this confidence, GSE's simulation solution starts with the most robust engineering approach possible. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, GSE provides simulation solutions that achieve unparalleled fidelity and accuracy. The solutions that GSE provides are also known for ease of use, resulting in increased productivity for end-users. For these reasons, GSE has delivered more nuclear power plant simulators than any other company in the world.

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

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

● Universal Training Simulators: These products complement the Self-Paced Training Tutorials by reinforcing what the student learned in the tutorial, putting it into practice on the Universal Simulator. The simulation models are high fidelity and engineering correct, but represent a typical plant or typical process, rather than the exact replication of a client's plant. We have delivered over 360 such simulation models to clients consisting of major oil companies and educational institutions.

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

● Plant-Specific Operator Training Simulators:  These simulators provide an exact replication of the plant control room and plant operations. They provide the highest level of realism and training available, and allow users to practice their own plant-specific procedures. Clients can safely practice startup, shutdown, and other normal operations, as well as response to abnormal events we all hope they never have to experience in real life. Since our inception, we have delivered over 480 plant-specific simulators to clients in the nuclear power, fossil power and process industries worldwide.

Nuclear Industry Training and Consulting

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

Webring together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high-fidelity simulation and training solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate level training solutions of EnVision and the extensive nuclear industry training and consulting services of Absolute and Hyperspring.

25

Results of Operations - three months ended March 31, 2019 versus three months ended March 31, 2018

Revenue.  Revenue for the three months ended March 31, 2019 totaled $22.2 million, which was 3.1% less than the $22.9 million of revenue for the three months ended March 31, 2018. The decrease in revenue was primarily due to decrease in the NITC segment listed below:

(in thousands)	Three months ended
	March 31,
	2019			2018
Revenue:
Performance Improvement Solutions		$	12,190		$	9,901
Nuclear Industry Training and Consulting			10,004			12,994
Total revenue		$	22,194		$	22,895

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

Nuclear Industry Training and Consulting revenue decreased (23.0%) to $10.0 million for the three months ended March 31, 2019 from $13.0 million for the three months ended March 31, 2018.  The decrease in sales was attributed to lower demand for staff augmentation support from two major customers. Nuclear Industry Training and Consulting orders totaled $9.8 million, and $18.8 million for the three months ended March 31, 2019 and 2018, respectively. In the first quarter of 2019, the Company has increased the business development team to grow sales and to make us more responsive to the needs of our new and existing customers.

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

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

(in thousands)	Three months ended
	March 31,
	2019			%			2018			%
Gross profit:
Performance Improvement Solutions		$	3,699		30.3	%		$	3,251		32.8	%
Nuclear Industry Training and Consulting			1,037		10.4	%			1,647		12.7	%
Total gross profit		$	4,736		21.3	%		$	4,898		21.4	%

The increase in gross profit for Performance Improvement Solutions for the three months ended March 31, 2019 as compared to the same period in 2018 was primarily driven by the acquisitions of True North and DP Engineering as well as cost savings realized on certain large projects through percentage of  completion contracts, which were not expected to recur in the foreseeable future. For the three months ended March 31, 2019 and 2018, our revenue on training and consulting services through T&M or fixed-price contracts accounted for 41% and 16% of the segment revenue, respectively.

The decrease in gross profit margin during 2019 for Nuclear Industry Training and Consulting was primarily driven by lower margin from Hyperspring and Absolute projects.

Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses totaled $4.4 million and $4.5 million for the three months ended March 31, 2019 and 2018, respectively. Significant changes in the components of SG&A spending were as follows:

($ in thousands)	Three months ended
	March 31,
	2019		%			2018		%
Selling, general and administrative expenses:
Corporate charges	$	3,233		73.1	%	$	3,337		73.7	%
Business development expenses		944		21.3	%		918		20.3	%
Facility operation & maintenance (O&M)		245		5.6	%		271		6.0	%
Others		1		0.0	%		1		0.0	%
Total	$	4,423		100.0	%	$	4,527		100.0	%

Corporate charges decreased $(0.1) million due primarily to $1.0 million of additional general and administrative expenses relate to our acquisitions of True North and DP Engineering, $0.6 million of acquisition related expense,  offset by $0.5 million of savings as a result of our international restructuring plan along with other corporate cost saving initiatives and $1.2 million of decrease due to change on the fair value of contingent consideration.

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 $240,000 and $329,000 for the three months ended March 31, 2019 and 2018, respectively. Before capitalization of software development costs, research and development totaled $350,000 and $434,000 for three months ended March 31, 2019 and 2018, respectively.

Restructuring charges. On December 27, 2017, our Board of Directors approved an international restructuring plan to streamline and optimize our global operations. We expected restructuring charges to total $2.2 million, excluding any tax impacts and cumulative translation adjustments. For the three months ended March 31, 2019, we did not incur any restructuring charges. As of March 31, 2019, we had incurred total restructuring charges of $2.0 million since 2017, and we expect to record the remaining restructuring charges of approximately $0.2 million before the end of 2019. The restructuring charges exclude cumulative translation adjustment losses of approximately $1.7 million, assuming currency rates at March 31, 2019, which will be recorded as a charge against net income upon liquidation of the respective foreign subsidiaries. We also expect to recognize tax benefits related to the liquidation of these subsidiaries that we anticipate will offset a majority of the currency translation adjustment losses. For the three months ended March 31, 2019, the Company made payments related to our restructuring for employee termination benefits totaling $0.1 million that had been previously accrued for. For the three months ended March 31, 2018, we recorded restructuring charges of $0.9 million, which represented true-up adjustments related to the restructuring plan initiated in 2015.

Depreciation. Depreciation expense totaled $91,000 and $103,000 for the three months ended March 31, 2019 and 2018, respectively.

26

Amortization of definite-lived intangible assets. Total amortization expense related to definite-lived intangible assets totaled $0.5 million and $0.2 million for the three months ended March 31, 2019, and 2018, respectively.

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

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

Interest (expense) income, net. Interest expense totaled $222,000 and $0 for the three months ended March 31, 2019 and 2018, respectively. Interest income totaled $14,000 and $22,000 for the three months ended March 31, 2019 and 2018, respectively. The Company drew down under its five-year term loan of $14.3 million in February 2019 to finance the acquisition of  DP Engineering, and has recorded interest expense of $83,000 related to the term loan for the period of time this additional debt was outstanding during the three months ended March 31, 2019. Interest expense is expected to increase in the future as the debt from the acquisition of DP Engineering was only outstanding for a half of the three months ended March 31, 2019.

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

(Benefit) Provision for income taxes.  Income tax benefit was $(1.8) million, or an effective income tax rate of 30.4%, for the three months ended March 31, 2019, compared to $0.3 million, or an effective income tax rate of (20.9%), for the three months ended March 31, 2018. The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. Tax expense in 2019 is comprised mainly of the tax impact of the loss for impairment, federal income tax expense, foreign income tax expense, and state tax expense. Tax expense in 2018 is comprised mainly of federal income tax expense, foreign income tax expense, and state tax expense.

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

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 2000 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 2015 forward for China, 2015 forward for India and 2016 forward for the UK.

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

27

Critical Accounting Policies and Estimates

In preparing the Company's consolidated financial statements, management makes several estimates and assumptions that affect the Company's reported amounts of assets, liabilities, revenues and expenses. The Company's most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock based compensation awards, and the recoverability of deferred tax assets. These critical accounting policies and estimates are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our most recent Annual Report on Form 10-K. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates may require adjustment.

Liquidity and Capital Resources

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

For the three months ended March 31, 2019 and 2018, net cash used in operating activities was $(0.6) million and $(5.5) million, respectively. The year over year change of $4.9 million in cash flows used in operating activities was primarily driven by the loss on impairment, change in the fair value of contingent consideration,  the change in contract receivables, billing in excess of revenue earned and accounts payable and accrued expenses, which was mainly due to timing differences of cash collections and billing.

Net cash used in investing activities totaled $(13.6) million and $(0.4) million for the three months ended March 31, 2019 and 2018, respectively. The increase in cash outflow in 2019 was primarily driven by the acquisition of DP Engineering, the net cash consideration of which was $14.8 million.

For the three months ended March 31, 2019 and 2018, cash provided by (used in) financing activities totaled $13.5 million and $(1.7) million, respectively. The increase in the cash inflow from financing activities was largely driven by the proceeds from issuance of a term loan of $14.3 million; the increase was partially offset by an increase of $0.1 million in the Company's withholding of RSUs in order to pay employees’ payroll withholding taxes on vested RSUs, and repayments of $0.7 million on the term loan.

At March 31, 2019, the Company had cash and cash equivalents of $11.3 million. The Company believes that its (i) cash and cash equivalents and (ii) cash generated from normal operations will be sufficient to fund its working capital and other requirements for at least the next twelve months.

Credit Facilities

Citizens Bank

The Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs. On May 11, 2018, GSE and Performance Solutions (collectively, the Borrower) entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) with the Bank, amending and restating the Company's existing Credit and Security Agreement with the Bank, which included a $5.0 million asset-based revolving credit facility between the Borrower and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (b) a $25.0 million delayed draw term loan facility available to be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Company.

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

At March 31, 2019, there were no outstanding borrowings on the RLOC and four letters of credit totaling $1.9 million. The amount available at March 31, 2019, after consideration of the letters of credit was approximately $3.1 million.

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

28

Non-GAAP Financial Measures

References to “EBITDA” mean net (loss) income, before taking into account interest expense (income), provision for income taxes, depreciation and amortization. References to Adjusted EBITDA exclude loss on impairment, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, and acquisition-related expense. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate the Company’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:

(in thousands)

	Three months ended
	March 31,
	2019			2018
Net loss	$	(4,236	)	$	(1,496	)
Interest expense (income), net		208			(22	)
Provision for income taxes		(1,848	)		259
Depreciation and amortization		729			371
EBITDA		(5,147	)		(888	)
Loss on impairment		5,464			-
Impact of the change in fair value of contingent consideration		(1,200	)		-
Restructuring charges		-			917
Stock-based compensation expense		597			627
Impact of the change in fair value of derivative instruments		(93	)		156
Acquisition-related expense		628			-
Adjusted EBITDA	$	249		$	812

29

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

References to Adjusted net income exclude the impact of gain from loss on impairment, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, acquisition-related expense, and amortization of intangible assets related to acquisitions. Adjusted Net Income and adjusted earnings per share (adjusted EPS) are not measures of financial performance under generally accepted accounting principles (GAAP). Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, are useful to investors to evaluate the Company’s results because they exclude certain items that are not directly related to the Company’s core operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results for any particular period, such as stock-based compensation expense.  These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to GAAP net income, the most directly comparable GAAP financial measure, is as follows:

(in thousands)	Three months ended
	March 31,
	2019			2018
Net loss	$	(4,236	)	$	(1,496	)
Loss on impairment		5,464			-
Impact of the change in fair value of contingent consideration		(1,200	)		-
Restructuring charges		-			917
Stock-based compensation expense		597			627
Impact of the change in fair value of derivative instruments		(93	)		156
Acquisition-related expense		628			-
Amortization of intangible assets related to acquisitions		509			150
Adjusted net income	$	1,669		$	354
Diluted loss per common share	$	(0.21	)	$	(0.08	)
Adjusted earnings per common share – Diluted	$	0.08		$	0.02
Weighted average shares outstanding - Diluted(1)		20,188,580			19,902,752

⁽¹⁾ During the three months ended March 31, 2019 and 2018, the Company reported both a GAAP net loss and positive adjusted net income. Accordingly, there were 237,834 and 388,367 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.

30

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

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

Changes in Internal Control over Financial Reporting

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

Limitation of Effectiveness of Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

31

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Company has added the below risk factor to the disclosure.

If we cannot comply with the financial or other restrictive covenants in our credit agreement, or obtain waivers or other relief from our lender, we may cause an event of default to occur, which could result in loss of our sources of liquidity and acceleration of our debt.

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

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	Fourth Amendment and Reaffirmation Agreement dated as of March 20, 2019, by and among GSE Systems, Inc., and GSE Performance Solutions, Inc., as Borrowers, GSE True North Consulting, LLC, Hyperspring, LLC, Absolute Consulting, Inc., and DP Engineering LLC, as Guarantors, and Citizens Bank, National Association, as Bank. 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

32

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, 2019

GSE SYSTEMS, INC.

