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GSE SystemsGSE SYSTEMS INC FORM 10-K (Annual Report) Filed 03/16/18 for the Period Ending 12/31/17 Address Telephone CIK 1332 LONDONTOWN BLVD SYKESVILLE, MD, 21784 4109707874 0000944480 Symbol GVP SIC Code Industry Sector Fiscal Year 7372 - Services-Prepackaged Software Software Technology 12/31 http://www.edgar-online.com © Copyright 2018, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title of each class Name of each exchange on which registeredCommon Stock, $.01 par value NYSE AmericanSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONEIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during 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 requirementsfor the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. [ ]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" inRule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☒Emerging growth company ☐ (Do not check if a smaller reportingcompany) 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 orrevised 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 o No ☒The aggregate market value of Common Stock held by non-affiliates of the Registrant was $56,765,904 on June 30, 2017, the last business day of theRegistrant's most recently completed second fiscal quarter, based on the closing price of such stock on that date of $3.10.The number of shares outstanding of the registrant's Common Stock as of February 28, 2018 was 19,425,905 shares.DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the SecuritiesExchange Act of 1934, as amended, are incorporated by reference into Part III. 1 TABLE OF CONTENTSPART I PageItem 1.Business3Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments15Item 2.Properties15Item 3.Legal Proceedings15Item 4.Mine Safety Disclosures15 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities16Item 6.Selected Financial Data16Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations17Item 7A.Quantitative and Qualitative Disclosures About Market Risk26Item 8.Financial Statements and Supplementary Data27Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure60Item 9A.Controls and Procedures60Item 9B.Other Information60 PART III Item 10.Directors, Executive Officers and Corporate Governance*60Item 11.Executive Compensation*61Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*61Item 13.Certain Relationships and Related Transactions, and Director Independence*62Item 14.Principal Accountant Fees and Services*62 PART IV Item 15.Exhibits and Financial Statement Schedules62Item 16.Form 10-K Summary63 SIGNATURES65*to be incorporated by reference from the Proxy Statement for the registrant's 2018 Annual Meeting of Shareholders.2 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 of1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on management's assumptions, expectations andprojections about us, and the industry within which we operate, and that have been made pursuant to the Private Securities Litigation Reform Act of 1995reflecting our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, wordssuch as "anticipate", "believe", "continue", "estimate", "intend", "may", "plan", "potential", "predict", "expect", "should", "will" and similar expressions, or thenegative of these terms or other comparable terminology, have been used to identify these forward-looking statements. These forward-looking statements may alsouse 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, 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 notactually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-lookingstatements. 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 orcircumstances. We caution you that a variety of factors, including but not limited to the factors described below under Item 1A Risk Factors and the following,could cause our business conditions and results to differ materially from what is contained in forward-looking statements:-changes in the rate of economic growth in the United States and other major international economies;-changes in investment by the nuclear and fossil electric utility industry, the chemical and petrochemical industries, or the U.S. military;-changes in the financial condition of our customers;-changes in the regulatory environment;-changes in project design or schedules;-contract cancellations;-changes in our estimates of costs to complete projects;-changes in trade, monetary and fiscal policies worldwide;-currency fluctuations;-war and/or terrorist attacks on facilities either owned by our customers or our company, or where equipment or services are or may be provided;-initiation, prosecution, or outcomes of future litigation;-protection and validity of our trademarks and other intellectual property rights;-increasing competition by foreign and domestic companies;-compliance with our debt covenants;-recoverability of claims against our customers and others; and-changes in estimates used in our critical accounting policies.Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such otherassumptions 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 topredict accurately and are generally beyond our control. You should consider the areas of risk described above and in Item 1A Risk Factors in connection with anyforward-looking statements that may be made by us. You should not place undue reliance on any forward-looking statements. New factors emerge from time totime, 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 areadvised, 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 withthe SEC.Company Information Available on the InternetOur Internet address is www.gses.com . We make available free of charge through our Internet site our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; proxy statements, and any amendment to those reports filed or furnished pursuant to the Exchange Act as soon as reasonablypracticable after such material is electronically filed with, or furnished to, the SEC. PART IITEM 1. BUSINESS .GSE Systems, Inc. (GSE Systems, GSE, the Company, we, us or our), a NYSE American company trading under the symbol GVP, is a world leader in real-timehigh-fidelity simulation and provides a wide range of simulation, consulting, training, and engineering solutions to the global power and process industries. Weprovide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue throughimproved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services thatsystematically help clients fill key vacancies in the organization on a short-term basis, primarily in procedures, engineering, technical support, and training focusedon regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation softwarefor the refining, chemical, and petrochemical industries, through our wholly-owned subsidiary GSE Performance Solutions, Inc.We execute projects globally with approximately 388 employees operating from offices in the U.S. and China and at client sites. While the majority of revenuecomes from the nuclear power market, we also serve the fossil, refining, chemical, and petrochemical markets. GSE Systems was formed on March 30, 1994 to consolidate the simulation and related businesses of General Physics International Engineering & Simulation,S3 Technologies, and EuroSim. The Company completed its Initial Public Offering in 1995.On November 14, 2014, we acquired Hyperspring, LLC. Hyperspring is a nuclear industry training and consulting firm that primarily provides highly skilled, high-value professionals to fill training and consulting positions on a contract basis for nuclear power plant operators. Hyperspring professionals provide training,operations and maintenance support including: generic fundamentals exams (GFES), accreditation training visit (ATV) preparation, senior reactor operator (SRO)certification, procedure development, work management, tagging/labeling, outage execution, planning/scheduling, corrective action, self-assessments andequipment reliability. Customers include TVA, Entergy, Southern Company, PSEG Nuclear LLC and NRG Energy Inc.On September 20, 2017, we acquired Absolute Consulting, Inc. (Absolute). Absolute is a provider of technical consulting and staffing solutions to the globalnuclear power industry and employs approximately 160 professionals with expertise in procedures writing, engineering, technical support, project management,training, project controls, and corrective actions. This acquisition brings a natural adjacency to GSE, fits well with our growth strategy, and benefits our customersfrom expanded capabilities and offerings.3Operating SegmentsWe operate through two reportable business segments: Performance Improvement Solutions and Nuclear Industry Training and Consulting. Each segment focuseson delivering solutions to customers within our targeted markets - primarily the power and process industries. Marketing and communications, accounting, finance,legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources aregenerally aligned with each segment to support existing customer accounts and new customer development. The following is a description of our businesssegments:·Performance Improvement Solutions (approximately 56% of revenue)Our Performance Improvement Solutions segment primarily encompasses our power plant high-fidelity simulation solutions and interactive computer basedtutorials/simulation focused on the process industry. This segment includes various simulation products, engineering services, and operation training systemsdelivered across the industries we serve: primarily nuclear and fossil fuel power generation, as well as the process industries. Our simulation solutions include thefollowing: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, includingoperator training systems, for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industryprocesses and control systems to newly hired employees and for ongoing workforce development and training. GSE and its predecessors have been providing theseservices since 1976.·Nuclear Industry Training and Consulting (approximately 44% of revenue)Nuclear Industry Training and Consulting provides highly specialized and skilled nuclear operations instructors, procedure writers, technical engineers, and otherconsultants to the nuclear power industry. These employees work at our clients' facilities under client direction. Examples of these highly skilled positions aresenior reactor operations instructors, procedure writers, project managers, work management specialists, planners and training material developers. This business ismanaged through Hyperspring and the newly acquired Absolute subsidiaries. The business model, management focus, margins and other factors clearly separatethis business line from the rest of the Company's product and service portfolio. GSE and its predecessors have been providing these services since 1997.Financial information is provided in Note 17 of the accompanying consolidated financial statements regarding our business segments and geographic operationsand revenue.Business Strategy, Industry Trends, Products and ServicesBusiness StrategyOur objective is to provide a powerful technology-enabled engineering and training/consulting services platform focused primarily on the nuclear power industry.We offer our differentiated suite of products and services to adjacent markets such as fossil power and the process industries where our offerings are a natural fitwith a clear and compelling value proposition for the market. Our primary growth strategy is twofold: (1) seek acquisitions to accelerate our overall growth in amanner that is complementary to our core business and (2) expand organically within our core markets by leveraging our market leadership position and driveincreased usage and product adoption via new products and services. To accomplish this, we will pursue the following activities:Pursue roll-up acquisition strategy. We intend to complement our organic growth strategy through selective acquisitions including, but not limited to, thefollowing: technical engineering; training, staffing and consulting service businesses focused on the power industry particular nuclear; value added componentsfor nuclear power plants; and software utilized in the power industry, both domestic and international. We are focusing our efforts on acquisitions that wouldenhance our existing portfolio of products and services, strengthen our relationships with our existing customers, and potentially expand our footprint to includenew customers in our core served industries. We have made several acquisitions since 2011 and believe the opportunity exists to acquire businesses that arecomplementary to ours, allowing us to accelerate our growth strategy.In January 2011, we acquired a software company called EnVision Systems Inc., which provided interactive multi-media tutorials and simulation models, primarilyto the process industries. We have integrated the technology assets from this acquisition and expanded the firm's application to other industries, and we intend torepeat this successful process. In 2014, we acquired Hyperspring, which enabled GSE to offer highly skilled nuclear operations and consulting personnel withunique know-how to our client base which is nuclear power plants. This deepened our relationship with existing clients and won business for us at new client sitesin the nuclear industry. This acquisition has proven to be synergistic, enabling cross selling domestically, and in 2015, the expansion of these offerings tointernational customers for the first time. In September 2017, we acquired Absolute, a provider of technical consulting and staffing solutions to the global nuclear power industry, located in Navarre, Florida. The acquisition of Absolute is expected to strengthen the Company's global leadership in nuclear training andconsulting solutions. The acquisition adds new capabilities to the GSE solution offering, and brings new highly complementary customers to GSE while deepeningGSE relationships with existing clients. The acquisition of Absolute is a significant proof point of the thesis that GSE is a compelling platform for consolidating afragmented vendor ecosystem for nuclear power. The acquisition adds significant scale and focus to the business, while positioning GSE as a "go to" provider ofconsulting 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 ourcustomers and therefore expand our total addressable market. Currently we are working on initiatives to expand our solution offerings in both our businesssegments which may include, but not be limited to, the following: expanding our software product portfolio to the industries we serve with enhanced power andprocess simulation tools and systems that are complementary to our core offerings; delivering enhanced learning management systems/solutions; offering fullyoutsourced training solutions to our customers; adding work flow process improvement solutions; tailoring operational reporting and business intelligencesolutions 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. We have delivered a compelling solution, theGSE GPWR TM Generic Pressurized Water Reactor