/S/ KYLE J. LOUDERMILK

Kyle J. Loudermilk

Chief Executive Officer

(Principal Executive Officer)

/S/ EMMETT A. PEPE

Emmett A. Pepe

Chief Financial Officer

(Principal Financial and Accounting Officer)

33

EX-10.1

FOURTH AMENDMENT AND REAFFIRMATION AGREEMENT

THIS FOURTH AMENDMENT AND REAFFIRMATION AGREEMENT is dated as of March 20, 2019 (this “Agreement”), by and among GSE SYSTEMS, INC., a Delaware corporation (“Parent”), GSE PERFORMANCE SOLUTIONS, INC., a Delaware corporation (“GSE Performance” and collectively with Parent, the “Borrowers” and each a “Borrower”), GSE TRUE NORTH CONSULTING, LLC, a Delaware limited liability company (“True North”), HYPERSPRING, LLC, a Delaware limited liability company (“Hyperspring”), ABSOLUTE CONSULTING, INC., a Delaware corporation (“Absolute” and together with True North and Hyperspring collectively, the “Original Guarantors” and each an “Original Guarantor”), DP ENGINEERING, LLC, formerly DP Engineering Ltd. Co., a Delaware limited liability company (“DP Engineering” and together with the Original Guarantors collectively, the “Guarantors” and each a “Guarantor” and together with the Borrowers collectively, the “Loan Parties” and each a “Loan Party”), and CITIZENS BANK, NATIONAL ASSOCIATION (the “Bank”).  Capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement (as defined below) or the Guaranty (as defined below), as applicable.

WHEREAS, pursuant to the terms of that certain Credit and Security Agreement, dated as of December 29, 2016 (as the same may have been amended, renewed, replaced, or supplemented from time to time prior to the Closing Date (as defined in the Credit Agreement), the “Original Credit Agreement”), by and among Borrowers and Bank, the Bank agreed to provide a revolving line of credit to Borrowers in an amount not to exceed $5,000,000 pursuant to a revolving line of credit note dated as of the Initial Closing Date (as defined in the Credit Agreement) of the Borrowers payable to the order of the Bank (the “RLOC Note”);

WHEREAS, Hyperspring executed and delivered a Guaranty and Suretyship Agreement (as the same may have been amended, restated or modified from time to time, the “Hyperspring Guaranty”) dated as of December 29, 2016 in favor of Bank in connection with Borrower entering into the Original Credit Agreement;

WHEREAS, Absolute executed and delivered a Guaranty and Suretyship Agreement (as the same may have been amended, restated or modified from time to time, the “Absolute Guaranty”) dated as of September 20, 2017 in favor of Bank in connection with the Original Credit Agreement;

WHEREAS, True North executed and delivered a Guaranty and Suretyship Agreement (as the same may have been amended, restated or modified from time to time, the “True North Guaranty”) dated as of May 11, 2018 in favor of Bank in connection with the Credit Agreement;

WHEREAS, GSE Performance executed and delivered a Pledge Agreement (as the same may have been amended, restated or modified from time to time, the “GSE Performance Pledge Agreement”) dated as of September 20, 2017 in favor of Bank in connection with the Original Credit Agreement;

WHEREAS, Borrowers and Bank entered into that certain Amended and Restated Credit Agreement (as the same may have been amended, restated or modified from time to time, the “Credit Agreement”) dated as of May 11, 2018 to continue the RLOC and to provide for a Term Loan Facility in a principal amount up to $25,000,000;

WHEREAS, Original Guarantors and Bank entered into that certain Security Agreement (as the same may have been amended, restated or modified from time to time, the “Security Agreement”) dated as of May 11, 2018;

WHEREAS, pursuant to that certain Amendment and Reaffirmation Agreement dated as of May 11, 2018, the Borrowers, the Original Guarantors and the Bank agreed to amend the terms and conditions of the RLOC Note and the GSE Performance Pledge Agreement;

WHEREAS, pursuant to that certain Second Amendment and Reaffirmation Agreement dated as of  May 25, 2018, the Borrowers, the Original Guarantors and the Bank agreed to amend certain terms and conditions of the Credit Documents to reflect the conversion of True North to a Delaware limited liability company;

WHEREAS, on February 15, 2019 GSE Performance acquired all of the membership interests of DP Engineering and DP Engineering executed and delivered a (a) Guaranty and Suretyship Agreement (the “DP Engineering Guaranty” and together with the True North Guaranty, the Hyperspring Guaranty and Absolute Guaranty collectively, the “Guaranty”) in favor of Bank in connection with the Credit Agreement and (b) Pledge Agreement in favor of Bank in connection with the Credit Agreement; and

WHEREAS, the parties hereto intend that, (a) the Credit Documents shall be amended subject to the terms and conditions set forth herein, (b) the obligations under the Guaranty and the Security Agreement will continue to be in effect, on the terms set forth therein, and (c) the Guaranty and the Security Agreement will continue to support and otherwise benefit the Obligations (as defined in the Guaranty).

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree, under seal, as follows:

ARTICLE I

Section 1.01.Amendments to Credit Documents.  The Credit Documents (as defined in the Credit Agreement) are hereby amended as follows:

(a)All references in the Credit Documents to “DP Engineering Ltd. Co., a Texas limited liability company” are hereby deleted and replaced with “DP Engineering, LLC, a Delaware limited liability company”.

(b)Exhibit A to the GSE Performance Pledge Agreement is hereby deleted and replaced with Exhibit A attached hereto.

ARTICLE II
Reaffirmation

Section 2.01.Reaffirmation.

(a)Each Guarantor hereby: (i) affirms and confirms its guarantee and other commitments and obligations, under the Guaranty, the Security Agreement and any other Credit Documents executed by such Guarantor and (ii) confirms that each guarantee and other commitments and obligations under the Guaranty, the Security Agreement and any other Credit Documents executed by such Guarantor shall continue to be in full force and effect and shall continue to accrue to the benefit of the Bank notwithstanding the effectiveness of the Credit Agreement.

(b)Each Borrower hereby affirms the execution and delivery to Bank of the Credit Documents, and the Credit Documents are continued in full force and effect and are in all respects hereby affirmed and ratified.

ARTICLE III
Representations and Warranties

Each Loan Party, to the extent applicable, hereby represents and warrants, which representations and warranties shall survive execution and delivery of this Agreement, as follows:

Section 3.01.Organization.  Each Loan Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization.

Section 3.02.Authority; Enforceability.  Each Loan Party has the corporate or limited liability company power to execute, deliver and carry out the terms and provisions of this Agreement and has taken all necessary corporate and other action, to authorize the execution, delivery and performance by it of this Agreement.  Each Loan Party has duly executed and delivered this Agreement, and this Agreement constitutes a legal, valid and binding obligation of such Loan Party, enforceable against it in accordance with the terms hereof.

Section 3.03.Credit Documents.  The representations and warranties made by each Loan Party and set forth in the Credit Documents are true and correct on and as of the date hereof with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date (in which case any such representation and warranty shall have been true and correct as of such earlier date).

ARTICLE IV
Miscellaneous

Section 4.01.Conditions to Effectiveness of Agreement.  The Bank’s willingness to agree to the amendments set forth in this Agreement is subject to the delivery by the Borrower to the Bank of the items described under the heading “To be Delivered Within 30 Days Post-Closing” of the closing checklist attached hereto as Exhibit B.

Section 4.02.Notices.  All communications and notices hereunder shall be in writing and given as provided in Section 10.9 of the Credit Agreement or  Section 13 of the Guaranty, as applicable.

Section 4.03.Expenses.  Each Loan Party acknowledges and agrees that the Bank shall be entitled to reimbursement of expenses as provided in Section 10.2 of the Credit Agreement and Section 10 of the Guaranty, as applicable.

Section 4.04.Credit Document.  This Agreement is a “Credit Document” executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions thereof.

Section 4.05.Successors and Assigns.  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

Section 4.06.No Novation.  Nothing herein contained shall be construed as a substitution or novation of the obligations outstanding under the Credit Documents, which shall remain in full force and effect except as modified by this Agreement and the Credit Agreement.

Section 4.07.Governing Law; Waiver of Jury Trial.  This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware. EACH LOAN PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING BROUGHT OR INSTITUTED BY ANY PARTY HERETO OR ANY SUCCESSOR OR ASSIGN OF ANY PARTY, ON OR WITH RESPECT TO THIS AGREEMENT, ANY OF THE OTHER DOCUMENTS, THE COLLATERAL OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO OR THERETO, WHETHER BY CLAIM OR COUNTERCLAIM.

Section 4.08.Remaining Force and Effect.  Except as specifically amended hereby, the Credit Documents remain in full force and effect in accordance with their original terms and conditions.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed under seal by its respective authorized officers as of the day and year first above written.

	BANK:
Witness/Attest:	CITIZENS BANK, NATIONAL ASSOCIATION By: (SEAL)Edward S. WinslowSenior Vice President
	BORROWERS:
Witness/Attest:	GSE SYSTEMS, INC. By: (SEAL)Emmett PepeChief Financial Officer
Witness/Attest:	GSE PERFORMANCE SOLUTIONS, INC. By: (SEAL)Emmett PepeTreasurer
	GUARANTORS:
Witness/Attest:	ABSOLUTE CONSULTING, INC. By: (SEAL)Emmett PepeTreasurer
Witness/Attest:	HYPERSPRING, LLC By: (SEAL)Emmett PepeTreasurer
Witness/Attest:	GSE TRUE NORTH CONSULTING, LLC By: (SEAL)Emmett PepeTreasurer
Witness/Attest:	DP ENGINEERING, LLC By: (SEAL)Emmett PepeTreasurer

EXHIBIT A

ISSUERS

Absolute Consulting, Inc., a Delaware corporation (100%)

GSE True North Consulting, LLC, a Delaware limited liability company (100%)

Hyperspring, LLC, a Delaware limited liability company (100%)

DP Engineering, LLC, a Delaware limited liability company (100%)

DP-NXA Consultants, LLC, a Texas limited liability company (48%)

EXHIBIT B

CLOSING CHECKLIST

See attachment.

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, 2019	/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, 2019	/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, 2019 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, 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, 2019	/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, 2019	Apr. 30, 2019
Document and Entity Information [Abstract]
Entity Registrant Name	GSE SYSTEMS INC
Entity Central Index Key	0000944480
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding		19,996,304
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 11,346	$ 12,123
Contract receivables, net	18,636	21,077
Prepaid expenses and other current assets	1,953	1,800
Total current assets	31,935	35,000
Equipment, software, and leasehold improvements	5,516	5,293
Accumulated depreciation	(4,320)	(4,228)
Equipment, software, and leasehold improvements, net	1,196	1,065
Software development costs, net	596	615
Goodwill	16,709	13,170
Intangible assets, net	8,999	6,080
Deferred tax assets	7,589	5,461
Operating lease - right of use assets, net	4,331	0
Other assets	69	49
Total assets	71,424	61,440
Current liabilities:
Current portion of long-term debt, net of debt issuance costs and original issue discount	4,763	1,902
Accounts payable	1,573	1,307
Accrued expenses	1,577	2,646
Accrued compensation	2,702	3,649
Billings in excess of revenue earned	7,511	10,609
Accrued warranty	1,123	981
Income taxes payable	1,382	1,176
Other current liabilities	1,148	60
Total current liabilities	21,779	22,330
Long-term debt, less current portion, net of debt issuance costs and original issue discount	17,341	6,610
Operating lease liabilities	3,703	0
Other liabilities	1,333	1,371
Total liabilities	44,156	30,311
Commitments and contingencies
Stockholders' equity:
Preferred stock $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding	0	0
Common stock $0.01 par value; 60,000,000 shares authorized, 21,595,215 shares issued, 19,996,304 shares outstanding as of March 31, 2019; 60,000,000 shares authorized, 21,485,445 shares issued, 19,886,534 shares outstanding as of December 31, 2018	216	214
Additional paid-in capital	78,578	78,118
Accumulated deficit	(46,805)	(42,569)
Accumulated other comprehensive loss	(1,722)	(1,635)
Treasury stock at cost, 1,598,911 shares on March 31, 2019 and December 31, 2018	(2,999)	(2,999)
Total stockholders' equity	27,268	31,129
Total liabilities and stockholders' equity	$ 71,424	$ 61,440

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares	Mar. 31, 2019	Dec. 31, 2018
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)	60,000,000	60,000,000
Common stock, shares issued (in shares)	21,595,215	21,485,445
Common stock, shares outstanding (in shares)	19,996,304	19,886,534
Treasury stock (in shares)	1,598,911	1,598,911

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Revenue	$ 22,194	$ 22,895	[1]
Cost of revenue	17,458	17,997
Gross profit	4,736	4,898
Operating expenses:
Selling, general and administrative	4,423	4,527
Research and development	240	329
Restructuring charges	0	917
Loss on impairment	5,464	0
Depreciation	91	103
Amortization of definite-lived intangible assets	509	150
Total operating expenses	10,727	6,026
Operating loss	(5,991)	(1,128)
Interest (expense) income, net	(208)	22
Gain (loss) on derivative instruments, net	93	(156)
Other income, net	22	25
Loss before income taxes	(6,084)	(1,237)
(Benefits) provision for income taxes	(1,848)	259
Net loss	$ (4,236)	$ (1,496)
Basic loss per common share (in dollars per share)	$ (0.21)	$ (0.08)
Diluted loss per common share (in dollars per share)	$ (0.21)	$ (0.08)
Weighted average shares outstanding - Basic (in shares)	19,950,746	19,514,385
Weighted average shares outstanding - Diluted (in shares)	19,950,746	19,514,385

[1] Prior period amounts have not been adjusted under the modified retrospective transition method for the adoption of ASC 606.

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS [Abstract]
Net loss	$ (4,236)	$ (1,496)
Cumulative translation adjustment	(87)	(45)
Comprehensive loss	$ (4,323)	$ (1,541)

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - 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, 2017	$ 210	$ 76,802	$ (42,870)	$ (1,471)	$ (2,999)	$ 29,672
Balance (in shares) at Dec. 31, 2017	21,024,395				(1,598,911)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense		595				595
Common stock issued for options exercised (in shares)	109,513
Common stock issued for options exercised	$ 1	56				57
Common stock issued for RSUs vested (in shares)	81,976
Common stock issued for RSUs vested	$ 1	(1)				0
Shares withheld to pay taxes		(76)				(76)
Foreign currency translation adjustment				(45)		(45)
Net loss			(1,496)			(1,496)
Balance at Mar. 31, 2018	$ 212	77,376	(43,711)	(1,516)	$ (2,999)	29,362
Balance (in shares) at Mar. 31, 2018	21,215,884				(1,598,911)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of adopting ASC 606			655			655
Cumulative effect of adopting ASC 606			0
Balance at Dec. 31, 2018	$ 214	78,118	(42,569)	(1,635)	$ (2,999)	31,129
Balance (in shares) at Dec. 31, 2018	21,485,445				(1,598,911)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense		570				570
Common stock issued for options exercised (in shares)	1,508
Common stock issued for options exercised	$ 1	41				42
Common stock issued for RSUs vested (in shares)	108,262
Common stock issued for RSUs vested	$ 1	(1)				0
Shares withheld to pay taxes		(150)				(150)
Foreign currency translation adjustment				(87)		(87)
Net loss			(4,236)			(4,236)
Balance at Mar. 31, 2019	$ 216	$ 78,578	$ (46,805)	$ (1,722)	$ (2,999)	$ 27,268
Balance (in shares) at Mar. 31, 2019	21,595,215				(1,598,911)

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Cash flows from operating activities:
Net loss	$ (4,236)	$ (1,496)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on impairment	5,464	0
Depreciation	91	103
Amortization of definite-lived intangible assets	509	150
Amortization of capitalized software development costs	129	118
Change in fair value of contingent consideration	(1,200)	0
Stock-based compensation expense	597	627
Gain (loss) on derivative instruments, net	(93)	156
Deferred income taxes	(2,128)	(90)
Changes in assets and liabilities:
Contract receivables, net	5,388	(4,683)
Prepaid expenses and other assets	439	(12)
Accounts payable, accrued compensation, and accrued expenses	(2,446)	647
Billings in excess of revenue earned	(3,185)	(1,127)
Accrued warranty	62	(75)
Other liabilities	23	154
Cash used in operating activities	(586)	(5,528)
Cash flows from investing activities:
Capital expenditures	(11)	(318)
Capitalized software development costs	(110)	(105)
Acquisition of DP Engineering, net of cash acquired	(13,521)	0
Cash used in investing activities	(13,642)	(423)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	14,263	0
Repayment of long-term debt	(671)	0
Proceeds from issuance of common stock on the exercise of stock options	42	57
Contingent consideration payments to former owners of Hyperspring, LLC	0	(1,701)
Shares withheld to pay taxes	(150)	(76)
Cash provided by (used in) financing activities	13,484	(1,720)
Effect of exchange rate changes on cash	(33)	10
Net decrease in cash, cash equivalents, and restricted cash	(777)	(7,661)
Cash, cash equivalents, and restricted cash, beginning balance	12,123	20,071
Cash, cash equivalents, and restricted cash, ending balance	$ 11,346	$ 12,410

XML

Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2019

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Basis of Presentation

GSE is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the power and process industries. References in this report to “GSE,” the “Company,” “we” and “our” are to GSE Systems and its subsidiaries, collectively.

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the Company, GSE, we, us, or our) and are unaudited. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2018 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 27, 2019.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. The Company’s most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired including impairment test, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock-based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from these estimates and those differences could be material.

Revenue recognition

The Company derives its revenue through three broad revenue streams: 1) System Design and Build (SDB), 2) Software, and 3) Training and Consulting services. We recognize revenue from SDB and software contracts mainly through the Performance Improvement Solutions segment and the training and consulting service contracts through both the Performance Improvement Solutions ("Performance") segment and Nuclear Industry Training and Consulting ("NITC")segment.

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

In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

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

Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer.  Revenue from the sale of subscription-based standalone software licenses, which do not require significant modification or customization, is recognized ratably over the term of such licenses following delivery to the customer.  Delivery is considered to have occurred when the customer receives a copy of the software and is able to use and benefit from the software.

A software license sale contract with multiple deliverables typically includes the following elements: license, installation and training services and PCS. The total transaction price of a software license sale contract is typically fixed, and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue is recognized when the installation and training is completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.

The contracts within the training and consulting services revenue stream are either time and materials (T&M) based or fixed-price based. Under a typical T&M contract, the Company is compensated based on the number of hours of approved time provided by temporary workers and the bill rates which are fixed by type of work, as well as approved expenses incurred. Customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (ASC) 606-10-55-18, Revenue from contracts with customers, we elected to apply the "right to invoice" practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each temporary worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under a typical fixed-price contract, we recognize the revenue using the completed contract method as we are not able to reasonably estimate costs to complete and contracts typically have a term of less than one month.

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

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2019

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

2. Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2016-02, Leases (Topic 842), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest applicable period presented in the consolidated financial statements, with certain practical expedients available.

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

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

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

Accounting pronouncements not yet adopted

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

In January 2017, the FASB issued ASU 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 Loss per Common Share

3 Months Ended

Mar. 31, 2019

Basic and Diluted Loss per Common Share [Abstract]

Basic and Diluted Loss per Common Share

3. Basic and Diluted Loss per Common Share

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

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

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

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Acquisitions

3 Months Ended

Mar. 31, 2019

Acquisitions [Abstract]

Acquisitions

4. Acquisitions

2019 Acquisition

DP Engineering

On February 15, 2019, through its wholly-owned subsidiary Performance Solutions, the Company entered into a membership interest purchase agreement with Steven L. Pellerin, Christopher A. Davenport, and DP Engineering (the “DP Engineering Purchase Agreement”), to purchase 100% of the membership interests in DP Engineering for $13.5 million. The purchase price is subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5 million, potentially payable in 2020 and 2021 depending on DP Engineering’s satisfaction of certain targets for adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") in calendar years 2019 and 2020, respectively.  The acquisition was completed through the drawdown of $14.3 million (including transaction costs) of the term loan. An escrow of approximately $1.7 million was funded at the closing and is available to GSE to satisfy indemnification claims for 18 months after the closing.

DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages, which is in line with our Performance  segment.  Located in Fort Worth, Texas, DP Engineering is well-regarded as a leading service provider to the nuclear power industry, having been designated an “engineer of choice” by two large power generation companies.  The Company's allocation of the purchase price remains preliminary and the net assets are subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.

Based on preliminary forecasted adjusted EBITDA of DP Engineering for year 2019 and 2020, as of the acquisition date, the estimated fair value of the total earn-out amount was $1.2 million.

The following table summarizes the calculation of adjusted purchase price as of the acquisition date (in thousands):

Base purchase price per agreement	$	13,500
Pre closing working capital adjustment		155
Fair value of contingent consideration		1,200
Total purchase price	$	14,855

The following table summarizes the consideration paid to acquire DP Engineering and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, contingent consideration, accrued compensation and the residual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of DP Engineering, net of cash acquired" line caption.

(in thousands)

Total purchase price	$	14,855
Purchase price allocation:
Cash		134
Contract receivables		2,934
Prepaid expenses and other current assets		209
Property, and equipment, net		210
Intangible assets		6,798
Other assets		1,806
Accounts payable and accrued expenses		(1,375	)
Other liabilities		(1,494	)
Total identifiable net assets		9,222
Goodwill		5,633
Net assets acquired	$	14,855

The fair value of the assets acquired includes gross trade receivables of $2.9 million, of which the Company expects to collect in full. GSE did not acquire any other class of receivable as a result of the acquisition of DP Engineering.

DP Engineering contributed revenue of $1.6 million to GSE for the period from February 15, 2019 to March 31, 2019.

The goodwill is primarily attributable to value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modification during plant outages, and the workforce of the acquired business and the significant synergies expected to arise after the acquisition of DP Engineering. The total amount of goodwill is expected to be tax deductible. All of the $5.6 million of goodwill was assigned to our Performance segment. As discussed above, the goodwill amount is provisional pending receipt of the final valuations of various assets and liabilities and is subject to adjustments within the measurement period, which is not to exceed one year from the acquisition date.

The Company identified other intangible assets of $6.8 million, including customer contracts and relationships, tradename, and non-compete agreements, with amortization periods of five to fifteen years. Please see Note 9 for further analysis on the carrying amount change due to impairment on goodwill and definite-lived intangible assets at March 31, 2019.

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

Intangible Assets	Weighted average amortization period		Fair Value
	(in years)		(in thousands)
Customer relationships		15	$	4,898
Tradename		10		1,172
Non-compete agreements		5		728
Total			$	6,798

2018 Acquisition

True North

On May 11, 2018, GSE, through its wholly-owned subsidiary Performance Solutions, entered into a membership interest purchase agreement with Donald R. Horn, Jenny C. Horn, and True North Consulting LLC (the "True North Purchase Agreement") to purchase 100% of the membership interests in True North Consulting LLC (True North) for $9.75 million. The purchase price was subject to customary pre- and post-closing working capital adjustments, resulting in total consideration of $9.9 million. The True North Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions subject to certain limitations. An escrow of $1.5 million was funded from the cash paid to the sellers of True North at the closing and is available to GSE to promote retention of key personnel and satisfy indemnification claims for 18 months after the closing. The acquisition of True North was completed on an all-cash transaction basis. In connection with the acquisition, we issued a $10.3 million term loan to finance the transaction (including the transaction costs). See note 14, for further details of the loan.

True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. Located in Montrose, Colorado, True North is a well-regarded service provider to leading companies in the power industry. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complementary talent pool to our employee base.

The following table summarizes the consideration paid to acquire True North and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. The Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, accrued compensation and the residual amount allocated to goodwill.