simulation technology, proving that our modeling technology can be sold via traditional license terms andconditions to the nuclear industry ecosystem. We have both upgraded and expanded the EnVision™ library of simulation and eLearning tutorials for the processindustries with specific new products for training clients in the upstream segment of the oil and gas industry including launching a new cloud-based trainingplatform, EnVision™ Learning On-Demand, that significantly extends the capabilities of its industry leading EnVision™ tutorials and simulations. We continue toprovide cutting edge training systems by adapting our technology to systems to 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 andBalance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry's need for more accurate simulation of both normal andaccident scenarios, we provide our DesignEP ® and RELAP5-HD ® solutions. Our entire JADE TM suite of simulation software, including industry leadingJTOPMERET ® and JElectric TM software, provides the most accurate simulation of Balance-of-Plant and electrical systems available to the nuclear and fossilplant simulation market. The significant enhancements we have made to our SimExec ® and OpenSim TM platforms enables customers to be more efficient in thedaily operation of their simulators. We are bringing SimExec ® and OpenSim TM together into a next generation unified environment that will add new capabilitiesas requested by clients and driven by market need.We intend to continue to make pragmatic and measured investments in R&D that first and foremost are driven by the market, and are complementary to advancingour 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 targetmarkets, ensuring that we add greater value, in an easier to use fashion, at lower cost of ownership than any alternative available to customers. GSE has pioneereda number of industry standards over our lifetime and will continue to be one of the most innovative companies in our industry. During the years ended December31, 2017 and 2016, we have made R&D investments totaling $1.6 million, respectively.Strengthen and develop our talent . Our experienced employees and management team are our most valuable resources. Attracting, training, and retaining toptalent is critical to our success. To achieve our talent goals, we intend to remain focused on providing our employees with entrepreneurial opportunities to increaseclient contact within their areas of expertise and to expand our business within our service offerings. We will also continue to provide our employees with training,personal and professional growth opportunities, performance-based incentives including opportunities for stock ownership, bonuses and competitive benefits asbenchmarked to our industry and locations.Continue to deliver industry-recognized high-quality services . We have developed a strong reputation for quality services based upon our industry-recognizeddepth of experience, ability to attract and retain quality professionals, and expertise across multiple service sectors. We have received industry certificates andawards including being recognized for outstanding work on projects by Bechtel's Nuclear, Security & Environmental global business unit (NS&E) at the BechtelSupply Chain Recognition awards in April 2016. In addition, we have a recognized high-value brand as one of the most respected providers of software andservices to the nuclear industry, as evidenced by our marquee client base and significant market wins over the past years. A recently conducted survey of clientswith projects underway and/or just delivered validates our brand with a Net Promoter Score of +72, a compelling score for an industrial technology and servicescompany.4 Expand international operations in selected markets. We believe there are additional opportunities for us to market our software and services to internationalcustomers, and to do so in a cost-effective manner. For example, we believe partnerships with Value Added Resellers (VAR) could significantly expand our salespipeline for the EnVision™ software suite. In 2016, we entered into a reseller agreement with an entity in the Middle East that has an established track record ofsuccess selling simulation and workforce development solutions to the process industries throughout the region. Such VARs may yield positive results for ourpursuit of international nuclear opportunities globally (see industry trends below). We may explore the creation of appropriate joint ventures to target nuclear new-build and maintenance programs in key regions.Industry TrendsIndustry need for building and sustaining a highly skilled workforceWe believe a critical ongoing challenge facing the industries we serve is access to, and continued development of, a highly trained and efficient workforce. Thischallenge manifests primarily in two ways: the increasing pace at which industry knowledge and experience are lost as a significant percentage of the existingexperienced workforce reaches retirement age; and the fact that as new power plants come on-line, there is an increased demand for more workers to staff andoperate those plants.In the United States, the energy industry is expected to lose a large percentage of its workforce within the next few years as baby boomers retire on the traditionalschedule. For example, Power Engineering reports the power sector will need more than 100,000 skilled workers by the end of 2018 to replace retiring babyboomers. Electric, Light, and Power reports 72% of energy employers currently struggle to find quality candidates, and fill open positions. The NationalElectrical Contractors Association reports 7,000 electricians join the field each year, while 10,000 retire . Finally, the Nuclear Energy Institute estimates that 39%of the nuclear workforce will be eligible to retire in 2018. As the nuclear industry expands its fleet and strains to maintain the high standards of training the existingworkforce, existing plant simulator systems, which provide a critical environment for training services, are often operating 24 hours a day. With workers retiringand the need to backfill as well as expand the workforce for new units, certain operators are exploring the opportunity to de-bottleneck their existing simulatorcapabilities through the creation of dual reference simulators. Other workforce shortages and/or short term spike in demand for specialist skills that we offersimilarly are positive development for our business.According to the US Energy & Employment Report released in January 2017, the employment in the traditional energy and energy efficiency sectors increased by55% in 2016, adding 300,000 net new jobs. The Nuclear Energy Institute projects 20,000 new position will be needed in the nuclear industry over the next 5 years.Globally, as more people increase their standard of living, their demand for power will increase, which in turn will require the on-going construction of powerplants to meet this surging demand. Developing a skilled labor force to operate these plants and keeping their skills current and their certifications in compliancewith regulatory requirements is a key challenge facing the global power industry.Growing global power demand and the increasing emphasis on nuclear powerOn September 28, 2017, United States Secretary of Energy, Rick Perry, directed the nation's Federal Energy Regulatory Commission (FERC) to improve theresilience of the national electrical grid by creating rules recognizing the critical value generated by nuclear power plants, among other things. The Notice ofProposed Rulemaking stated that FERC must order grid operators to increase how they value "reliability and resilience attributes" in energy generation. Alllicensed nuclear power plants and a significant portion of existing coal plants can meet those requirements today.While this request to FERC was unanimously rejected by the commissioners in January 2018, they did say they shared Secretary Perry's stated goals of gridresiliency, and directed regional transmission operators to provide information to help FERC examine the matter further. The operators have 60 days to submit newmaterials. At that time, the agency can issue another order. While disappointing that the request by Secretary Perry was rejected, it is the first time in quite sometime that there is federal recognition of the need for support of the nuclear fleet in the US.At the time of Secretary Perry's request to FERC, he announced a separate action to support and accelerate the development of new nuclear plants with conditionalcommitments of up to $3.7 billion in loan guarantees to the owners of the Vogtle nuclear power plant in Georgia. Secretary Perry stated, "I believe the future ofnuclear energy in the United States is bright and look forward to expanding American leadership in innovative nuclear technologies." "Advanced nuclear energyprojects like Vogtle are the kind of important energy infrastructure projects that support a reliable and resilient grid, promote economic growth, and strengthen ourenergy and national security".In December 2017, Georgia's Public Service Commission voted unanimously to allow continued construction of two nuclear reactors at Georgia Power's embattledPlant Vogtle. Commission chair Stan Wise said the decision came down to the importance of fuel diversity and the long term benefits the project would have onGeorgians. Georgia utility regulators on Thursday conditioned their approval of the Vogtle nuclear project with the caveat that Congress approves roughly $800million worth of tax credits.A two-year budget deal signed by President Donald Trump on February 9, 2018, includes provisions that will benefit the development of nuclear power in the U.S.including the expansion of Plant Vogtle, which is located near Waynesboro, Ga. The Nuclear Energy Institute said that the legislation signed by Trump: (1) allowsfor new nuclear reactors placed in service after Dec. 31, 2020 to qualify for the nuclear PTC; (2) permits the Secretary of Energy to allocate credits up to a 6,000-megawatt capacity limit for the first "new nuclear" reactors placed in service after Dec. 31, 2020; and (3) allows public-entity project partners to transfer theircredits to other project partners.NEI said that the deadline change will ensure the two reactors being built at Vogtle will benefit from the PTC and that the 6,000-MW capacity limit indicates thePTC will also benefit NuScale Power LLC's and its partners' plans to build its first commercial power plant at the Idaho National Laboratory by 2026.The U.S. Energy Information Administration's latest International Energy Outlook 2017 projects that world energy consumption will grow by 28% between 2015and 2040. Most of this growth is expected to come from countries that are not in the Organization for Economic Cooperation and Development (OECD), andespecially in countries where demand is driven by strong economic growth, particularly in Asia. Non-OECD Asia (which includes China and India) accounts formore than 60% of the world's total increase in energy consumption from 2015 through 2040. At the same time, countries globally are pledging to reduce greenhouse gas emissions despite this growth in demand for power. These trends are increasingly favorable to nuclear power. The United Kingdom illustrates thistrend, with an energy policy that places a much greater reliance on nuclear power and relies on plans for a new nuclear fleet, while slashing subsidies for solarenergy and seeking to phase out coal fired power plants. With plans to build at least three new nuclear plants, the UK plans to add 16GWe of new nuclear capacityoperating by 2030 according to World Nuclear Association.Today there are some 440 nuclear power reactors operating in 30 countries plus Taiwan, with a combined capacity of over 390 GWe. In 2014 these provided over11% of the world's electricity. There are currently 50 nuclear plants under construction in 13 countries, including 20 in China, seven in Russia, six in India andfour in the United Arab Emirates according to the Nuclear Energy Institute. Two reactors are currently under construction in the U.S. at Southern Nuclear's Vogtle,Georgia site. Per the World Nuclear Association, there are 160 reactors in 23 countries in specific phases of planning that will be operating by 2030 and over 300more are proposed. This pace of construction is surpassing the peak construction velocity of the 1970s and 1980s as countries around the world recognize theimportance of lowering carbon emissions from power generation.For the existing nuclear U.S. fleet, there is recognition that these plants are essential to meeting goals of reducing carbon emissions, even as renewable energysources are introduced. This recognition of the importance of nuclear providing zero-carbon baseload is demonstrated by the state of New York's Clean EnergyStandard that values the emission-free energy of New York's nuclear fleet and in so doing providing an emissions-free subsidy of 1.7¢/kWh. This subsidy helpsensure the state's existing nuclear plants remain economically viable in an era of low cost natural gas even with wind and solar receiving a subsidy of 4.5¢/kWh. Inaddition, the Illinois Legislature on December 2, 2016, passed the Future Energy Jobs Bill on December 2, 2016, a measure that ensures the continued operation ofthe Clinton and Quad Cities nuclear power plants in that state. In a statement, the Nuclear Energy Institute said the bill's passage was a "remarkable moment" forthe state and the nuclear industry. Gov. Bruce Rauner signed the bill into law on December 7, 2016. The Future Energy Jobs Bill provides Exelon andCommonwealth Edison with a $235 million annual credit for the carbon-free energy produced by the Clinton and Quad Cities nuclear plants. At the end of October2017, Connecticut passed a bill that may help it keep its Millstone nuclear plant open. The bill permits state energy officials to change the rules for how DominionNuclear Connecticut sells electricity from Millstone. Millstone could sell up to 75% of its output in competition with the other zero-carbon sources of electricityunder the bill. This is a significant recognition of the strategic value that nuclear power provides via zero-carbon baseload. The actions of New York, Illinois andConnecticut starts a trend which may continue as states such as Ohio, Pennsylvania, and New Jersey consider legislation to recognize the value of zero carbonpower produced by nuclear plants in those states. This would be similar to how the Renewable Portfolio Standard was rolled out across more than half the states inthe US to recognize the benefits of zero carbon renewable power.In regulated markets where the economy is growing, the nuclear fleet is profitable and expanding, with two reactors under construction in the southeast U.S. Longer term, the trends for nuclear power have promise as small scale modular reactors (SMR's) advance in development and prototyping. There is a projectplanned to build a NuScale Power SMR at Idaho National Labs. NuScale Power is a long-standing GSE customer. Tennessee Valley Authority submitted anapplication for an early site permit for two or more SMRs modules (up to 800 MWe, 2420 MWt) at the Clinch River Nuclear site on May 12, 2016. In January2017 the Nuclear Regulatory Commission has accepted and docketed the early site permit. U.S. Department of Energy recently released a draft plan to doubleAmerica's nuclear power capacity by 2050. The plan, dubbed "Vision 2050", promotes expanding America's nuclear capacity through advanced reactor designsincluding small and medium-size reactors.We believe GSE is well positioned to take full advantage of these strategic global and domestic trends by providing high fidelity simulation and training solutionsto the global power and process industries.5 Products and ServicesPerformance Improvement SolutionsTo assist our clients in creating world-class internal training and engineering improvement processes, we offer a set of integrated and scalable products andservices which provide a structured program focused on continuous skills improvement for experienced employees to engineering services, which include plantdesign verification and validation. 