(in thousands)

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

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

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

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

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

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

Unaudited Pro Forma Financial Information

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

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

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

For the three months ended March 31, 2019, the Company has incurred $0.6 million of transaction costs related to the acquisition of DP Engineering. Due to a triggering event occurred after the acquisition as depicted in Note 9, an impairment test was conducted, which resulted in substantially writing down the estimated fair value of goodwill and definite-lived intangible assets initially recognized upon the acquisition. These expenses are included in general and administrative expense on GSE's consolidated statements of operations and are reflected in pro forma loss for the three months ended March 31, 2019, in the table above.

The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 1, 2018, nor is it intended to be an indication of future operating results.

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Restructuring Activities

3 Months Ended

Mar. 31, 2019

Restructuring Activities [Abstract]

Restructuring Expenses

5. Restructuring Activities

On December 27, 2017, the board of GSE Systems approved an international restructuring plan to streamline and optimize the Company's global operations. Beginning in December 2017, GSE has been in the process of consolidating its engineering services and R&D activities to Maryland and ceasing an unprofitable non-core business in the United Kingdom (UK). As a result, the Company closed its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improve Company productivity by eliminating duplicate employee functions, increasing GSE's focus on its core business, improving efficiency and maintaining the full range of engineering capabilities while reducing costs and organizational complexity.

GSE eliminated approximately 40 positions since 2017 due to these changes, primarily in Europe and India, and will undertake other cost-savings measures. The restructuring plan is expected to be completed by the end of 2019. As a result of these efforts, GSE expects to record a total restructuring charge of approximately $2.2 million, primarily related to workforce reductions, contract termination costs and asset write-offs due to the exit activities. As of March 31, 2019, we had recorded total restructuring charges totaling $2.0 million since 2017. We incurred no costs during the three months ended March 31, 2019. We recognized $1.3 million of restructuring cost for the year ended December 31, 2018. In addition to the total recognized restructuring costs, the Company has an estimated $1.7 million of cumulative translation adjustments that will be charged against net loss and an estimated $1.0 million of tax benefits that will be realized upon liquidation of these foreign entities. GSE expects to recognize the remaining restructuring costs, currency translation adjustments and tax benefits by the end of 2019.

For the three months ended March 31, 2019,  we made payments related to our restructuring for employee termination benefits for the amount of $52,000 that have been previously accrued. The accrued employee termination benefits were included in "accrued compensation", and the accrued lease termination costs were included in "accrued expenses" in the consolidated balance sheets.

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Contingent Consideration

3 Months Ended

Mar. 31, 2019

Contingent Consideration [Abstract]

Contingent Consideration

6. Contingent Consideration

Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, Business Combinations, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

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

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

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Contract Receivables

3 Months Ended

Mar. 31, 2019

Contract Receivables [Abstract]

Contract Receivables

7. Contract Receivables

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

The components of contract receivables are as follows:

(in thousands)	March 31,			December 31,
	2019			2018
Billed receivables	$	10,205		$	15,998
Unbilled receivables		8,859			5,506
Allowance for doubtful accounts		(428	)		(427	)
Total contract receivables, net	$	18,636		$	21,077

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

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

As of March 31, 2019, the Company had two customers that accounted for 18.7% and 20.2% of its consolidated contract receivables, respectively. As of December 31, 2018, the Company had one customer that accounted for 16.8% of its consolidated contract receivables.

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Software Development Costs, Net

3 Months Ended

Mar. 31, 2019

Software Development Costs [Abstract]

Software Development Costs

8. 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 $110,000 and $105,000 for the three months ended March 31, 2019 and 2018, respectively.  Total amortization expense was approximately $129,000 and $118,000 for the three months ended March 31, 2019 and 2018, respectively.

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Goodwill and Intangible Assets

3 Months Ended

Mar. 31, 2019

Goodwill and Intangible Assets [Abstract]

Goodwill and Intangible Assets

9. Goodwill and Intangible Assets

Goodwill

The Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company tests goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, which are the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includes Hyperspring and Absolute).

On February 15, 2019, we acquired DP Engineering (as depicted in Note 4) and preliminarily recorded goodwill and identified intangible assets as part of the acquisition. On February 23, 2019, an unexpected event occurred at one of DP Engineering's significant customers and all pending work for that customer was suspended pending a root cause analysis on February 28, 2019. While that analysis is now complete, and virtually all of the suspended projects have been restarted, the customer has indicated that DP Engineering will be suspended from obtaining new projects for up to six months from the date of original notice of suspension or approximately September 2019. While the Company and DP Engineering are working to rehabilitate the customer relationship, the Company determined that the notice of suspension was a triggering event necessitating an interim goodwill impairment test.

On May 10, 2019, the Company determined that a material impairment had occurred, requiring an interim assessment for impairment to be completed related to both $5.6 million of goodwill recorded and $6.8 million of definite-lived intangible assets in the acquisition.

The impairment test was based on income based approach with discounted cash flow method and market based approach with guideline public company method and merger and acquisition method.

The preliminary result of the interim impairment testing indicated that the current estimated fair value of goodwill recorded from the acquisition of DP Engineering had declined below its initial estimated fair value at the acquisition date. As a result, the Company recognized an impairment charge of $2.1 million to write down the goodwill on DP Engineering. The fair value of goodwill recognized from the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment based upon the preliminary purchase price allocation. The Company determined that the impact of the suspension of obtaining new contracts from that customer resulted in a material downward revision to DP Engineering's revenue and profitability forecasts when compared to the acquisition date valuation. The impairment charge on goodwill was recorded within "Loss on impairment" in our consolidated statements of operations.

Changes in the net carrying amount of goodwill from December 31, 2018 through March 31, 2019 were due to the acquisition of DP Engineering, and were comprised of the following items:

(in thousands)

	Performance Improvement Solutions			Nuclear Industry Training and Consulting		Total
Balance, January 1, 2019	$	4,739		$	8,431	$	13,170
Acquisition		5,633			-		5,633
Dispositions		-			-		-
Goodwill impairment loss		(2,094	)		-		(2,094	)
Balance, March 31, 2019	$	8,278		$	8,431	$	16,709

Intangible Assets Subject to Amortization

Amortization of intangible assets other than goodwill is recognized on a straight-line basis over the estimated useful life of the intangible assets, except for 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.

As discussed in Note 4, Acquisitions, we recognized definite-lived intangible assets of $6.8 million upon acquisition of DP Engineering on February 15, 2019, including customer contracts and relationships, trademarks and non-compete agreements, with amortization periods of five to fifteen years. Amortization of our definite-lived intangible assets is recognized on a straight-line basis over the estimate useful life of the associated assets.

As described above, following a February 23, 2019 event occurred at a customer location and subsequent receipt of a suspension notice on February 28, 2019, the Company has concluded that DP Engineering's relationship with a significant customer has been adversely impacted. The DP Engineering customer contracts and relationships were the major definite-lived intangible assets that were recognized upon the acquisition of DP Engineering. Accordingly, the Company determined that, in addition to the above describe testing of a potential impairment of goodwill, an interim definite-lived intangible asset impairment test was also necessary.

Therefore, the impairment test of the definite-lived intangible assets recognized upon the acquisition of DP Engineering was also conducted.

The interim impairment test was based on the present value of revised cash flow projected for five to fifteen years. The result of the impairment test indicated that the current estimated fair value of noted definite-lived intangible assets had declined below their initial estimated fair value. As a result, the Company recognized an impairment charge of $3.4 million. The fair value of definite-lived intangible assets recognized upon the acquisition of DP Engineering is still provisional and subject to further measurement period adjustment according to purchase price allocation. The impairment charge of $3.4 million on definite-lived intangible assets were recorded within "Loss on impairment" in our consolidated statements of operations.

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

(in thousands)

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

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

Amortization expense related to definite-lived intangible assets totaled $0.5 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years:

(in thousands)
Years ended December 31:
2019 (remainder)	$	1,536
2020		1,973
2021		1,470
2022		1,152
2023		868
Thereafter		2,000
Total	$	8,999

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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2019

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

10. Fair Value of Financial Instruments

ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1:  inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2:  inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  A Level 2 input must be observable for substantially the full term of the asset or liability. The Monte Carlo model was used to calculate the fair value of level 2 instrument liability award. The inputs used are current stock price, expected term, risk-free rate, number of trials, volatility and interest rates.

Level 3:  inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The contingent consideration was based on EBITDA.

At March 31, 2019, and December 31, 2018, the Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate fair value based upon their short-term nature.

As of March 31, 2019, the Company had four standby letters of credit totaling $1.9 million which represent performance bonds on three contracts.

For the three months ended March 31, 2019, the Company did not have any transfers between fair value Level 1, Level 2 or Level 3.  The Company did not hold any non-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at March 31, 2019.

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

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

Money market funds at both March 31, 2019 and December 31, 2018 are included in cash and cash equivalents in the respective consolidated balance sheets.

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

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

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

(in thousands)
Balance, January 1, 2019	$	-
Issuance of contingent consideration in connection with acquisitions		1,200
Change in fair value		(1,200	)
Balance, March 31, 2019	$	-

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Derivative Instruments

3 Months Ended

Mar. 31, 2019

Derivative Instruments [Abstract]

Derivative Instruments

11. Derivative Instruments

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

Foreign Currency Risk Management

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

As of March 31, 2019, the Company had foreign exchange contracts outstanding of approximately 3.2 million Euro. The contracts expire on various dates through December 2020. At December 31, 2018, the Company had contracts outstanding of approximately 3.2 million Euro at fixed rates.

Interest Rate Risk Management

As discussed in Note 13, the Company entered into a term loan to finance the acquisition of True North in May 2018. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company. As part of our overall risk management policies, in June 2018, the Company entered into a pay-fixed, receive-floating interest rate swap contract with a notional amount of $9.0 million to reduce the impact associated with interest rate fluctuations. The notional value amortizes monthly in equal amounts based on the five-year principal repayment terms. The terms of the swap require the Company to pay interest on the basis of a fixed rate of 3.02%, and the Company will receive interest on the basis of one-month USD-LIBOR-BBA-Bloomberg.

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

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

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

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

For the three months ended March 31, 2019 and 2018, the Company recognized net gain (loss) on its derivative instruments as outlined below:

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

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2019

Stock-Based Compensation [Abstract]

Stock-Based Compensation

12. Stock-Based Compensation

The Company recognizes stock-based compensation expense for all equity-based awards issued to employees, directors and non-employees that are expected to vest. Stock-based compensation expense is based on the fair value of awards as of the grant date.  The Company recognized $570,000 and $595,000 of stock-based compensation expense related to equity awards for the three months ended March 31, 2019 and 2018, respectively, under the fair value method. In addition to the stock-based compensation expense recognized, the Company also recognized $27,000 and $32,000 of expense related to the change in the fair value of cash-settled restricted stock units (RSUs) during the three months ended March 31, 2019 and 2018, respectively.

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

The Company's 1995 long-term incentive program (LTIP) provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and other Company employees. Vesting of the performance-vesting restricted stock units (PRSU's) is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during designated performance period as established by the Compensation Committee of the Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are  expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.

During the three months ended March 31, 2019, the Company granted approximately three hundred fifty thousand performance-vesting RSUs to employees with an aggregate fair value of $0.9 million. During three months ended March 31, 2018, the Company did not grant any performance-vesting RSUs. The Company did not any grant stock options for the three months ended March 31, 2019 and 2018.

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Debt

3 Months Ended

Mar. 31, 2019

Debt [Abstract]

Debt

13. Debt

The Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizens Bank, National Association (the Bank) on December 29, 2016, to fund general working capital needs, including acquisitions. On May 11, 2018, GSE  entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) with the Bank, amending and restating the Company's existing Credit and Security Agreement with the Bank, which included a $5.0 million asset-based revolving credit facility between the Company and the Bank, to now include (a) a $5.0 million revolving credit facility not subject to a borrowing base, including a letter of credit sub-facility, and (b) a $25.0 million delayed draw term loan facility available to be drawn upon for up to 18 months and to finance certain permitted acquisitions by the Company. The credit facilities mature in five years and bear interest at one-month LIBOR plus a margin that varies depending on the overall leverage ratio of the Company and its subsidiaries. Revolving loans are interest-only with principal due at maturity, while term loans require monthly payments of principal and interest based on an amortization schedule. The Company's obligations under the Credit Agreement are guaranteed by the Company's wholly-owned subsidiaries. The credit facilities are secured by liens on all assets of the Company. Attendant to the Company's acquisition of DP Engineering, the Company and the Bank entered into a Third Amendment and Reaffirmation Agreement and a Fourth Amendment and Reaffirmation Agreement on February 15, 2019 and March 20, 2019, respectively.

RLOC

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

At March 31, 2019, there were no outstanding borrowings under the RLOC and four letters of credit totaling $1.9 million. The amount available at March 31, 2019, after consideration of letters of credit was approximately $3.1 million.

Term Loan

As discussed in Note 4, we acquired DP Engineering on February 15, 2019 for approximately $13.5 million in cash. The purchase price was subject to customary pre- and post-closing working capital adjustments plus an additional earn-out amount not to exceed $5.0 million potentially payable in 2020 and 2021. We drew down $14.3 million to finance the acquisition of DP Engineering. The loan bears interest at the adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years.

As discussed in Note 4, we also acquired True North on May 11, 2018 for approximately $9.75 million in cash.  The purchase price was subject to customary pre and post-closing working capital adjustments. We drew down $10.3 million to finance the acquisition of True North, $0.5 million of which was repaid to the Bank on the same day. The loan bears interest at the adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company and matures in five years. We also incurred $70,000 debt issuance costs and $75,000 loan origination fees related to the Credit Agreement. Debt issuance costs and loan origination fees are reported as a direct deduction from the carrying amount of the loan and are amortized over the term of the loan using the effective interest method.

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

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

The Credit Agreement contains customary covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions after any applicable grace period could result in the obligations under the Credit Agreement becoming immediately due and payable and termination of the credit facilities. In addition to non-compliance with covenants and restrictions, the Credit Agreement also contains other customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the Bank may declare the obligations under the Credit Agreement to be immediately due and payable and may terminate the credit facilities. At March 31, 2019, the Company was in compliance with its financial covenants.

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Product Warranty

3 Months Ended

Mar. 31, 2019

Product Warranty [Abstract]

Product Warranty

14. Product Warranty

The Company accrues for estimated warranty costs at the time the related revenue is recognized based on historical experience and projected claims. The Company's SDB contracts generally provide a one-year base warranty on the systems. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.1 million, while the remaining $0.6 million is classified as long-term within other liabilities. The activity in the accrued warranty accounts is as follows:

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

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Revenue

3 Months Ended

Mar. 31, 2019

Revenue [Abstract]

Revenue

15. Revenue

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

The following table represents a disaggregation of revenue by type of goods or services for the three months ended March 31, 2019 and 2018, along with the reportable segment for each category:

(in thousands)

	Three months ended March 31,
	2019		2018
Performance Improvement Solutions segment
System Design and Build	$	6,442	$	7,495
Software		749		869
Training and Consulting Services		4,999		1,537
Nuclear Industry Training and Consulting segment
Training and Consulting Services		10,004		12,994
Total revenue	$	22,194	$	22,895

SDB contracts are typically fixed-priced, and we receive payments based on a billing schedule as established in our contracts. The transaction price for software contracts is generally fixed. Fees for software are normally due in advance of or shortly after delivery of the software. Fees for PCS are normally paid in advance of the service period. For Training and Consulting Services, the customers are generally billed on a regular basis, such as weekly, biweekly or monthly, for services provided. Contract liability, which we classify as billing in excess of revenue earned, relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied.

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

(in thousands)

	March 31, 2019		December 31, 2018
Billings in excess of revenue earned (BIE)	$	7,511	$	10,609
Revenue recognized in the period from amounts included in BIE at the beginning of the period	$	5,040		11,275

For an SDB contract, we generally have two main performance obligations: the training simulator build and PCS. The training simulator build generally includes hardware, software, and labor. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method. In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

For the three months ended March 31, 2019, the Company recognized revenue of $0.8 million related to performance obligations satisfied in previous periods.

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

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Income Taxes

3 Months Ended

Mar. 31, 2019

Income Taxes [Abstract]

Income Taxes

16. Income Taxes

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

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

The Company's income tax (benefit) provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. Tax expense in 2019 is comprised mainly of the tax impact of the loss for impairment, federal income tax expense, foreign income tax expense, and state tax expense. Tax expense in 2018 is comprised mainly of federal income tax expense, foreign income tax expense, and state tax expense.

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

Because of its net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations from the year 2000 and forward. The Company is subject to foreign tax examinations by tax authorities for years 2011 forward for Sweden, 2015 forward for China, 2015 forward for India, and 2016 forward for the UK.

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

The Company recognizes deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. The Company has evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on its India, Swedish and U.K. net deferred assets as of March 31, 2019.  The Company has determined that it will continue to assess a valuation allowance on its China deferred tax asset related to transfer pricing. The Company has determined that it is more likely than not that it will realize the benefits of its deferred taxes in the U.S.

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Leases

3 Months Ended

Mar. 31, 2019

Leases [Abstract]

Leases

17. Leases

The Company maintains leases of office facilities and equipment. Leases generally have remaining terms of one year to six years, whereas leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The Company recognizes lease expense for minimum lease payments on a straight-line basis over the term of the lease. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease, with renewal periods generally ranging from one year to five years. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disruption to operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease.

Upon the adoption of the new lease standard ASU 2016-02, on January 1, 2019, the Company elected the package of practical expedients permitted under the transition guidance within the amended guidance, which among other things, allowed registrants to carry forward historical lease classification. Accordingly, all existing leases that were classified as operating leases by the Company historically, were classified as operating leases.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets represent the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The Company's real estate leases, which are comprised primarily of office spaces, represent a majority of the lease liability. The majority of our lease payments are fixed, although an immaterial portion of payments are variable in nature. Variable lease payments vary based on changes in facts and circumstances related to the use of the ROU and are recorded as incurred. The Company uses an incremental borrowing rate based on rates available at commencement in determining the present value of future payments.

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. The Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

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

Operating Leases	Classification	March 31, 2019
Leased Assets
Operating lease - right of use assets	Long term assets	$	4,331
Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,088
Operating lease liabilities	Long term liabilities		3,703
		$	4,791

The Company has entered into a sublease with a tenant to rent out 3,822 of square feet from the lease at its Sykesville office on April 1, 2017, with the exact same consideration as on the head lease. The sublease does not relieve the Company of its primary lease obligation. The lessor agreement was an operating lease historically. The Company does not recognize underlying assets for the sublease as a lessor of the operating lease. The net amount received from the sublease is recorded within selling, general and administrative expenses.

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

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

⁽¹⁾Includes variable lease costs which are immaterial.

⁽²⁾Include leases maturity less than twelve months from the report date.

⁽³⁾ Sublease portfolio consists of the sublease part of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

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

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

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

Lease Term and Discount Rate	Three Months Ended March 31, 2019
Weighted-average remaining lease term (years)
Operating leases	4.44
Weighted-average discount rate
Operating leases	5%

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

(in thousands)

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

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Segment Information

3 Months Ended

Mar. 31, 2019

Segment Information [Abstract]

Segment Information

18. Segment Information

The Company has two reportable business segments. The Performance segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example engineering services include, but not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for ASME code and ASME Section XI. The Company provides these services through GSE, True North and DP Engineering across all market segments. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.

The NITC segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities. This business is managed through our Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.

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

On May 11, 2018, GSE, through our wholly-owned subsidiary GSE Performance Solutions, Inc., entered into the True North Purchase Agreement to purchase 100% of the membership interests in True North. True North is a provider of technical engineering solutions to nuclear and fossil fuel power plants with an emphasis on regulatory-driven ASME code programs. The acquisition of True North is expected to broaden our engineering services offering, expand our relationships with several of the largest nuclear energy providers in the United States, and add a highly specialized, complimentary talent pool to our employee base. For reporting purposes, True North is included in our Performance segment due to similarities in services provided including technical engineering solutions to the nuclear and fossil fuel power sector.

Due to the impairment described in Note 9 related to DP Engineering, we recognized charges totaling $5.5 million related to the impairment of certain definite-lived intangible assets and goodwill in our Performance segment.

Our primary measure of segment performance as shown in the table below excluded loss on impairment of intangible and goodwill, and the change in fair value of contingent consideration, net, which we do not believe are representative of the ongoing operations of the Performance segment. Excluding this discrete item from our segment measure of performance allows for better period over period comparison.

The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated loss before income taxes. Inter-segment revenue is eliminated in consolidation and is not significant:

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

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Non-consolidated Variable Interest Entity

3 Months Ended

Mar. 31, 2019

Non-consolidated Variable Interest Entity [Abstract]

Non-consolidated Variable Interest Entity

19.Non-consolidated Variable Interest Entity

The Company, through its wholly owned subsidiary DP Engineering, effectively holds 48% membership interest in DP-NXA Consultants LLC (DP-NXA) upon the acquisition of DP Engineering on February 15, 2019.

DP-NXA was established to provide in industrial services that include civil, structural, architectural, electrical, fire protection, plumbing, mechanical consulting engineering services to customers. DP-NXA sub-contracts their work to its two owners, NXA Consultants LLC (NXA), which owns 52% of the entity, and DP Engineering. DP Engineering and NXA contributed $48 and $52, respectively, for 48% and 52% interest in DP-NXA. DP Engineering recorded the contributed cash as an equity investment.

Upon the acquisition of DP Engineering, the Company evaluated the nature of DP Engineering's investment in DP-NXA and determined that DP-NXA is a variable interest entity (“VIE”). The Company does not have the power to direct activities that most significantly impact DP-NXA, and therefore, cannot be DP-NXA’s primary beneficiary. Furthermore, the Company concluded that it did not hold a controlling financial interest in DP-NXA since NXA, the VIE's majority owner, makes all operation and business decisions. As a result, the Company did not consolidate the assets and liabilities of the VIE in our financial statements.

The Company's maximum exposure to loss is limited to the investment in the VIE. As of March 31, 2019, the Company has not made any additional contributions to DP-NXA and its maximum exposure to loss relating to this unconsolidated VIE was immaterial. As of March 31, 2019, the Company does not have existing guarantee in relation to DP-NXA and any third-party it contracted with.

The Company will reevaluate if DP-NXA meets the definition of a VIE upon specific reconsideration of events.

The following table presents the carrying amount and classification of the assets related to the Company’s variable interests in non-consolidated VIE and the maximum exposure to loss at March 31, 2019.

(In thousands)	March 31, 2019
Assets
Cash:
Checking account	$	155
Total assets		155
Liabilities
Credit card and other payables		1
Total liabilities		1
Total net assets		154
Maximum exposure to loss	$	154

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2019

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

GSE is a leading provider of professional and technical engineering, staffing services, and simulation software to clients in the power and process industries. References in this report to “GSE,” the “Company,” “we” and “our” are to GSE Systems and its subsidiaries, collectively.

The consolidated interim financial statements included herein have been prepared by GSE Systems, Inc. (the Company, GSE, we, us, or our) and are unaudited. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2018 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 27, 2019.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. The Company’s most significant estimates relate to revenue recognition on contracts with customers, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired including impairment test, valuation of long-lived assets to be disposed of, valuation of contingent consideration issued in business acquisitions, valuation of stock-based compensation awards, 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 derives its revenue through three broad revenue streams: 1) System Design and Build (SDB), 2) Software, and 3) Training and Consulting services. We recognize revenue from SDB and software contracts mainly through the Performance Improvement Solutions segment and the training and consulting service contracts through both the Performance Improvement Solutions ("Performance") segment and Nuclear Industry Training and Consulting ("NITC")segment.

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

In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in the estimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.

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

Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer.  Revenue from the sale of subscription-based standalone software licenses, which do not require significant modification or customization, is recognized ratably over the term of such licenses following delivery to the customer.  Delivery is considered to have occurred when the customer receives a copy of the software and is able to use and benefit from the software.

A software license sale contract with multiple deliverables typically includes the following elements: license, installation and training services and PCS. The total transaction price of a software license sale contract is typically fixed, and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue is recognized when the installation and training is completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.