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 plantbehavior across the entire range of operations. To achieve this, GSE's simulation solution starts with the most robust engineering approach possible. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, GSE provides simulation solutions that achieve unparalleled fidelity andaccuracy. The solutions that GSE provides are also known for ease of use, resulting in increased productivity by end-users. For these reasons, GSE has deliveredmore 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 ofdesign assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in newtechnology being deployed, often involving the integration of disparate technologies for the first time, a high-fidelity simulator allows designers to see theinteraction between systems for the very first time. With our combination of simulation technology and expert engineering, GSE was chosen to build first-of-a-kindsimulators 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 ortypical process, rather than the exact replication of a client's plant. We have delivered over 360 such simulation models to clients consisting of majoroil companies and educational institutions.●Part-Task Training Simulators: Like the Universal Simulators, we provide other unique training solutions such as a generic nuclear plant simulatorand VPanel ® displays, which replicate control room hardware and simulator solutions specific to industry needs such as severe accident models totrain 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. Theyprovide the highest level of realism and training and allow users to practice their own plant-specific procedures. Clients can safely practice startup,shutdown, normal operations, as well as response to abnormal events we all hope they never have to experience in real life. Since our inception, wehave delivered over 480 plant-specific simulators to clients in the nuclear power, fossil power and process industries worldwide.Nuclear Industry Training and ConsultingAs 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 toensure safe ongoing plant operations. In addition, operating and training needs change over time and sometimes our clients require fixed priced discrete projects orspecialized courses in contrast to straight staff augmentation. The industry needs operating personnel, including procedure writers, engineers, operators andinstructors who can step in and use as well as update the client's operating methods, procedures, training material and more. Finding technical professionals andinstructors, 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 both qualifiedprofessionals, instructors and turnkey projects/courses that work within the client's system and complement the operating or training methods they already have inplace. Examples of our training program courses include senior reactor operator certification, generic fundamentals training, and simulation supervisor training. Inaddition, we also provide expert support through consulting or turnkey projects for procedure writing, technical engineers, project managers, training materialupgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability.We bring together the collection of skills we have amassed over more than 40 years beginning with its traditional roots in custom high-fidelity simulation andtraining solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate leveltraining solutions of EnVision and the extensive nuclear industry training and consulting services of Absolute and Hyperspring.Customers and LocationsFor more than 40 years, we have been developing next-generation, custom training simulation technologies. Since we built the first commercial full-scope nuclearpower plant simulator in 1971, we have completed more than 1,100 installations in 50 countries. In 2017, approximately 19% of our revenue was generated from end-users outside the United States. A small representative list of our customer base includes:ABB Inc., American Electric Power, Bechtel Hanford National Laboratory, Duke Energy, EDF Energy (United Kingdom), Emerson Process Management, Exelon,Korean Electric Power Company (Korea), PSEG Nuclear, Inc., Shangdong Nuclear Power Co. Ltd. (China), Siemens AG (Germany), Southern Nuclear OperatingCompany, Inc., State Nuclear Power Automation System Engineering Company (China), Savannah River Nuclear Solutions, LLC, Tennessee Valley Authority,US Department of Energy, and Westinghouse Electric Co.Hydrocarbon and chemical process customers include numerous large oil refineries and chemical plants such as BP (worldwide), Statoil ASA (Norway), Chevron,Emerson Process Management, Shell Oil Company (worldwide), and Total (Belgium).Marketing and SalesWe market our products and services through a network of direct sales staff, agents and representatives, and strategic alliance partners. Market-oriented business and customer account teams define and implement specific campaigns to pursue opportunities.We continue to have a proactive public relations program, issuing more non-financial press releases aimed at product development and delivery, as well as our rolein numerous industry trade shows and technical conferences. We are active across numerous social media platforms to build a stronger presence across all mediaour clients use to find information about the Company, and providing useful information for each stage of the client's journey with the Company.The Company's ability to support its multi-facility, international and/or multinational clients is facilitated by its network of offices and strategic partners in the U.S.and overseas. In addition to the office located in China, the Company's ability to conduct international business is enhanced by its multilingual and multiculturalworkforce. GSE has strategic relationships with system integrators and agents representing its interests in Bulgaria, Japan, Malaysia, Mexico, Singapore, SouthAmerica, South Korea, Taiwan, Ukraine and various locations in the Gulf Coast Countries of the Middle East.6 CompetitionIn the nuclear simulation market, we compete directly with firms primarily from Canada, France and the U.S., such as L-3 MAPPS Inc., a subsidiary of L-3 Communications (Canada), CORYS T.E.S.S (France) and Western Services Corporation. In the fossil simulation market, the Company competes with smallercompanies in the U.S. and overseas. In the process industry the main competition comes from large Digital Control System/Automation companies such asHoneywell and Schneider.The Nuclear Industry Training and Consulting business services include technical professional and training-related and services as well as staff augmentationsolutions. The competition for these services includes, but is not limited to the following: GP Strategies, The Westwind Group, Professional TrainingTechnologies, and Western Technical Services. The competition for staff augmentation includes: Day & Zimmerman, Planet Forward, and The Westwind Group.Competitive AdvantagesWhile there is competition in various industry niches, few companies in our space can combine our engineering, simulation and training expertise, especially forthe nuclear power industry. None of our competitors serve the broader performance improvement market and few work across the broader energy markets ofnuclear and fossil power plus petrochemicals.Proprietary Software Tools . We developed a library of proprietary software tools including auto-code generators and system models that substantially facilitateand expedite the design, production and integration, testing and modification of software and systems. These tools are used to automatically generate the computercode and systems models required for specific functions commonly used in simulation applications, thereby enabling the Company or its customers to develophigh-fidelity, real-time software quickly, accurately and at lower costs. The Company also has an expertise in being able to integrate 3 rd party engineering codesinto the Company's simulation environment, thereby being able to offer some of the most sophisticated technical solutions in the market. The Company has asubstantial library of Process-Specific Simulation models and eLearning Modules aimed at the oil and gas, refining and specialty chemicals market.Industry Expertise . We are a leading innovator and developer of real-time software with more than 40 years of experience producing high-fidelity, real-timesimulators. As a result, the Company has acquired substantial applications expertise in the energy and process industries. The Company employs a highly educatedand experienced multinational workforce of approximately 430 employees, including approximately 84 engineers and scientists in fields such as chemical,mechanical and electrical engineering, applied mathematics and computer sciences, and approximately 226 instructors and plant operations staff specialists.Unique Combination of Talent. Nobody in our market space brings together the sophistication of simulation technology with the engineering expertise, trainingexpertise and visualization expertise to provide the holistic people and plant performance improvement solutions as well as we do.Reputation for Customer Satisfaction. As part of its ISO-9000 Quality Program Certification, GSE measures customer satisfaction across numerous factors suchas On-Time Delivery, Problem Solving, and Customer Communication. In each category measured we routinely exceed customer expectations .Training Curricula . The Company has developed hundreds of detailed courses and simulator exercise material and specific industrial applications including oiland gas refining, gas-oil production, nuclear and combined cycle gas turbine power plant and desalination.Our Nuclear Industry Training and Consulting business is mostly focused on training and operations support. Our trainers and consultants provide their services atthe customer facilities which allow us to interface with our customers directly in the course of doing business versus having to periodically call on customers. Ourproximity allows us a significant competitive advantage in that we can immediately offer solutions and therefore bypass lengthy bid processes.Intellectual Property.The Company depends upon its intellectual property rights in its proprietary technology and information. GSE maintains a portfolio of trademarks (both registeredand unregistered), copyrights (both registered and unregistered), and licenses. While such trademarks, copyrights and licenses as a group are of materialimportance to the Company, it does not consider any one trademark, copyright, or license to be of such importance that the loss or expiration thereof wouldmaterially affect the Company. The Company relies upon a combination of trade secrets, copyright, and trademark law, contractual arrangements and technicalmeans to protect its intellectual property rights. GSE distributes its software products under software license agreements that grant customers nonexclusive licensesfor the use of its products, which are nontransferable. Use of the licensed software is restricted to designated computers at specified sites, unless the customerobtains a site license of its use of the software. Software and hardware security measures are also employed to prevent unauthorized use of the Company'ssoftware, and the licensed software is subject to terms and conditions prohibiting unauthorized reproduction of the software.The Company does not own any patents. The Company believes that all of the Company's trademarks (especially those that use the phrase "GSE Systems") arevalid and will have an unlimited duration as long as they are adequately protected and sufficiently used. The Company's licenses are perpetual in nature and willhave an unlimited duration as long as they are adequately protected and the parties adhere to the material terms and conditions.GSE has numerous registered U.S. trademarks: GSE Systems®, JTOPMERET®, RELAP5-HD®, TOTALVISION®, VPanel® and SimExec®. Some of thesetrademarks have also been registered in foreign countries. The Company also claims trademark rights to DesignEP™, Java Application and DevelopmentEnvironment (JADE)™, OpenSim™, PSA-HD™, RACS™, SimSuite Pro™, SmartTutor™, THOR™, and Xtreme I/S™.In addition, the Company maintains federal statutory copyright protection with respect to its software programs and products, has registered copyrights for some ofthe documentation and manuals related to these programs, and maintains trade secret protection on its software products.Despite these protections, the Company cannot be sure that it has protected or will be able to protect its intellectual property adequately, that the unauthorizeddisclosure or use of its intellectual property will be prevented, that others have not or will not develop similar technology independently, or, to the extent it ownsany patents in the future, that others have not or will not be able to design around those patents. Furthermore, the laws of certain countries in which the Company'sproducts are sold do not protect its products and intellectual property rights to the same extent as the laws of the United States. 