The contracts within the training and consulting services revenue stream are either time and materials (T&M) based or fixed-price based. Under a typical T&M contract, the Company is compensated based on the number of hours of approved time provided by temporary workers and the bill rates which are fixed by type of work, as well as approved expenses incurred. Customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (ASC) 606-10-55-18, Revenue from contracts with customers, we elected to apply the "right to invoice" practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each temporary worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under a typical fixed-price contract, we recognize the revenue using the completed contract method as we are not able to reasonably estimate costs to complete and contracts typically have a term of less than one month.

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

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Recent Accounting Pronouncements (Policies)

3 Months Ended

Mar. 31, 2019

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2016-02, Leases (Topic 842), a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest applicable period presented in the consolidated financial statements, with certain practical expedients available.

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

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

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

Accounting pronouncements not yet adopted

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

In January 2017, the FASB issued ASU 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 Loss per Common Share (Tables)

3 Months Ended

Mar. 31, 2019

Basic and Diluted Loss per Common Share [Abstract]

Weighted Average Number of Common Shares and Common Share Equivalents Used in the Determination of Basic and Diluted Loss Per Share

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

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

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Acquisitions (Tables)

3 Months Ended

Mar. 31, 2019

Business Acquisition [Abstract]

Business Acquisition, Pro Forma Information

Unaudited Pro Forma Financial Information

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

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

DP Engineering Ltd, CO. [Member]

Business Acquisition [Abstract]

Adjusted Purchase Price Consideration and Fair Value Adjustments

The following table summarizes the calculation of adjusted purchase price as of the acquisition date (in thousands):

Base purchase price per agreement	$	13,500
Pre closing working capital adjustment		155
Fair value of contingent consideration		1,200
Total purchase price	$	14,855

Consideration Paid For Assets Acquired and Liabilities Assumed

The following table summarizes the consideration paid to acquire DP Engineering and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. Due to the recent completion of the acquisition, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, contingent consideration, accrued compensation and the residual amount allocated to goodwill. The following amounts except for cash are all reflected in the consolidated statement of cash flows within the "Acquisition of DP Engineering, net of cash acquired" line caption.

(in thousands)

Total purchase price	$	14,855
Purchase price allocation:
Cash		134
Contract receivables		2,934
Prepaid expenses and other current assets		209
Property, and equipment, net		210
Intangible assets		6,798
Other assets		1,806
Accounts payable and accrued expenses		(1,375	)
Other liabilities		(1,494	)
Total identifiable net assets		9,222
Goodwill		5,633
Net assets acquired	$	14,855

Fair Value of Intangible Assets Acquired and Related Weighted Average Amortization Period

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

Intangible Assets	Weighted average amortization period		Fair Value
	(in years)		(in thousands)
Customer relationships		15	$	4,898
Tradename		10		1,172
Non-compete agreements		5		728
Total			$	6,798

True North Consulting, LLC [Member]

Business Acquisition [Abstract]

Consideration Paid For Assets Acquired and Liabilities Assumed

The following table summarizes the consideration paid to acquire True North and the preliminary fair value of the assets acquired and liabilities assumed at the date of the transaction. The Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair value. As of March 31, 2019, the Company had not finalized the determination of the fair value allocated to various assets and liabilities, including, but not limited to, contract receivables, prepaid expenses and other current assets, intangible assets, accounts payable, accrued expenses, accrued compensation and the residual amount allocated to goodwill.

(in thousands)

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

Fair Value of Intangible Assets Acquired and Related Weighted Average Amortization Period

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

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

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Contract Receivables (Tables)

3 Months Ended

Mar. 31, 2019

Contract Receivables [Abstract]

Contract Receivables

The components of contract receivables are as follows:

(in thousands)	March 31,			December 31,
	2019			2018
Billed receivables	$	10,205		$	15,998
Unbilled receivables		8,859			5,506
Allowance for doubtful accounts		(428	)		(427	)
Total contract receivables, net	$	18,636		$	21,077

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Goodwill and Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2019

Goodwill and Intangible Assets [Abstract]

Change in Net Carrying Amount of Goodwill

Changes in the net carrying amount of goodwill from December 31, 2018 through March 31, 2019 were due to the acquisition of DP Engineering, and were comprised of the following items:

(in thousands)

	Performance Improvement Solutions			Nuclear Industry Training and Consulting		Total
Balance, January 1, 2019	$	4,739		$	8,431	$	13,170
Acquisition		5,633			-		5,633
Dispositions		-			-		-
Goodwill impairment loss		(2,094	)		-		(2,094	)
Balance, March 31, 2019	$	8,278		$	8,431	$	16,709

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Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2019

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, 2019:

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

Money market funds at both March 31, 2019 and December 31, 2018 are included in cash and cash equivalents in the respective consolidated balance sheets.

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

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

Roll-Forward of the Fair Value of the Contingent Consideration

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, 2019:

(in thousands)
Balance, January 1, 2019	$	-
Issuance of contingent consideration in connection with acquisitions		1,200
Change in fair value		(1,200	)
Balance, March 31, 2019	$	-

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Derivative Instruments (Tables)

3 Months Ended

Mar. 31, 2019

Derivative Instruments [Abstract]

Estimated Fair Value of the Contracts in the Consolidated Balance Sheets

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

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

Net (Loss) Gain on Derivative Instruments

For the three months ended March 31, 2019 and 2018, the Company recognized net gain (loss) on its derivative instruments as outlined below:

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

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Debt (Tables)

3 Months Ended

Mar. 31, 2019

Debt [Abstract]

Outstanding Long-term Debt

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

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

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Product Warranty (Tables)

3 Months Ended

Mar. 31, 2019

Product Warranty [Abstract]

Activities in the Accrued 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 SDB contracts generally provide a one-year base warranty on the systems. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $1.1 million, while the remaining $0.6 million is classified as long-term within other liabilities. The activity in the accrued warranty accounts is as follows:

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

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Revenue (Tables)

3 Months Ended

Mar. 31, 2019

Revenue [Abstract]

Disaggregation of Revenue

The following table represents a disaggregation of revenue by type of goods or services for the three months ended March 31, 2019 and 2018, along with the reportable segment for each category:

(in thousands)

	Three months ended March 31,
	2019		2018
Performance Improvement Solutions segment
System Design and Build	$	6,442	$	7,495
Software		749		869
Training and Consulting Services		4,999		1,537
Nuclear Industry Training and Consulting segment
Training and Consulting Services		10,004		12,994
Total revenue	$	22,194	$	22,895

Balance of Contract Liabilities and Revenue Recognized in Reporting Period

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

(in thousands)

	March 31, 2019		December 31, 2018
Billings in excess of revenue earned (BIE)	$	7,511	$	10,609
Revenue recognized in the period from amounts included in BIE at the beginning of the period	$	5,040		11,275

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2019

Income Taxes [Abstract]

(Benefit) Provision for Income Taxes and Effective Tax Rates

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

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

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Leases (Tables)

3 Months Ended

Mar. 31, 2019

Leases [Abstract]

Classification of Operating ROU Assets and Lease Liabilities on the Balance Sheet

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

Operating Leases	Classification	March 31, 2019
Leased Assets
Operating lease - right of use assets	Long term assets	$	4,331
Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,088
Operating lease liabilities	Long term liabilities		3,703
		$	4,791

Lease Income and Expenses

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

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

⁽¹⁾Includes variable lease costs which are immaterial.

⁽²⁾Include leases maturity less than twelve months from the report date.

⁽³⁾ Sublease portfolio consists of the sublease part of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

Future Minimum Lease Payments

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

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

Operating Lease Weighted Average Remaining Lease Term And Discount Rate

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

Lease Term and Discount Rate	Three Months Ended March 31, 2019
Weighted-average remaining lease term (years)
Operating leases	4.44
Weighted-average discount rate
Operating leases	5%

Classification of Lease Payments in the Statement of Cash Flows

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

(in thousands)

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

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Segment Information (Tables)

3 Months Ended

Mar. 31, 2019

Segment Information [Abstract]

Reconciliation of Segment Revenue to Consolidated Revenue and Operating Results to Consolidated Income Before Income Taxes

The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated loss before income taxes. Inter-segment revenue is eliminated in consolidation and is not significant:

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

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Non-consolidated Variable Interest Entity (Tables)

3 Months Ended

Mar. 31, 2019

Non-consolidated Variable Interest Entity [Abstract]

Carrying Amount and Classification of Assets Related to Variable Interests

The following table presents the carrying amount and classification of the assets related to the Company’s variable interests in non-consolidated VIE and the maximum exposure to loss at March 31, 2019.

(In thousands)	March 31, 2019
Assets
Cash:
Checking account	$	155
Total assets		155
Liabilities
Credit card and other payables		1
Total liabilities		1
Total net assets		154
Maximum exposure to loss	$	154

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Summary of Significant Accounting Policies (Details)	3 Months Ended
	Mar. 31, 2019 Stream Obligation
Accounting Policies [Abstract]
Number of broad revenue streams | Stream	3
Number of performance obligations | Obligation	2
Warranty period	1 year
Minimum [Member]
Accounting Policies [Abstract]
Average time period to complete installation and training	1 day
Maximum [Member]
Accounting Policies [Abstract]
Average time period to complete installation and training	2 days

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Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Accounting Pronouncements Recently Adopted [Abstract]
Operating lease liability	$ 4,791
Right of use assets	4,331	$ 0
ASU 2016-02 [Member]
Accounting Pronouncements Recently Adopted [Abstract]
Operating lease liability	2,700
Right of use assets	$ 3,000

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Basic and Diluted Loss per Common Share (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Numerator [Abstract]
Net loss	$ (4,236)	$ (1,496)
Denominator [Abstract]
Weighted-average shares outstanding for basic loss per share (in shares)	19,950,746	19,514,385
Effect of dilutive securities [Abstract]
Employee stock options and warrants (in shares)	0	0
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share (in shares)	19,950,746	19,514,385
Shares related to dilutive securities excluded because inclusion would be anti-dilutive (in shares)	237,834	763,200

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Acquisitions, Consideration Paid For Acquisition (Details) $ in Thousands			2 Months Ended	3 Months Ended
	Feb. 15, 2019 USD ($) Company	May 11, 2018 USD ($)	Mar. 31, 2019 USD ($)	Mar. 31, 2019 USD ($)	Mar. 31, 2018 USD ($)		Dec. 31, 2018 USD ($)
Calculation of Adjusted Purchase Price [Abstract]
Fair value of contingent consideration				$ 1,200
Business Combination, Recognized Identifiable Assets Acquired, and Liabilities Assumed, Net [Abstract]
Goodwill			$ 16,709	16,709			$ 13,170
Revenue				22,194	$ 22,895	[1]
Net (loss) Income				$ (4,236)	$ (1,496)
DP Engineering Ltd, CO. [Member]
Business Acquisition [Abstract]
Percentage of ownership interest acquired	100.00%
Business acquisition, name of acquired entity				DP Engineering Ltd, CO.
Business acquisition, effective date of acquisition				Feb. 15, 2019
Calculation of Adjusted Purchase Price [Abstract]
Base purchase price per agreement	$ 13,500
Pre closing working capital adjustment	155
Fair value of contingent consideration	1,200
Total purchase price	14,855
Acquisition [Abstract]
Total purchase price	14,855
Business Combination, Recognized Identifiable Assets Acquired, and Liabilities Assumed, Net [Abstract]
Cash	134
Contract receivables	2,934
Prepaid expenses and other current assets	209
Property, and equipment, net	210
Intangible assets	6,798
Other assets	1,806
Accounts payable and accrued expenses	(1,375)
Other liabilities	(1,494)
Total identifiable net assets	9,222
Goodwill	5,633
Net assets acquired	14,855
Tax deductible goodwill	5,633
Cash consideration in escrow	1,687
Proceeds from issuance of debt	14,263
Earn-out amount	$ 5,000
Period to satisfy indemnification claims	18 months
Number of large power generation companies | Company	2
Transaction costs			628	$ 628
Revenue			$ 1,581
True North Consulting, LLC [Member]
Business Acquisition [Abstract]
Percentage of ownership interest acquired		100.00%
Business acquisition, name of acquired entity				True North Consulting LLC
Business acquisition, effective date of acquisition				May 11, 2018
Calculation of Adjusted Purchase Price [Abstract]
Base purchase price per agreement		$ 9,750
Total purchase price		9,915
Acquisition [Abstract]
Total purchase price		9,915
Business Combination, Recognized Identifiable Assets Acquired, and Liabilities Assumed, Net [Abstract]
Cash		306
Contract receivables		1,870
Prepaid expenses and other current assets		8
Property, and equipment, net		1
Intangible assets		5,088
Accounts payable and accrued expenses		(1,744)
Accrued compensation		(353)
Total identifiable net assets		5,176
Goodwill		4,739
Net assets acquired		9,915
Tax deductible goodwill		4,739
Cash consideration in escrow		1,463
Proceeds from issuance of debt		$ 10,300
Period to satisfy indemnification claims		18 months

[1] Prior period amounts have not been adjusted under the modified retrospective transition method for the adoption of ASC 606.