7 Government Regulations.Our operations are directly and indirectly affected by political developments and both domestic and foreign governmental regulations. We cannot determine theextent to which changing political priorities, new legislation, new regulations or changes in existing laws or regulations may affect our future operations, positivelyor negatively.Industries Served.The following chart illustrates the approximate percentage of the Company's 2017 and 2016 consolidated revenue by industries served: Years ended December 31, 2017 2016Nuclear power83% 73%Fossil fuel power9% 17%Process6% 6%Other2% 4%Total100% 100%Backlog. As of December 31, 2017, we had approximately $71.4 million of total gross revenue backlog compared to $73.2 million as of December 31, 2016. Most of our contract terms are less than 24 months. With respect to our backlog, it includes only those amounts that have been funded and authorized and does notreflect the full amounts we may receive over the term of such contracts. Our backlog includes future expected revenue at contract rates, excluding contractrenewals or extensions that are at the discretion of the client. We calculate backlog without regard to possible project reductions or expansions or potentialcancellations 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 andother parties. Because backlog is not a defined accounting term, our computation of backlog may not necessarily be comparable to that of our industry peers.Employees. As of December 31, 2017, we had approximately 430 employees, which include approximately 181 in our Performance Improvement segment and249 in our Nuclear Industry Training and Consulting segment. This also includes approximately 100 licensed engineers and other advanced degreed professionals. Excluding our Nuclear Industry Training and Consulting business, which consists primarily of contracted instructors, our employee attrition rate for 2017 amongall staff was approximately 10%. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to beaddressed through attracting top talent.ITEM 1A. RISK FACTORS.The following are some of the factors that we believe could cause our actual results to differ materially from historical results and from the results contemplated bythe forward-looking statements contained in this report and other public statements made by us. Additional risks and uncertainties not presently known to us, orthat we currently see as immaterial, may also harm our business. Most of these risks are generally beyond our control. If any of the risks or uncertainties describedbelow, or any such other or additional risks and uncertainties actually occurs, our business, results of operations and financial condition could be materially andadversely affected. The following information should be read in conjunction with Item 7 - Management's Discussion and Analysis of Financial Condition andResults of Operations and the consolidated financial statements and related notes under Item 8 - Financial Statements and Supplementary Data.Our business is largely dependent on sales to the nuclear power industry. Any disruption in this industry would have a material adverse effect upon ourrevenue and profitability.In 2017, 83% of our revenue was from customers in the nuclear power industry (73% in 2016). We expect to derive a significant portion of our revenue fromcustomers in the nuclear power industry for the foreseeable future. Our ability to supply nuclear power plant simulators and related products and services isdependent on the continued operation of nuclear power plants and, to a lesser extent, on the construction of new nuclear power plants. A wide range of factorsaffect the continued operation and construction of nuclear power plants, including the political and regulatory environment, the availability and cost of alternativemeans of power generation, the occurrence of future nuclear incidents, such as the one which occurred at the Fukushima Daiichi nuclear plant in 2011, and generaleconomic conditions. In addition, demand for our products and services may be affected by changes in the legal and regulatory environment within which theglobal nuclear power industry operates. Regulatory changes could materially affect demand for our products, the profitability of our service deliveries to nuclearpower industry customers, and the overall efficacy of our current business model.8 Our sales to foreign customers expose us to risks associated with operating internationally.Sales of products and services to end users outside the United States accounted for approximately 19% of the Company's consolidated revenue in 2017 and 33% ofconsolidated revenue in 2016. Consequently, our businesses are subject to a variety of risks that are specific to international operations, including the following:·export laws and regulations that could erode our profit margins or restrict exports;·compliance with the U.S. Foreign Corrupt Practices Act and similar non-U.S. regulations such as the UK Bribery Act;·the burden and cost of compliance with foreign laws, treaties and technical standards generally, as well as responding to changes in those regulations;·contract award and funding delays;·potential restrictions on transfers of funds;·potential difficulties in accounts receivable collection;·currency fluctuations, including costs and potentially limited availability of viable hedging options;·import and export duties and value added or other taxes;·transportation and communication delays and interruptions;·difficulties involving strategic alliances and managing foreign sales agents or representatives;·uncertainties arising from foreign local business practices and cultural considerations; and·potential military conflicts and political risks.While we have and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of our foreign business, we cannot ensure thatsuch measures will be adequate. During the years ended December 31, 2017 and 2016, we did not have revenues greater than 10% from any individual foreigncountry.9 Nuclear Industry Training and Consulting revenue, results of operations, and cash flows may suffer upon the loss of a significant customer.For the years ended December 31, 2017 and 2016, the following customers have provided more than 10% of this operating segment's revenues: Years ended December 31, 2017 2016Entergy Corporation (Entergy)48% 22%Tennessee Valley Authority16% 32%PSEG Nuclear LLC8% 14%Entergy provided 20.8% and 10.2% of our consolidated revenue for the years ended December 31, 2017 and 2016, respectively.Hyperspring and Absolute may lose a significant customer if any existing contract with such customer expires without being extended, renewed, renegotiated or isterminated by the customer prior to expiration, to the extent such early termination is permitted by the contract. A number of Hyperspring and Absolute's contractsare typically subject to expiration during each year, and they may lose any of these contracts if they are unable to extend, renew or renegotiate the contracts. Theloss of any significant customer would adversely affect our Nuclear Industry Training and Consulting segment's revenue, results of operations, and cash flows.Our expense levels are based upon our expectations as to future revenue, and we may be unable to adjust spending to compensate for a revenue shortfall.Accordingly, any revenue shortfall would likely have a disproportionate effect on our operating results.Our revenue was $70.9 million and $53.1 million for the years ended December 31, 2017 and 2016, respectively. We had operating income of $0.2 million and$1.6 million for the years ended December 31, 2017 and 2016, respectively. Our operating results have fluctuated in the past and may fluctuate significantly in thefuture as a result of a variety of factors, including purchasing patterns, timing of new products and enhancements by us and our competitors, and fluctuating globaleconomic conditions. Since our expense levels are based in part on our expectations as to future revenue and includes certain fixed, pre-negotiated, and prepaidcosts, we may be unable to adjust spending in a timely manner to compensate for any revenue shortfall and such revenue shortfalls would likely have adisproportionate adverse effect on our operating results.Our backlog is subject to unexpected adjustments and cancellations and may not be a reliable indicator of future revenues or earnings.Backlog represents products or services that our customers have committed by contract or purchase order to purchase from us which have not yet been delivered orrecognized as revenue. Our backlog as of December 31, 2017 and 2016 was $71.4 million and $73.2 million, respectively. There can be no assurance that therevenues projected in our backlog will be realized or, if realized, will result in profits. Because of project cancellations or changes in project scope and schedule,we cannot predict with certainty when or if backlog will be performed. In addition, even where a project proceeds as scheduled, it is possible that contractedparties may default and fail to pay amounts owed to us or poor project performance could increase the cost associated with a project. Delays, suspensions,cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate the revenues and profits that we actually realizefrom projects in backlog. Reductions in our backlog due to cancellation or modification by a customer or for other reasons may adversely affect, potentially to amaterial extent, the revenues and earnings we actually receive from contracts included in our backlog. Many of the contracts in our backlog provide forcancellation fees in the event customers cancel projects. These cancellation fees usually provide for reimbursement of our out-of-pocket costs, revenues for workperformed prior to cancellation and a varying percentage of the profits we would have realized had the contract been completed. However, we typically have nocontractual right upon cancellation to the total revenues reflected in our backlog. Projects may remain in our backlog for extended periods of time. If we experiencesignificant project terminations, suspensions or scope adjustments to contracts reflected in our backlog, our financial condition, results of operations and cash flowsmay be adversely impacted.10 We are currently a party to multiple fixed price contracts and will continue to enter into similar contracts in the future. If we are not able to accuratelyestimate or control costs on such projects, the profitability of such projects could be reduced.A significant portion of our revenue is attributable to contracts entered into on a fixed price basis, which allow us to benefit from cost savings, but we carry theburden of cost overruns. If our initial estimates are incorrect regarding our costs of performance under these contracts, or if unanticipated circumstances arise, wecould experience cost overruns which would result in reduced profits or even result in net losses on these contracts. Our financial condition is dependent upon ourability to maximize our earnings from our contracts. Lower earnings or losses caused by cost overruns could have a negative impact on our financial results.Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost-reimbursable contracts, which aresubject to a contract ceiling amount, we are reimbursed for allowable costs and are paid a fee, which may be fixed or performance based. However, if our costsexceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for allsuch costs even under a time and materials contract.Our inability to successfully estimate and manage costs on each of these contract types may materially and adversely affect our financial condition.Our simulation business is dependent on product innovation and research and development, which costs are incurred prior to realization of revenue fornew products and improvements.We believe that our success will depend in large part on our ability to maintain and enhance our current product line, develop new products, maintain technologicalcompetitiveness and meet an expanding range of customer needs. Our product development activities are aimed at the development and expansion of our library ofsoftware modeling tools, the improvement of our display systems and workstation technologies, and the advancement and upgrading of our simulation technology.The life cycles for software modeling tools, graphical user interfaces, and simulation technology are variable and largely determined by competitive pressures andthe evolution of software and standards that may be controlled by third parties. Consequently, we will need to continue to make significant investments in researchand development to enhance and expand our capabilities in these areas and to maintain our competitive advantage. We cannot control, and we may be unable topredict accurately, the development and evolution of these competitive pressures and external software and standards.11 We use derivative instruments in the normal course of our business which could result in financial losses and exposure to other risks that negativelyimpact our net income (loss) and business operational efficiency.We periodically enter into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates onforeign-denominated trade receivables. We could recognize financial losses as a result of volatility in the market values of these contracts or if a derivativeinstrument counterparty fails to perform. We attempt to minimize credit exposure by limiting counterparties to internationally recognized financial institutions, buteven these counterparties are subject to default and contract risk and this risk is beyond our control. Additionally, we may need or wish to avail ourselves of otherforms of hedging or derivative instruments in the future depending on our business needs, and these other types of derivative instruments may be subject to thesame and other risk, and may not be available to us on a cost-effective or risk-controlled basis, if at all. The unavailability of viable and cost effective riskmanagement, hedging, or similar instruments now or in the future could adversely impact our business operational efficiency or results.We issue performance, advance payment, and bid bonds in the normal course of our business which could result in financial losses that negatively impactour net income (loss).We may be required to issue performance, advance payment, and bid bonds to our customers and potential customers as a normal part of our business activities.Our customers may have the ability to draw upon these performance bonds in the event we fail to cure a material breach of the contract within 30 days of receivingnotice from the customer regarding the nature of the breach. As of December 31, 2017, we had issued advance payment and performance bonds on three contractstotaling $0.9 million, all of which have been cash collateralized; the largest of these performance bonds was for $0.5 million. Although we expect no materialbreaches to occur on these contracts, if such a breach were to occur and we failed to cure such breach, we could incur a loss of up to $0.9 million.We rely upon our intellectual property rights for the success of our business; however, the steps we have taken to protect our intellectual property may beinadequate.Although we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements andreliable product maintenance are important to establishing and maintaining a technological leadership position, our business depends, in part, on the strength of ourintellectual property rights in our proprietary technology and information. We rely upon a combination of trade secret, copyright, and trademark law, contractualarrangements and technical means to protect our intellectual property rights. We enter into confidentiality agreements with our employees, consultants, jointventure and alliance partners, customers and other third parties that are granted access to our proprietary information, and limit access to and distribution of ourproprietary information. There can be no assurance, however, that we have protected or will be able to protect our proprietary technology and informationadequately, that the unauthorized disclosure or use of our proprietary information will be prevented, that others have not or will not develop similar technology orinformation independently, or, to the extent we own any patents in the future, that others have not or will not be able to design around those future patents.Furthermore, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as the lawsof the United States. Our inability to protect our intellectual property rights from infringement, dilution, or loss could make it more difficult for us to generaterevenue from the offer, licensure, and sale of our products and services and could enable third parties to compete with us more effectively.12 The industries in which we operate are highly competitive. This competition may prevent us from raising prices at the same pace at which our costsincrease.Our businesses operate in highly competitive environments with both domestic and foreign competitors, many of whom have substantially greater financial,marketing and other resources than we do. The principal factors affecting competition in our industries include price, technological proficiency, ease of systemconfiguration, product reliability, applications expertise, engineering support, local presence and financial stability. We believe competition in the simulation fieldsmay further intensify in the future as a result of advances in technology, consolidations and strategic alliances among competitors, increased costs required todevelop new technology and the increasing importance of software content in systems and products. As our business has a significant international component,changes in the value of the dollar could adversely affect our ability to compete internationally and could reduce our profitability on international businessopportunities that we do win.We may encounter difficulties in effectively integrating acquired businesses.As part of our business strategy, we have acquired, and intend to acquire, companies with compatible or related products. These acquisitions will be accompaniedby the risks commonly encountered in acquisitions of companies, which include, among other things:·potential exposure to unknown liabilities of the acquired companies;·higher than anticipated acquisition costs and expenses;·difficulty and expense of assimilating the operations and personnel of the companies, especially if the acquired operations are geographically distant orculturally different;·potential disruption of our ongoing business and diversion of management time and attention;·failure to maximize our financial and strategic position by the successful incorporation of acquired technology;·difficulties in adopting and maintaining uniform standards, controls, procedures and policies;·loss of key employees and customers as a result of changes in management; and·possible dilution to our shareholders.We may not be successful in overcoming these risks or any other problems encountered in connection with any of our acquisitions, and if we are not successful,our financial results may be materially impacted.We are dependent on our management team, and the loss of or the inability to attract and retain one or more key employees or groups could harm ourbusiness and prevent us from implementing our business plan in a timely manner.Our future success is substantially dependent on the continued services and continuing contributions of our executive officers and other key personnel. Our NuclearIndustry Training and Consulting business segment is particularly dependent on key personnel and their key strategic relationships. The loss of the services of anyof our executive officers or other key personnel could harm our business. Our future success also depends on our ability to continue to attract, retain, and motivatehighly skilled employees. If we are not able to attract and retain key skilled personnel, our business could be harmed.A failure to attract and retain technical personnel could reduce our revenue and our operational effectiveness.There is a continuing demand for qualified technical personnel in the industries within which we operate. We believe that our future growth and success willdepend upon our ability to attract, train and retain such personnel. Our design and development efforts depend on hiring and retaining qualified technical personnel.An inability to attract or maintain a sufficient number of technical personnel could have a material adverse effect on our contract performance or on our ability tocapitalize on market opportunities.The nuclear power industry, our largest customer group, is associated with a number of hazards which could create significant liabilities.Our business could expose us to third party claims with respect to product, environmental and other similar liabilities. Although we have sought protection fromthese potential liabilities through a variety of legal and contractual provisions as well as through liability insurance, the effectiveness of such protections has notbeen fully tested. Certain of our products and services are used by the nuclear power industry primarily in operator training. Although our contracts for suchproducts and services typically contain provisions designed to protect us from potential liabilities associated with such use, there can be no assurance that wewould not be materially adversely affected by claims or actions which may potentially arise due to factors that may be outside of our direct control.Cyber security incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputationand results of operations.Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems tosophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate thesethreats (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 orunavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potentialconsequences of a material cyber security incident include reputational damage, litigation with third parties, 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 ourcompetitiveness and results of operations.Third-party claims that we allegedly infringe the intellectual property rights of others may be costly to defend or settle and could damage our business.We cannot be certain that our software and services do not infringe issued patents, copyrights, trademarks or other intellectual property rights of third parties. Wemay be subject to legal proceedings and claims from time to time, including claims of alleged infringement of intellectual property rights of third parties by us orour licensees concerning their use of our software products and integration technologies and services. Third parties may bring claims of infringement against us.Because our software is integrated with our customers' networks and business processes, as well as other software applications, third parties may bring claims ofinfringement against us, as well as our customers and other software suppliers, if the cause of the alleged infringement cannot easily be determined.Claims of alleged infringement may have a material adverse effect on our business and may discourage potential customers from doing business with us onacceptable terms, if at all, even if they are ultimately adjudicated to have no merit, dismissed, or settled. Defending against claims of infringement may be time-consuming and may result in substantial costs and diversion of resources, including our management's attention to our business. Furthermore, a party making aninfringement claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that couldprevent us from selling our software or require that we re-engineer some or all of our products. Claims of intellectual property infringement also might require usto enter costly royalty or license agreements. We may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Our business, operatingresults and financial condition could be harmed significantly if any of these events were to occur, and the price of our common stock could be adversely affected. In addition, we have agreed, and may agree in the future, to indemnify certain of our customers against claims that our software infringes upon the intellectualproperty rights of others. Although we carry general liability insurance, our current insurance coverage may not apply to, and likely would not protect us entirely orat all from, liability that may be imposed under any of the types of claims described above.We are subject to a wide variety of laws and regulations.Our businesses are subject to regulation by U.S. federal and state laws and foreign laws, regulations and policies. Changes to laws or regulations may require us tomodify our business objectives if existing practices become more restricted, subject to escalating costs or prohibited outright. Particular risks include regulatoryrisks arising from federal laws, such as laws regarding export of sensitive technologies or technical information. Our business and the industries in which weoperate are also at times being reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties or the assertion of privatelitigation claims and damages.13 Provisions in our corporate documents and Delaware law could delay or prevent a change in control of our company, even if that change may beconsidered beneficial by some stockholders.The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay or prevent a change in control of ourcompany that a stockholder may consider favorable. These include provisions:·providing that our Board of Directors fixes the number of members of the board and fills all vacancies on the Board of Directors;·providing for the division of our Board of Directors into three classes with staggered terms;·limiting who may call special meetings of stockholders;·prohibiting stockholder action by written consent, thereby requiring stockholder action to be taken at a meeting of the stockholders;·establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be actedon by stockholders at stockholder meetings;·establishing supermajority vote requirements for certain amendments to our certificate of incorporation and bylaws;·limiting the right of stockholders to remove directors; and·authorizing the issuance of "blank check" preferred stock, which could be issued by our Board of Directors to increase the number of outstanding sharesand thwart a takeover attempt.In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions notapproved in advance by our Board of Directors, including discouraging takeover attempts that might result in a premium over the market price for shares of ourcommon stock.We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Boardof Directors and by providing our Board of Directors with more time to assess any acquisition proposal, and are not intended to make our company immune fromtakeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that ourBoard of Directors determines is not in the best interests of our company and our stockholders.A sustained decline in the price of our common stock or weaker than forecasted operating results could result in write-downs of goodwill and otherintangible assets and capitalized software development costs.In conjunction with business acquisitions, we record goodwill and other intangible assets and review their fair value for impairment annually as of December 31, oron an interim basis if impairment indicators are present, such as a significant reduction in our market capitalization, significant declines in operating performanceor disruptions to the business that could reduce our future cash flow. On November 14, 2014, we recorded $5.6 million of goodwill related to our acquisition ofHyperspring. On September 20, 2017, we recorded $2.8 million of goodwill related to our acquisition of Absolute. We tested our goodwill at the reporting unitlevel as of December 31, 2017 and 2016, and there was no indication of impairment. We can provide no assurance that we will not have an impairment charge infuture periods as the result of changing conditions. See Note 4 to our consolidated financial statements for information regarding our goodwill.We capitalize certain computer software development costs and, accordingly, the capitalized costs are reported on our balance sheet. Capitalization of computersoftware development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when thesoftware product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in costof 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, we assess the status of our development programs and the recoverability of the unamortized software developmentcosts 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 recoverthe unamortized software costs we will write-down these costs to their estimated fair value based on the future undiscounted cash flows. The excess of anyunamortized computer software costs over the related net realizable value is written down and charged to operations.Treatment of goodwill and capitalized software development costs in the current and future accounting periods may have an impact on the value of the company,results of operations, and price of our common stock.Our ability to use our net operating loss (NOL) carryforward and certain other tax attributes may be limited.Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," generally defined as a greater than 50%change (by value) in its equity ownership over a three-year period, the corporation's ability to use its pre-change NOL carryforwards, and other pre-change taxattributes (such as research tax credits) to offset its post-change income or tax liabilities may be limited. We may experience ownership changes in the future as aresult of shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federaltaxable income may be subject to limitations, which could potentially result in increased future tax liability to us.14 ITEM 1B. UNRESOLVED STAFF COMMENTS .None.ITEM 2.PROPERTIES .The Company is headquartered in a facility in Sykesville, Maryland (approximately 43,000 square feet). The lease for this facility expires on June 30, 2023. As ofDecember 31, 2017, the Company subleased approximately 4,800 square feet of the facility.On November 28, 2017, the Company entered into an office lease agreement to lease approximately 5,039 rentable square feet of an office building located inColumbia, Maryland. The lease is for an initial six years and six months with two renewal periods of five years each. The Company expects to relocate part of theback-office employees to the new office in the first quarter of 2018.In addition, the Company leases office space domestically in Huntsville, Alabama, Navarre, Florida, and internationally in Beijing, China, Chennai, India(terminating in 2018), Nyköping, Sweden (terminating in 2018) and Stockton-On-Tees, England (terminating in 2018). The Company leases these facilities forterms ending between 2018 and 2023.ITEM 3.LEGAL PROCEEDINGS .The Company and its subsidiaries are from time to time involved in ordinary routine litigation incidental to the conduct of its business. The Company and itssubsidiaries are not a party to, and its property is not the subject of, any material pending legal proceedings that, in the opinion of management, are likely to have amaterial adverse effect on the Company's business, financial condition or results of operations.ITEM 4.MINE SAFETY DISCLOSURES.Not applicable.15 PART IIITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OFEQUITY SECURITIES.The Company's common stock is listed on the NYSE American Stock Exchange, where it trades under the symbol "GVP". The following table sets forth, for theperiods indicated, the high and low sale prices for the Company's common stock reported by the NYSE American Stock Exchange for each full quarterly periodwithin the two most recent fiscal years:2017QuarterHigh LowFirst$3.85 $3.05Second$3.75 $2.85Third$3.55 $2.35Fourth$3.60 $3.102016QuarterHigh LowFirst$2.92 $2.00Second$2.67 $2.07Third$2.89 $2.16Fourth$3.70 $2.66On February 28, 2018, there were 19,425,905 shares of common stock outstanding, which was held by approximately 766 holders of record. The Company hasnever declared or paid a cash dividend on its common stock. The Company currently intends to retain future earnings to finance the growth and development of itsbusiness and, therefore, does not anticipate paying any cash dividends in the foreseeable future on its common stock.The Company believes factors such as quarterly fluctuations in results of operations and announcements of new products by the Company or by its competitorsmay cause the market price of the common stock to fluctuate, perhaps significantly. In addition, in recent years the stock market in general, and the shares oftechnology companies in particular, have experienced extreme price fluctuations. The Company's common stock has also experienced a relatively low tradingvolume, making it further susceptible to extreme price fluctuations. These factors may adversely affect the market price of the Company's common stock.ITEM 6.SELECTED FINANCIAL DATA .This information is not required for smaller reporting companies.16 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .GSE is a world leader in real-time high-fidelity simulation, providing a wide range of simulation, training, and engineering solutions to the global power andprocess 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 servicesthat systematically help clients fill key vacancies in the organization on a short-term basis, primarily in training professionals focused on regulatory complianceand certification in the nuclear power industry.On September 20, 2017, the Company acquired Absolute Consulting, Inc., now a wholly-owned subsidiary of GSE Performance Solutions, Inc. AbsoluteConsulting, Inc. is a provider of technical consulting and staffing solutions to the global nuclear power industry and employs approximately 160 professionals withexpertise in procedures writing, engineering, technical support, project management, training, project controls, and corrective actions. This acquisition brings anatural adjacency to GSE, fits well with our growth strategy, and benefits our customers from expanded capabilities and offerings.We execute projects globally with approximately 388 employees operating from offices in the U.S., China, and at client sites. While the majority of revenue comesfrom the nuclear power market, we also serve the fossil, refining, chemical, and petrochemical markets.Through our Hyperspring and Absolute subsidiaries, we provide highly skilled, high-value professionals to fill training and consulting positions on a contract basisfor nuclear power plant operators. Hyperspring professionals provide training, operations and maintenance support including: generic fundamentals exams(GFES), accreditation training visit (ATV) preparation, senior reactor operator (SRO) certification, procedure development, work management, tagging/labeling,outage execution, planning/scheduling, corrective action, self-assessments and equipment reliability. Customers include TVA, Entergy, Southern Company,PSEG Nuclear LLC and NRG Energy Inc.17 Results of Operations.The following table sets forth the results of operations for the periods presented expressed as a percentage of revenue.($ in thousands)Years ended December 31, 2017 % 2016 %Revenue$70,880 100.0 % $53,101 100.0 %Cost of revenue 52,336 73.8 % 36,843 69.4 % Gross profit 18,544 26.2 % 16,258 30.6 %Operating expenses Selling, general and administrative 15,469 21.8 % 12,260 23.1 %Research and development 1,391 2.0 % 1,261 2.4 %Restructuring charges 778 1.1 % 490 0.9 %Depreciation 342 0.5 % 383 0.7 %Amortization of definite-lived intangible assets 335 0.5 % 289 0.5 %Total operating expenses 18,315 25.8 % 14,683 27.7 % Operating income 229 0.3 % 1,575 3.0% Interest income, net 80 0.1 % 85 0.2 %Gain (loss) on derivative instruments, net 99 0.1 % (18) 0.0%Other (expense) income, net (4) 0.0 % 130 0.2% Income before income taxes 404 0.6 % 1,772 3.3%(Benefit) provision for income taxes (4,980) -7.0 % 350 0.7 % Net income$5,384 7.6 % $1,422 2.7%18 Comparison of the Years Ended December 31, 2017 to December 31, 2016.Revenue. Revenue for the year ended December 31, 2017, totaled $70.9 million, which was 33.5% greater than the $53.1 million of revenue for the year endedDecember 31, 2016. The year over year increase in revenue was primarily driven by the respective increases in the two segments listed below:(in thousands)Year ended December 31, 2017 2016Revenue: Performance Improvement Solutions$39,899 $35,474Nuclear Industry Training and Consulting 30,981 17,627Total revenue$70,880 $53,101Performance Improvement Solutions revenue increased 12.5% from $35.5 million to $39.9 million for the years ended December 31, 2016 and 2017, respectively.The increase in revenue for the year ended December 31, 2017 compared to the prior year is mainly driven by an additional $10.4 million in revenues from a majorcustomer per the large contract executed in the first quarter of 2016. Excluding this customer, revenues were down $6.0 million compared to the prior year. Thisdecrease was primarily due to a $2.3 million decrease in revenues from foreign subsidiaries as well as several large contracts that were completed in 2016 and onlypartially backfilled by new orders in 2017. We recorded total Performance Improvement Solutions orders of $16.9 million and $63.7 million for the years endedDecember 31, 2017 and 2016, respectively.For the year ended December 31, 2017, Nuclear Industry Training and Consulting r evenue totaled $31.0 million compared to revenue of $17.6 million during theyear ended December 31, 2016. The $13.4 million increase was primarily attributable to the acquisition of Absolute, which contributed $8.7 million of revenues tothe current year increase, as well as Hyperspring's major customer, which contributed $6.5 million of increased revenues compared to the prior year mainly due toa landmark event for operator performance at this customer; the increase was partially offset by a decrease of $2.0 million from two other customers due to lowerstaff augmentation needs. Nuclear Industry Training and Consulting orders totaled $38.1 million and $15.8 million for the years ended December 31, 2017 and2016, respectively. Absolute contributed $8.2 million of orders for the current year since the acquisition date.At December 31, 2017, the Company's backlog was $71.4 million: $46.3 million for the Performance Improvement Solutions segment and $25.1 million for theNuclear Industry Training and Consulting segment, $13.1 million of which was attributable to Absolute. At December 31, 2016, the Company's backlog was $73.2million: $68.8 million for the Performance Improvement Solutions segment and $4.4 million for the Nuclear Industry Training and Consulting segment.Performance Improvement Solutions segment's backlog decreased by $22.5 compared to December 31, 2016. The decrease in backlog is primarily due to 2016backlog that was converted to revenues during 2017 and has only been partially replaced by new orders. Excluding Absolute, Nuclear Industry Training andConsulting segment's backlog increased by $7.6 million, primarily due to increased orders from major customers for Hyperspring.19 Gross profit. Gross profit was $18.5 million, or 26.2%, for the year ended December 31, 2017 compared to $16.3 million, or 30.6%, for the year endedDecember 31, 2016.($ in thousands)Years ended December 31, 2017 % 2016 %Gross profit: Performance Improvement Solutions$13,712 34.4% $13,658 38.5%Nuclear Industry Training and Consulting 4,832 15.6% 2,600 14.8%Consolidated gross profit$18,544 26.2% $16,258 30.6%As a percentage of revenue, the Performance Improvement Solutions segment's gross profit decreased from 38.5% for the year ended December 31, 2016 to $13.7million, or 34.4%, for the year ended December 31, 2017. The decrease in gross profit percentage for Performance Improvement Solutions during 2017 wasprimarily driven by three large nuclear simulation projects with lower margin.For the years ended December 31, 2017 and 2016, the Nuclear Industry Training and Consulting segment had gross margin of 15.6% and 14.8%, respectively. Theminor fluctuations in gross profit percentage for Nuclear Industry Training and Consulting for the periods presented were due to normal changes in the mix ofprojects with different margins.Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses totaled $15.5 million and $12.3 million for the years endedDecember 31, 2017 and 2016, respectively. Fluctuations in the components of SG&A spending were as follows:($ in thousands)Years ended December 31, 2017 % 2016 %Selling, general and administrative expenses: Corporate charges$10,428 67.4% $8,392 68.5%Business development 3,560 23.0% 3,004 24.5%Facility operation & maintenance (O&M) 908 5.9% 1,043 8.5%Contingent consideration 446 2.9% (207) (1.7)%Bad debt expense 118 0.8% - 0.0%Other 9 0.1% 28 0.2%Total$15,469 100.0% $12,260 100.0%Corporate charges increased $2.0 million in 2017 compared to 2016. The increase was primarily due to higher stock-based compensation expenses of $0.9 million,acquisition-related expenses of $0.5 million, and higher professional fees of $0.7 million.Business development charges increased $0.6 million in 2017 compared to 2016, primarily due to acquisition of Absolute, which contributed $0.6 million ofbusiness development expenses since acquisition.Facility O&M expenses decreased $0.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in 2017 wasmainly due to the sublease of a portion of our Sykesville location and the closing of our Georgia office at the end of 2016.Contingent consideration expense mainly reflected the fair value adjustments related to our November 2014 Hyperspring acquisition. Contingent considerationincreased $0.7 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase primarily reflected better performancefor Hyperspring in 2017. The contingent consideration liability expired in November 2017 with the final payment made in January 2018.Bad debt expense. We recorded bad debt expense of $118,000 for the year ended December 31, 2017. We did not record bad debt expense for the year endedDecember 31, 2016. On July 31, 2017, South Carolina Electric and Gas Company announced that it would cease construction of new nuclear plants at the V.C.Summer Nuclear Station, one of the facilities for which the Company has an executory contract with Westinghouse for the provision of simulator software andequipment. Although there has been no formal rejection of the contract as part of the Westinghouse bankruptcy process, GSE considered it likely thatWestinghouse would reject the parties' contract pertaining to the V.C. Summer Nuclear Station. Therefore, at June 30, 2017, GSE reserved 100% of accountsreceivable, unbilled receivables, and billings in excess related to the V.C. Summer Nuclear Station, resulting in a net bad debt charge of $118,000.Research and development. Research and development costs consist primarily of software engineering personnel and other related costs. Research anddevelopment costs, net of capitalized software, totaled $1.4 million and $1.3 million for the years ended December 31, 2017 and 2016, respectively.Restructuring charges. Restructuring charges totaled $0.8 million and $0.5 million for the years ended December 31, 2017 and 2016, respectively. On December27, 2017, the Board of GSE Systems, Inc. approved an international restructuring plan to streamline and optimize the Company's global operations. Under therestructuring plan, we expect to record a total restructuring charge of $1.7 million, excluding any tax impacts and cumulative translation adjustments. We recordeda severance expense of $0.5 million, asset write-offs of $0.2 million and other costs of $46,000 for the year December 31, 2017. We expect to record the remainingrestructuring charges in 2018, primarily to reflect the office closure costs and the amounts to be transferred from cumulative translation adjustments and includedin determining net income for the period. In the third quarter of 2015, the Board of Directors of the Company approved restructuring actions for the Company'sworldwide operations. Under the restructuring plan, we recorded restructuring expense of $45,000 and $0.5 million for the years ended December 31, 2017 and2016 respectively. The decrease in 2015 restructuring plan charges was primarily due to nearing completion on the Company's restructuring activities initiatedduring 2015. Depreciation. Depreciation expense totaled $342,000 and $383,000 for the years ended December 31, 2017 and 2016, respectively.Amortization of definite-lived intangible assets. Amortization expense related to definite-lived intangible assets totaled $335,000 and $289,000 for the years endedDecember 31, 2017 and 2016, respectively. The increase in amortization was primarily due to Absolute's amortization of $136,000 for current year which waspartially offset by lower amortization of customer-related intangible assets that were recorded in conjunction with the Hyperspring acquisition in 2014.Gain (loss) on derivative instruments, net. The Company periodically enters into forward foreign exchange contracts to manage market risks associated with thefluctuations in foreign currency exchange rates on foreign-denominated trade receivables. The Company had not designated the contracts as hedges and recognizeda gain on the change in the estimated fair value of the contracts of $73,000 and 51,000 for the years ended December 31, 2017 and 2016, respectively.The foreign currency denominated trade receivables, unbilled receivables, billings in excess of revenue earned and subcontractor accruals that are related to theoutstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of theperiod. The gain or loss resulting from such remeasurement is also included in gain (loss) on derivative instruments net in the consolidated statements ofoperations. For the years ended December 31, 2017 and 2016, the Company incurred gain (losses) of $26,000 and $(69,000), respectively, from the remeasurementof such assets and liabilities.Other income (expense), net. The Company recognized $4,000 of other expense, net and $130,000 of other income, net for the years ended December 31, 2017and 2016, respectively. Other income recognized in 2016 primarily represented $101,000 Value Added Tax refund received by the Company's Chinese subsidiaryduring fiscal year 2016.20 Provision for Income Taxes. The Company files tax returns in the United States federal jurisdiction and in several state and foreign jurisdictions. Because of thenet operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations for tax years 1997, and forward, and is subject toforeign tax examinations by tax authorities for the years 2009 and forward. Open tax years related to state and foreign jurisdictions remain subject to examinationbut are not considered material to our financial position, results of operations or cash flows.The Company's tax expense (benefit) in 2017 was $(5.0) million, representing an annual effective tax rate of (1,232.7)%, and consisted of $0.5 million of currenttax provision and $(5.5) million of deferred taxes. The Company's tax expense in 2016 was $0.3 million, representing an annual effective rate of 19.8% andconsisted of $0.2 million of current tax provision and $0.1 million of deferred taxes.The increase of $0.3 million in current tax provision was primarily driven by the increased accrued provision for foreign uncertain tax positions as more serviceswere provided in certain countries, primarily in Korea and the interests and penalties we accrued on the foreign tax contingencies.The significant change of $5.6 million in deferred tax expense (benefits) was primarily driven by the release of $9.4 million of valuation allowance against thedeferred tax assets related to the U.S. entities which was partially offset by a decrease of $2.5 million for deferred taxes, primarily due to the remeasurement ofdeferred tax assets using a tax rate decreased from 34% to 21% and a charge of $1.4 million for provision for uncertain tax positions.The difference between the effective rate and statutory rate primarily resulted from the release of valuation allowance and change in the statutory tax rate from34% to 21%. Please see Note 12, Income Taxes for additional information.