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Acquisitions, Intangible Assets (Details) - USD ($) $ in Thousands			3 Months Ended
	Feb. 15, 2019	May 11, 2018	Mar. 31, 2019
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired			$ 6,798
DP Engineering Ltd, CO. [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired	$ 6,798
DP Engineering Ltd, CO. [Member] | Minimum [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets, weighted average useful life	5 years
DP Engineering Ltd, CO. [Member] | Maximum [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets, weighted average useful life	15 years
True North Consulting, LLC [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired		$ 5,088
True North Consulting, LLC [Member] | Minimum [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets, weighted average useful life		4 years
True North Consulting, LLC [Member] | Maximum [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets, weighted average useful life		15 years
Customer Relationships [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired			4,898
Customer Relationships [Member] | DP Engineering Ltd, CO. [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired	$ 4,898
Finite-lived intangible assets, weighted average useful life	15 years
Customer Relationships [Member] | True North Consulting, LLC [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired		$ 3,758
Finite-lived intangible assets, weighted average useful life		15 years
Tradename [Member] | DP Engineering Ltd, CO. [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired	$ 1,172
Finite-lived intangible assets, weighted average useful life	10 years
Tradename [Member] | True North Consulting, LLC [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired		$ 582
Finite-lived intangible assets, weighted average useful life		10 years
Non-compete Agreements [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired			$ 728
Non-compete Agreements [Member] | DP Engineering Ltd, CO. [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired	$ 728
Finite-lived intangible assets, weighted average useful life	5 years
Non-compete Agreements [Member] | True North Consulting, LLC [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired		$ 221
Finite-lived intangible assets, weighted average useful life		4 years
Alliance Agreements [Member] | True North Consulting, LLC [Member]
Acquired Finite-Lived Intangible Assets [Abstract]
Finite-lived intangible assets acquired		$ 527
Finite-lived intangible assets, weighted average useful life		5 years

XML

Acquisitions, Pro Forma Financial Information (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Business Acquisition, Pro Forma Information [Abstract]
Revenue	$ 25,178	$ 29,889
Net loss	$ (3,451)	$ (3,629)

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Restructuring Activities (Details) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2019 USD ($) Position	Mar. 31, 2018 USD ($)	Dec. 31, 2018 USD ($)
Restructuring Activities [Abstract]
Restructuring and related cost, expected number of positions eliminated | Position	40
Expected restructuring costs	$ 2,200
Restructuring cost, cost incurred to date	2,000
Restructuring charges	0	$ 917	$ 1,300
Cumulative translation adjustment	1,700
Tax benefit	1,000
Payments	$ (52)

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Contingent Consideration (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2019	Feb. 15, 2019
Contingent Consideration [Abstract]
Fair value of contingent consideration		$ 0	$ 1,200
Contingent liability outstanding	$ 0	$ 0
Payments of the liability-classified contingent consideration arrangements	$ (1,701)

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Contract Receivables (Details) $ in Thousands	1 Months Ended	3 Months Ended		12 Months Ended
	Apr. 30, 2019 USD ($)	Mar. 31, 2019 USD ($) Customer	Mar. 31, 2018 USD ($)	Dec. 31, 2018 USD ($) Customer
Contract Receivables [Abstract]
Maximum term of contract receivables		12 months
Components of contract receivables [Abstract]
Billed receivables		$ 10,205		$ 15,998
Unbilled receivables		8,859		5,506
Allowance for doubtful accounts		(428)		(427)
Total contract receivables, net		18,636		$ 21,077
Provision for Doubtful Accounts		0	$ 0
Unbilled Contract Receivables [Abstract]
Unbilled contract receivables billed during Apr 2019		$ (3,185)	$ (1,127)
Subsequent Event [Member]
Unbilled Contract Receivables [Abstract]
Unbilled contract receivables billed during Apr 2019	$ 6,200
Contract Receivable [Member]
Concentration Risk [Abstract]
Number of customers accounting for contract receivables | Customer		2		1
Percentage of contract receivables accounted by major customers				16.80%
Contract Receivable [Member] | Customer One [Member]
Concentration Risk [Abstract]
Percentage of contract receivables accounted by major customers		18.70%
Contract Receivable [Member] | Customer Two [Member]
Concentration Risk [Abstract]
Percentage of contract receivables accounted by major customers		20.20%

XML

Software Development Costs, Net (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Software Development Costs [Abstract]
Economic life of product	3 years
Software development costs capitalized	$ 110	$ 105
Capitalized software amortization	$ 129	$ 118

XML

Goodwill and Intangible Assets (Details) $ in Thousands		3 Months Ended
	Feb. 15, 2019 USD ($)	Mar. 31, 2019 USD ($) Segment	Mar. 31, 2018 USD ($)	Dec. 31, 2018 USD ($)
Goodwill and Intangible Assets [Abstract]
Number of reporting units | Segment		2
Number of operating segments | Segment		2
Goodwill [Roll Forward]
Net book value, beginning balance		$ 13,170
Acquisition		5,633
Dispositions		0
Goodwill impairment loss		(2,094)
Net book value, ending balance		16,709
Amortized Intangible Assets [Abstract]
Gross carrying amount		9,945		$ 9,945
Accumulated amortization		(4,374)		(3,865)
Addition		6,798
Impairment		(3,370)
Net		8,999		6,080
Impairment charge on definite-lived intangible assets		3,370
Amortization of definite-lived intangible assets		509	$ 150
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
2019		1,536
2020		1,973
2021		1,470
2022		1,152
2023		868
Thereafter		2,000
Total		8,999		6,080
Fair value of contingent consideration		$ 1,200
Amortization term of intangible assets acquired		3 years
Customer Relationships [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		$ 6,831		6,831
Accumulated amortization		(2,745)		(2,375)
Addition		4,898
Impairment		(3,370)
Net		5,614		4,456
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		5,614		4,456
Trade Names [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		1,295		1,295
Accumulated amortization		(405)		(318)
Addition		1,172
Impairment		0
Net		2,062		977
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		2,062		977
Developed Technology [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		471		471
Accumulated amortization		(471)		(471)
Net		0		0
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		0		0
Non Contractual Customer Relationships [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		433		433
Accumulated amortization		(433)		(433)
Net		0		0
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		0		0
Noncompete Agreements [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		221		221
Accumulated amortization		(61)		(35)
Addition		728
Impairment		0
Net		888		186
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		888		186
Alliance Agreement [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		527		527
Accumulated amortization		(92)		(66)
Net		435		461
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		435		461
Others [Member]
Amortized Intangible Assets [Abstract]
Gross carrying amount		167		167
Accumulated amortization		(167)		(167)
Net		0		0
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Total		0		$ 0
Performance Improvement Solutions [Member]
Goodwill [Roll Forward]
Net book value, beginning balance		4,739
Acquisition		5,633
Dispositions		0
Goodwill impairment loss		(2,094)
Net book value, ending balance		8,278
Nuclear Industry Training and Consulting [Member]
Goodwill [Roll Forward]
Net book value, beginning balance		8,431
Acquisition		0
Dispositions		0
Goodwill impairment loss		0
Net book value, ending balance		$ 8,431
DP Engineering Ltd, CO. [Member]
Goodwill [Roll Forward]
Net book value, ending balance	$ 5,633
Amortized Intangible Assets [Abstract]
Addition	$ 6,798
Period of suspension from obtaining new work	6 months
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Fair value of contingent consideration	$ 1,200
DP Engineering Ltd, CO. [Member] | Minimum [Member]
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Amortization term of intangible assets acquired		5 years
DP Engineering Ltd, CO. [Member] | Maximum [Member]
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
Amortization term of intangible assets acquired		15 years
DP Engineering Ltd, CO. [Member] | Customer Relationships [Member]
Amortized Intangible Assets [Abstract]
Addition	4,898
DP Engineering Ltd, CO. [Member] | Noncompete Agreements [Member]
Amortized Intangible Assets [Abstract]
Addition	$ 728

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Fair Value of Financial Instruments (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($) Letter	Dec. 31, 2018 USD ($)
Performance Bond [Abstract]
Number of standby letters of credit | Letter	4
Letter of credit and surety bonds	$ 1,900
Assets and liabilities measured at fair value [Abstract]
Money market funds	825	$ 824
Foreign exchange contracts	145	43
Total assets	970	867
Liability awards	(232)	(118)
Interest rate swap contract	(128)	(103)
Total liabilities	(360)	(221)
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets and liabilities measured at fair value [Abstract]
Money market funds	825	824
Foreign exchange contracts	0	0
Total assets	825	824
Liability awards	0	0
Interest rate swap contract	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	145	43
Total assets	145	43
Liability awards	(232)	(118)
Interest rate swap contract	(128)	(103)
Total liabilities	(360)	(221)
Significant Unobservable Inputs (Level 3) [Member]
Assets and liabilities measured at fair value [Abstract]
Money market funds	0	0
Foreign exchange contracts	0	0
Total assets	0	0
Liability awards	0	0
Interest rate swap contract	0	0
Total liabilities	0	$ 0
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning balance	0
Issuance of contingent consideration in connection with acquisitions	1,200
Change in fair value	(1,200)
Ending balance	$ 0

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Derivative Instruments, Foreign Exchange Contracts (Details) - EUR (€) € in Millions	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Derivative [Abstract]
Expiration date of contract	Dec. 31, 2020
Foreign Exchange Contracts [Member]
Derivative [Abstract]
Foreign exchange contract outstanding	€ 3.2	€ 3.2

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Derivative Instruments, Interest Rate Risk Management (Details) $ in Millions	3 Months Ended
	Mar. 31, 2019 USD ($)
Interest Rate Swap [Member]
Derivative [Abstract]
Notional amount	$ 9.0
Principal repayment term	5 years
Fixed interest rate	3.02%
Term Loan [Member] | Minimum [Member]
Derivative [Abstract]
Debt instrument, basis spread on variable rate	2.00%
Term Loan [Member] | Maximum [Member]
Derivative [Abstract]
Debt instrument, basis spread on variable rate	2.75%
LIBOR [Member]
Derivative [Abstract]
Term of variable rate	1 month
LIBOR - BBA Bloomberg [Member]
Derivative [Abstract]
Term of variable rate	1 month

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Derivative Instruments, Fair Values Derivatives, Balance Sheet Location (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Asset derivatives	$ 145	$ 43
Liability derivatives	(128)	(103)
Net fair value	17	(60)
Foreign Exchange Contracts [Member] | Prepaid Expenses and Other Current Assets [Member]
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Asset derivatives	145	43
Interest Rate Swaps [Member] | Other Liabilities [Member]
Estimated fair value of the contracts in the consolidated balance sheets [Abstract]
Liability derivatives	$ (128)	$ (103)

XML

Derivative Instruments, (Loss) Gain on Derivative Instruments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Net (Loss) Gain on Derivative Instruments [Abstract]
Interest rate swap - change in fair value	$ (26)	$ 0
Foreign exchange contracts - change in fair value	102	(118)
Remeasurement of related contract receivables and billings in excess of revenue earned	17	(38)
Gain (loss) on derivative instruments, net	$ 93	$ (156)