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 amountsof assets, liabilities, revenues and expenses. Those accounting estimates that have the most significant impact on the Company's operating results and place themost significant demands on management's judgment are discussed below. For all of these policies, management cautions that future events rarely develop exactlyas forecast, and the best estimates may require adjustment.Revenue Recognition. The Company recognizes revenue through (1) fixed price contracts on the sale of uniquely designed systems containing hardware, softwareand other materials which apply mainly to the Performance Improvement Solutions segment as well as (2) time and material contracts primarily through NuclearIndustry Training and Consulting support and service agreements.In accordance with U.S. generally accepted accounting principles (U.S. GAAP), our Performance Improvement Solutions segment accounts for revenue underfixed-price contracts using the percentage-of-completion method. This methodology recognizes revenue and earnings as work progresses on the contract and isbased on an estimate of the revenue and earnings earned to date, less amounts recognized in prior periods. The Company bases its estimate of the degree ofcompletion of the contract by reviewing the relationship of costs incurred to date to the expected total costs that will be incurred on the project. Estimated contractearnings are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which thechange is identified. Estimated losses are charged against earnings in the period such losses are identified. The Company recognizes revenue arising from contractclaims either as income or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is alegal basis of the claim.Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, softwaremodification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in theestimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.As the Company recognizes revenue under the percentage-of-completion method, it provides an accrual for estimated future warranty costs based on historical andprojected claims experience. The Company's long-term contracts generally provide for a one-year warranty on parts, labor and any bug fixes as it relates tocustomized software embedded in the systems.Revenue from the sale of software licenses without other elements in the contract and which do not require significant modifications or customization for theCompany's modeling tools are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection isconsidered probable. We utilize written contracts as a means to establish the terms and conditions by which our products support and services are sold to ourcustomers. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs after a license key hasbeen delivered electronically to the customer.The Company also recognizes revenue from the sale of software licenses from contracts with multiple deliverables. These software license sales are evaluatedunder ASC 985-605, Software Revenue Recognition . Contracts with multiple element arrangements typically include, but are not limited to, components such asinstallation, training, licenses, maintenance, and PCS listed in the contract. The Company has established that vendor specific objective evidence (VSOE) does notexist for all elements sold together with its software license sales. If a PCS or professional services element exists in the software license arrangement, revenue isrecognized ratably over the longest service period. If no PCS or professional services element exists in the arrangement, revenue is deferred until the lastundelivered element is delivered.The Company recognizes revenue under time and materials contracts primarily from Nuclear Industry Training and Consulting and certain cost-reimbursablecontracts. Revenue on time and material contracts is recognized as services are rendered and performed. Under a typical time-and-materials billing arrangement,customers are billed on a regularly scheduled basis, such as biweekly or monthly. Any unbilled amounts are typically billed the following month. Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performancebased. However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able toobtain reimbursement for all such costs.Impairment of Intangible Assets, including Goodwill. We review goodwill for impairment annually as of December 31 and whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable. We test 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. As of December 31, 2017, the Company's $8.4 million goodwill balance was related to ourNuclear Industry Training and Consulting segment, which arose from the acquisitions of Hyperspring in November 2014 and Absolute in September 2017.Accounting Standards Update (ASU) 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08) permits anentity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as abasis for determining whether it is necessary to perform the two-step goodwill impairment test. An entity is not required to perform step one of the goodwillimpairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount (Step 0). If the Step 0 test indicates the fairvalue of a reporting unit is less than its carrying value, then additional impairment testing is required in accordance with the provisions of ASC 350, Intangibles —Goodwill and Other .If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step impairment test is required. In thefirst step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assetsassigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reportingunit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of thereporting unit's goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit's assets and liabilities in a mannersimilar to a purchase price allocation, with any residual fair value allocated to goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fairvalue, then we record an impairment loss equal to the difference.At December 31, 2017, we performed a qualitative step 0 analysis and have concluded that the estimated fair values of each of our reporting units as of December31, 2017, is more likely than not, greater than their respective carrying values. At December 31, 2016, we performed a quantitative step one goodwill impairmenttest and concluded that the fair values of each of our reporting units exceeded their respective carrying values.Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates andassumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic andmarket conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that areunpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocatingshared assets and liabilities to determine the carrying values for each of our reporting units. The timing and frequency of our goodwill impairment tests are basedon an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assetsfor impairment and conduct formal tests when impairment indicators are present.21 Capitalization of Computer Software Development Costs. In accordance with U.S. GAAP, the Company capitalizes computer software development costsincurred after technological feasibility has been established, but prior to the release of the software product for sale to customers. Once the product is available tobe sold, the Company amortizes the costs, on a straight line method, over the estimated useful life of the product, which is typically three years. As ofDecember 31, 2017, the Company has net capitalized software development costs of $0.7 million. 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 thesale of the product. If the undiscounted cash flows are not sufficient to recover the unamortized software costs the Company will write-down the investment to itsestimated fair value based on future discounted cash flows. The excess of any unamortized computer software costs over the related net realizable value is writtendown and charged to operations. Significant changes in the sales projections could result in an impairment with respect to the capitalized software that is reportedon the Company's consolidated balance sheets.Valuation of Contingent Consideration for Business Acquisitions. Acquisitions may include contingent consideration payments based on future financial measuresof an acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of theseliabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions arereasonable; however, there is significant judgment involved. At each reporting date, the contingent consideration obligation will be revalued to estimated fair valueand changes in fair value subsequent to the acquisition will be reflected in income or expense in the consolidated statements of operations, and could cause amaterial 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 thevarious earn-out criteria.Deferred Income Tax Valuation Allowance. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and theirreported amounts in the consolidated financial statements. Management makes a regular assessment of the realizability of the Company's deferred tax assets. Inmaking this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income of the Company in making thisassessment. A valuation allowance is recorded to reduce the total deferred income tax asset to its realizable value. Based on the assessment the Company'smanagement performed as of December 31, 2017, we conclude that critical pieces of positive evidence supporting the realization of deferred tax assets existincluding the strength of three year cumulative positive earnings, reversal of existing deferred temporary differences and future taxable income for the U.S.entities. As a result, the Company has determined that a portion of the historic valuation allowance should be released as realization of the associated asset is morelikely than not. Accordingly, we reversed $9.4 million of valuation allowance against the deferred tax assets related to the U.S. entities. As of December 31, 2017,the Company has established a $1.1 million valuation allowance for its net deferred tax assets. Because a portion of the deferred tax assets are capital in nature, theCompany must assess the realizability of these assets separately from the deferred tax assets that are ordinary in nature. The Company determined that it would notbe able to generate sources of capital income and, therefore, would need to continue to assess a valuation allowance in the amount of $0.4 million. The Companycurrently does not have sufficient object evidence to substantiate the recovery of the deferred tax assets for U.K. Swedish and Chinese deferred tax assets atDecember 31, 2017, accordingly, a full valuation allowance of $0.7 million has been established on these deferred tax assets, predominantly comprised of netoperating losses.Liquidity and Capital Resources.As of December 31, 2017, GSE had cash and cash equivalents of $19.1 million compared to $21.7 million at December 31, 2016.Cash provided by operating activities. For the years ended December 31, 2017 and 2016, net cash provided by operating activities totaled $7.7 million and $10.2million, respectively. The year over year decrease in cash provided by operating activities was largely driven by:·A $3.1 million decrease in net inflows from changes in net working capital primarily due to a significant customer contract that was executed during2016 and the timing of contracted billing milestones of the projects.