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Stock-Based Compensation (Details)	3 Months Ended
	Mar. 31, 2019 USD ($) qtr shares	Mar. 31, 2018 USD ($) qtr shares
Restricted Stock Units [Member]
Share-based Compensation [Abstract]
Stock-based compensation expense	$ 27,000	$ 32,000
Granted market-based RSUs (in shares) | shares	350,000	0
Aggregate fair value for market-based RSUs	$ 900,000
Granted time-based RSUs (in shares) | shares	300,000	200,000
Aggregate fair value for time-based RSUs	$ 800,000	$ 700,000
Number of quarters RSU's will vest quarterly | qtr	8	8
Period in which RSU's will vest annually in equal amounts	3 years	3 years
Restricted Stock Units [Member] | Minimum [Member]
Share-based Compensation [Abstract]
Requisite service period	1 year
Restricted Stock Units [Member] | Maximum [Member]
Share-based Compensation [Abstract]
Requisite service period	3 years
Stock Option [Member]
Share-based Compensation [Abstract]
Stock-based compensation expense	$ 570,000	$ 595,000
Shares granted under stock options (in shares) | shares	0	0
Fair value of shares granted under stock option plan	$ 0

XML

Debt (Details) $ in Thousands			3 Months Ended
	Feb. 15, 2019 USD ($)	May 11, 2018 USD ($)	Mar. 31, 2019 USD ($) Letter	Dec. 31, 2018 USD ($)	Dec. 29, 2016 USD ($)
Line of Credit Facility [Abstract]
Number of letters of credit | Letter			4
Long-term Debt, Current and Noncurrent [Abstract]
Long-term debt, net of discount				$ 8,512
Less: current portion of long-term debt				(1,902)
Long-term debt, less current portion				$ 6,610
LIBOR [Member]
Term Loan [Abstract]
Term of variable rate			1 month
Citizen's Bank [Member] | Revolving Credit Facility [Member]
Line of Credit Facility [Abstract]
Line of credit facility expiration period			3 years
Principal amount of the line of credit					$ 5,000
Line of credit facility term			5 years
Outstanding letter of credit balance			$ 0
Number of letters of credit | Letter			4
Outstanding letter of credit balance			$ 1,900
Line of credit facility, remaining borrowing capacity			$ 3,100
Citizen's Bank [Member] | Revolving Credit Facility [Member] | Minimum [Member]
Line of Credit Facility [Abstract]
Percentage of letter of credit fees per annum			1.25%
Citizen's Bank [Member] | Revolving Credit Facility [Member] | Maximum [Member]
Line of Credit Facility [Abstract]
Percentage of letter of credit fees per annum			2.00%
Delayed Draw Term Loan [Member]
Long-term Debt, Current and Noncurrent [Abstract]
Long-term debt, net of discount			$ 22,104
Less: current portion of long-term debt			(4,763)
Long-term debt, less current portion			$ 17,341
Delayed Draw Term Loan [Member] | Minimum [Member]
Term Loan [Abstract]
Debt instrument, basis spread on variable rate			2.00%
Delayed Draw Term Loan [Member] | Maximum [Member]
Term Loan [Abstract]
Debt instrument, basis spread on variable rate			2.75%
Delayed Draw Term Loan [Member] | Citizen's Bank [Member] | LIBOR [Member]
Term Loan [Abstract]
Term of variable rate			1 month
Delayed Draw Term Loan [Member] | Citizen's Bank [Member] | Minimum [Member]
Term Loan [Abstract]
Debt instrument, basis spread on variable rate			2.00%
Delayed Draw Term Loan [Member] | Citizen's Bank [Member] | Maximum [Member]
Line of Credit Facility [Abstract]
Line of credit facility expiration period			18 months
Term Loan [Abstract]
Debt instrument, basis spread on variable rate			2.75%
Delayed Draw Term Loan [Member] | Citizen's Bank [Member] | Revolving Credit Facility [Member]
Line of Credit Facility [Abstract]
Principal amount of the line of credit		$ 25,000
DP Engineering Ltd, CO. [Member]
Term Loan [Abstract]
Cash purchase price	$ 13,500
Proceeds from issuance of debt	14,263
Earn-out amount	$ 5,000
DP Engineering Ltd, CO. [Member] | Delayed Draw Term Loan [Member]
Line of Credit Facility [Abstract]
Line of credit facility term	5 years
DP Engineering Ltd, CO. [Member] | Delayed Draw Term Loan [Member] | LIBOR [Member]
Term Loan [Abstract]
Term of variable rate			1 month
DP Engineering Ltd, CO. [Member] | Delayed Draw Term Loan [Member] | Minimum [Member]
Term Loan [Abstract]
Debt instrument, basis spread on variable rate	2.00%
DP Engineering Ltd, CO. [Member] | Delayed Draw Term Loan [Member] | Maximum [Member]
Term Loan [Abstract]
Debt instrument, basis spread on variable rate	2.75%
True North Consulting, LLC [Member]
Term Loan [Abstract]
Cash purchase price		9,750
Proceeds from issuance of debt		10,300
True North Consulting, LLC [Member] | Delayed Draw Term Loan [Member]
Line of Credit Facility [Abstract]
Line of credit facility term			5 years
Term Loan [Abstract]
Proceeds from issuance of debt		10,300
Repayments of debt		$ 500
Debt issuance costs			$ 70
Loan origination fees			$ 75
True North Consulting, LLC [Member] | Delayed Draw Term Loan [Member] | LIBOR [Member]
Term Loan [Abstract]
Term of variable rate			1 month

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Product Warranty (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Product warranty provision [Abstract]
Warranty terms for SDB contracts	1 year
Accrued warranty, current	$ 1,123
Accrued warranty, noncurrent	562
Activities in product warranty account [Abstract]
Balance, January 1, 2018	1,621
Current period provision	89
Current period claims	(27)
Currency adjustment	2
Balance at September 30, 2018	$ 1,685

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Revenue (Details) $ in Thousands	3 Months Ended			12 Months Ended
	Mar. 31, 2019 USD ($) Stream Obligation	Mar. 31, 2018 USD ($)		Dec. 31, 2018 USD ($)
Disaggregation of Revenue [Abstract]
Revenue	$ 22,194	$ 22,895	[1]
Number of broad revenue streams | Stream	3
Contract with Customer, Asset and Liability [Abstract]
Billings in excess of revenue earned (BIE)	$ 7,511			$ 10,609
Revenue recognized in the period from amounts included in BIE at the beginning of the period	5,040			$ 11,275
Amount of revenue recognized related to performance obligations satisfied in previous periods	$ 824
Revenue, Performance Obligation [Abstract]
Number of performance obligations | Obligation	2
Remaining performance obligation	$ 33,702
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-04-01
Revenue, Performance Obligation [Abstract]
Expected period to recognize revenue as performance obligations are satisfied	12 months
Performance Improvement Solutions [Member]
Disaggregation of Revenue [Abstract]
Revenue	$ 12,190	9,901
Performance Improvement Solutions [Member] | System Design and Build [Member]
Disaggregation of Revenue [Abstract]
Revenue	6,442	7,495	[1]
Performance Improvement Solutions [Member] | Software [Member]
Disaggregation of Revenue [Abstract]
Revenue	749	869	[1]
Performance Improvement Solutions [Member] | Training and Consulting Services [Member]
Disaggregation of Revenue [Abstract]
Revenue	4,999	1,537	[1]
Nuclear Industry Training and Consulting [Member]
Disaggregation of Revenue [Abstract]
Revenue	10,004	12,994
Nuclear Industry Training and Consulting [Member] | Training and Consulting Services [Member]
Disaggregation of Revenue [Abstract]
Revenue	$ 10,004	$ 12,994	[1]

[1] Prior period amounts have not been adjusted under the modified retrospective transition method for the adoption of ASC 606.

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Income Taxes [Abstract]
(Benefits) provision for income taxes	$ (1,848)	$ 259
Effective tax rate	30.40%	(20.90%)
Statutory federal income tax rate	21.00%
Income Tax Examination [Abstract]
Probability of uncertain tax position to be recognized	50.00%
Percentage of tax position realized upon ultimate settlement	50.00%
Sweden [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination	2011
China [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination	2015
India [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination	2015
UK [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination	2016
Federal [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination	2000
State [Member]
Income Tax Examination [Abstract]
Income tax examination, year under examination	2000

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Leases (Details) $ in Thousands		3 Months Ended
		Mar. 31, 2019 USD ($) Squarefeet	Dec. 31, 2018 USD ($)
Lessee, Operating Lease, Description [Abstract]
Sublease date		Apr. 01, 2017
Sublease square feet | Squarefeet		3,822
Leased Assets [Abstract]
Operating lease - right of use assets		$ 4,331	$ 0
Lease Liabilities [Abstract]
Operating lease liabilities - Current		1,088
Operating lease liabilities		3,703	$ 0
Operating lease liability		4,791
Consolidated Statement of Operations Information [Abstract]
Operating lease cost	[1]	228
Short-term leases costs	[2]	38
Sublease income	[3]	(16)
Net lease cost		250
Minimum Lease Payments [Abstract]
2019		986
2020		1,246
2021		1,216
2022		1,157
2023		622
After 2023		107
Total lease payments		5,334
Less: Interest		543
Operating lease liability		$ 4,791
Lease Term and Discount Rate [Abstract]
Lessee, Operating Lease, Remaining Lease Term		4 years 5 months 8 days
Weighted average discount rate		5.00%
Supplemental Cash Flow Information Other Information [Abstract]
Operating cash flows used in operating Leases		$ 235
Cash paid for amounts included in measurement of liabilities		235
Right-of-use assets obtained in exchange for new operating liabilities		$ 1,777
Minimum [Member]
Lessee, Operating Lease, Description [Abstract]
Remaining operating lease terms		1 year
Renewal option period		1 year
Maximum [Member]
Lessee, Operating Lease, Description [Abstract]
Remaining operating lease terms		6 years
Renewal option period		5 years

[1] Includes variable lease costs which are immaterial.

[2] Include leases maturity less than twelve months from the report date.

[3] Sublease portfolio consists of the sublease part of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

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Segment Information (Details) $ in Thousands		2 Months Ended	3 Months Ended
	Feb. 15, 2019 Company	Mar. 31, 2019 USD ($)	Mar. 31, 2019 USD ($) Segment	Mar. 31, 2018 USD ($)		May 11, 2018
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Number of reportable business segments | Segment			2
Contract term			2 years
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue			$ 22,194	$ 22,895	[1]
Operating loss			(5,991)	(1,128)
Loss on impairment			(5,464)	0
Change in fair value of contingent consideration			1,200	0
Interest (expense) income, net			(208)	22
Gain (loss) on derivative instruments, net			93	(156)
Other income, net			22	25
Loss before income taxes			(6,084)	(1,237)
Performance Improvement Solutions [Member]
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue			12,190	9,901
Operating loss			(802)	(790)
Nuclear Industry Training and Consulting [Member]
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue			10,004	12,994
Operating loss			$ (925)	$ (338)
DP Engineering Ltd, Co [Member]
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Percentage of ownership interest acquired	100.00%
Number of large power generation companies | Company	2
Segment Reporting Information, Profit (Loss) [Abstract]
Revenue		$ 1,581
True North Consulting, LLC [Member]
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Percentage of ownership interest acquired						100.00%

[1] Prior period amounts have not been adjusted under the modified retrospective transition method for the adoption of ASC 606.

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Non-consolidated Variable Interest Entity (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Cash [Abstract]
Total assets	$ 71,424	$ 61,440
Liabilities [Abstract]
Total liabilities	$ 44,156	$ 30,311
DP Engineering Ltd, Co [Member]
Variable Interest Entity [Line Items]
Ownership percentage	48.00%
Contribution amount	$ 48
NXA Consultants LLC [Member]
Variable Interest Entity [Line Items]
Ownership percentage	52.00%
Contribution amount	$ 52
Variable Interest Entity, Not Primary Beneficiary [Member]
Cash [Abstract]
Checking account	155
Total assets	155
Liabilities [Abstract]
Credit card and other payables	1
Total liabilities	1
Total net assets	154
Maximum exposure to loss	$ 154