·A $1.5 million increase in operating expenses (excluding non-cash operating expenses) mainly due to higher professional fees and transaction costsrelated to acquisition of Absolute in fiscal year 2017·The decrease was partially offset by a $2.3 million increase in gross profit, primarily driven by higher revenue contributed by two largest customersNet cash (used in) provided by investing activities. For the year ended December 31, 2017, net cash used in investing activities was $9.2 million compared to netcash of $2.1 million provided by investing activities in the prior year. The significant cash outflow in 2017 was primarily due to the acquisition of Absolute, whichresulted in a cash outflow of $9.1 million. For fiscal year 2016, the net cash inflow of $2.1 million was primarily due to release of cash restricted as collateral forstandby letters of credit.Cash used in financing activities. For the years ended December 31, 2017 and 2016, net cash used in financing activities totaled $1.6 million and $1.2 million,respectively. The increase in the cash outflow from financing activities is largely driven by the increase of $0.3 million in the Company's withholding RSUs inorder to pay employees' payroll withholding taxes on vested RSUs and a $0.6 million decrease in proceeds received from stock option exercises, partially offset bya $0.6 million decrease in contingent consideration payments to the former Hyperspring owners in 2017.Credit FacilitiesCitizen's BankIn December 2016, the Company entered into a three-year, $5.0 million revolving line of credit (RLOC) facility with Citizen's Bank to fund general workingcapital needs, including acquisitions. Working capital advances bear interest of one-month LIBOR plus 2.25% per annum and letter of credit fees are 1.25% perannum. The Company is not required to maintain a restricted cash collateral account at Citizen's Bank for outstanding letters of credit and working capitaladvances. The credit facility agreement is subject to standard financial covenants and reporting requirements. The maximum availability under the RLOC is subject to a borrowing base equal to 80% of eligible accounts receivable, and is reduced for any issued andoutstanding letters of credit and working capital advances. At December 31, 2017, there were no outstanding borrowings on the RLOC and three letters of credittotaling $0.8 million. The amount available at December 31, 2017, after consideration of the borrowing base, letters of credit and working capital advances wasapproximately $4.0 million.Branch Banking and Trust Bank (BB&T)At December 31, 2017, we had three letters of credit with BB&T totaling $0.9 million, which expired and are pending on release by the bank and customer. AtDecember 31, 2017, the Company had $1.0 million as cash collateral for the letters of credit.22 2018 Liquidity OutlookAt December 31, 2017, the Company had cash and cash equivalents of $19.1 million and $1.0 million of restricted cash.As discussed above, the Company has a $5.0 million RLOC with Citizen's Bank to fund general working capital needs, including acquisitions. At December 31,2017, the amount available under this RLOC, after consideration of the borrowing base, letters of credit and working capital advances was approximately $4.0million. This credit facility provides the Company with additional flexibility to pursue its strategic initiatives and continue to expand the business.The Company entered 2018 with $71.4 million of backlog; $56.6 million of which is expected to convert to revenue in 2018. The Company anticipates that itsnormal operations will generate sufficient liquidity and working capital to fund its consolidated operations during the next twelve months without additionalfinancing.As discussed in MD&A, on December 27, 2017, the board of GSE Systems, Inc. approved an international restructuring plan to streamline and optimize theCompany's global operations. GSE is in the process of consolidating its engineering services and R&D activities to Maryland and cease an unprofitable non-corebusiness in the U.K. As a result, the Company will be closing its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions aredesigned to improve Company productivity by eliminating duplicate employee functions and increasing GSE's focus on its core business, improving efficiency andmaintaining the full range of engineering capabilities while reducing costs and organizational complexity. Under the restructuring plan, the Company expects a$1.5 million cash outflow in 2018, which primarily includes severance expense, facility closing costs, and other restructuring costs.Foreign Exchange.A portion of the Company's international sales revenue has been and may be received in a currency other than the currency in which the expenses relating to suchrevenue are paid. Accordingly, the Company periodically enters into forward foreign exchange contracts to manage the market risks associated with thefluctuations in foreign currency exchange rates.Off-balance Sheet Obligations.The Company has no off-balance sheet obligations as of December 31, 2017, except for its operating lease commitments and outstanding letters of credit andsurety bonds.Other Matters.Management believes inflation has not had a material impact on the Company's operations. 23 EBITDA and Adjusted EBITDA Reconciliation (in thousands)EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). Management believesEBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate the Company's resultsbecause it excludes certain items that are not directly related to the Company's core operating performance that may, or could, have a disproportionate positive ornegative 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 performanceprepared in accordance with GAAP. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure inaccordance with SEC Regulation G follows: Three Months ended Twelve Months ended December 31, December 31, 2017 2016 2017 2016Net income$5,428 $1,004 $5,384 $1,422Interest income, net(20) (33) (80) (85)Provision for income taxes(5,379) 75 (4,980) 350Depreciation and amortization392 271 1,146 1,080EBITDA421 1,317 1,470 2,767Gain (loss) from the change in fair value of contingent consideration10 163 446 (207)Restructuring charges733 3 778 490Stock-based compensation expense599 650 2,472 1,550Consulting support for finance restructuring- 84 - 394Acquisition-related expense- - 473 -Westinghouse bankruptcy related expense- - 122 -Adjusted EBITDA$1,763 $2,217 $5,761 $4,99424 Adjusted Net Income and Adjusted EPS Reconciliation (in thousands, except per share amounts)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'sresults because they exclude certain items that are not directly related to the Company's core operating performance that may, or could, have a disproportionatepositive or negative impact on our results for any particular period. 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, themost directly comparable GAAP financial measure, is as follows: Three Months ended Twelve Months ended December 31, December 31, 2017 2016 2017 2016 (unaudited) (unaudited) audited auditedNet income$5,428 $1,004 $5,384 $1,422Gain/loss from the change in fair value of contingent consideration10 163 446 (207)Restructuring charges733 3 778 490Stock-based compensation expense599 650 2,472 1,550Consulting support for finance restructuring- 84 - 394Acquisition-related expense- - 473 -Westinghouse bankruptcy related expense- - 122 -Tax reform impact2,497 - 2,497 -Release of valuation allowance(9,382) - (9,382) -Adjusted net (loss) income$(115) 1,904 $2,790 $3,649 Diluted earnings per common share$(0.01) $0.10 $0.14 $0.20 Adjusted (loss) earnings per common share – Diluted$(0.01) $0.10 $0.14 $0.20 Weighted average shares outstanding – Diluted (a)19,395,592 19,073,513 19,605,427 18,512,266 (a) During the three months ended December 31, 2017, the Company reported a non-GAAP net loss and positive net income. Accordingly, there were 395,104dilutive shares from options and RSUs included in the diluted earnings per common share calculation for the three months ended December 31, 2017, that wereconsidered anti-dilutive in determining the non-GAAP diluted loss per common share.25 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Not required of a smaller reporting company.26 ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageGSE Systems, Inc. and Subsidiaries Report of Independent Registered Public Accounting FirmF-1Consolidated Balance Sheets as of December 31, 2017 and 2016F-2Consolidated Statements of Operations for the Years ended December 31, 2017 and 2016F-3Consolidated Statements of Comprehensive Income for the Years ended December 31, 2017 and 2016F-4Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 2017 and 2016F-5Consolidated Statements of Cash Flows for the Years ended December 31, 2017 and 2016F-6Notes to Consolidated Financial StatementsF-727 Report of Independent Registered Public Accounting FirmShareholders and Board of DirectorsGSE Systems, Inc.Sykesville, MarylandOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of GSE Systems, Inc. (the "Company") and subsidiaries as of December 31, 2017 and 2016, therelated consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the two years in the period ended December31, 2017, and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Companyand subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31,2017 , in conformity with accounting principles generally accepted in the United States of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sconsolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free ofmaterial misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control overfinancial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose ofexpressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in theconsolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.We have served as the Company's auditor since 2014./s/ BDO USA, LLPMcLean, VirginiaMarch 15, 201828 PART I - FINANCIAL INFORMATIONItem 1. Financial StatementsGSE SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data) December 31,ASSETS20172016 Current assets: Cash and cash equivalents$19,111 $21,747Restricted cash 960 1,140Contract receivables, net 13,997 18,863Prepaid expenses and other current assets 2,795 2,052Total current assets 36,863 43,802 Equipment, software and leasehold improvements 4,782 6,759Accumulated depreciation (3,719) (5,527)Equipment, software and leasehold improvements, net 1,063 1,232 Software development costs, net 690 982Goodwill 8,431 5,612Intangible assets, net 2,604 454Deferred tax assets 7,167 -Other assets 37 1,574Total assets$56,855 $53,656 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable$1,251 $923Accrued expenses 2,276 2,437Accrued compensation 2,866 2,624Billings in excess of revenue earned 14,543 21,444Accrued warranty 1,433 1,137Current contingent consideration 1,701 2,105Other current liabilities 1,182 716Total current liabilities 25,252 31,386 Other liabilities 1,931 1,149Total liabilities 27,183 32,535Commitments and contingencies - - Stockholders' equity: Preferred stock $.01 par value, 2,000,000 shares authorized, no shares issued and outstanding - -Common stock $.01 par value, 30,000,000 shares authorized, 21,024,395 and 20,433,608 shares issued and 19,425,484and 18,834,697 shares outstanding in 2017 and 2016 210 204Additional paid-in capital 76,802 75,120Accumulated deficit (42,870) (49,427)Accumulated other comprehensive loss (1,471) (1,777)Treasury stock at cost, 1,598,911 shares (2,999) (2,999)Total stockholders' equity 29,672 21,121Total liabilities and stockholders' equity$56,855 $53,656The accompanying notes are an integral part of these consolidated financial statements.29 GSE SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data) Years ended December 31, 2017 2016 Revenue$70,880 $53,101Cost of revenue 52,336 36,843Gross profit 18,544 16,258 Operating expenses Selling, general and administrative 15,469 12,260Research and development 1,391 1,261Restructuring charges 778 490Depreciation 342 383Amortization of definite-lived intangible assets 335 289Total operating expenses 18,315 14,683 Operating income 229 1,575 Interest income, net 80 85Gain (loss) on derivative instruments, net 99 (18)Other (expense) income, net (4) 130 Income before income taxes 404 1,772 (Benefit) provision for income taxes (4,980) 350 Net income$5,384 $1,422 Basic earnings per common share$0.28 $0.08 Diluted earnings per common share$0.27 $0.08The accompanying notes are an integral part of these consolidated financial statements.30 GSE SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Years ended December 31, 2017 2016 Net income$5,384 $1,422 Foreign currency translation adjustment 306 (317) Comprehensive income$5,690 $1,105The accompanying notes are an integral part of these consolidated financial statements.31 GSE SYSTEMS, INC, AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(in thousands) CommonStock AdditionalPaid-in Accumulated AccumulatedOtherComprehensive Treasury Stock Shares Amount Capital Deficit Loss Shares Amount TotalBalance, January 1, 201619,511 $195 $73,481 $(50,849) $(1,460) (1,599) $(2,999) $18,368 Stock-based compensationexpense- - 1,399 - - - - 1,399Common stock issued foroptions exercised458 4 829 - - - - 833Common stock issued forRSUs vested465 5 (5) - - - - -Vested RSU shares withheld topay taxes- - (584) - - - - (584)Foreign currency translationadjustment- - - - (317) - - (317)Net income- - - 1,422 - - - 1,422Balance, December 31, 201620,434 $204 $75,120 $(49,427) $(1,777) (1,599) $(2,999) $21,121 Cumulative effect of newaccounting principle- - - 1,173 - - - 1,173Stock-based compensationexpense- - 2,398 - - - - 2,398Common stock issued foroptions exercised182 2 207 - - - - 209Common stock issued forRSUs vested409 4 (4) - - - - -Vested RSU shares withheld topay taxes- - (919) - - - - (919)Foreign currency translationadjustment- - - - 306 - - 306Net income- - - 5,384 - - - 5,384Balance, December 31, 201721,024 $210 $76,802 $(42,870) $(1,471) (1,599) $(2,999) $29,672The accompanying notes are an integral part of these consolidated financial statements.32 GSE SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years ended December 31, 2017 2016Cash flows from operating activities: Net income$5,384 $1,422Adjustments to reconcile net income to net cash provided by operating activities: Write-off of long-lived assets to be disposed of 222 -Accrued severance costs 465 -Depreciation 342 383Amortization of definite-lived intangible assets 335 289Amortization of capitalized software development costs 469 408Change in fair value of contingent consideration 446 (207)Stock-based compensation expense 2,472 1,550Bad debt expense 118 -(Gain) loss on derivative instruments, net (99) 18Deferred income taxes (5,505) 123Loss on sale of equipment, software, and leasehold improvements 2 3Changes in assets and liabilities: Contract receivables, net 10,006 (6,078)Prepaid expenses and other assets 1,020 (1,249)Accounts payable, accrued compensation and accrued expenses (1,904) 961Billings in excess of revenue earned (6,897) 12,257Accrued warranty 462 (465)Other liabilities 370 737Net cash provided by operating activities 7,708 10,152 Cash flows from investing activities: Capital expenditures (112) (79)Proceeds from sale of assets - 30Capitalized software development costs (177) (245)Acquisition of Absolute Consulting, Inc., net of cash acquired (9,066) -Releases of cash as collateral under letters of credit 180 2,408Net cash (used in) provided by investing activities (9,175) 2,114 Cash flows from financing activities: Proceeds from issuance of common stock on the exercise of stock options 209 833RSUs withheld to pay taxes (919) (584)Contingent consideration payments to Hyperspring, LLC (850) (1,421)Net cash used in financing activities (1,560) (1,172) Effect of exchange rate changes on cash 391 (431)Net (decrease) increase in cash and cash equivalents (2,636) 10,663Cash and cash equivalents at beginning of year 21,747 11,084Cash and cash equivalents at end of year$19,111 $21,747 The accompanying notes are an integral part of these consolidated financial statements.33 GSE SYSTEMS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017 and 20161. Summary of Significant Accounting PoliciesPrinciples of consolidationThe accompanying consolidated financial statements include the accounts of GSE Systems, Inc. and its wholly-owned subsidiaries (collectively, the Company). Allintercompany balances and transactions have been eliminated in consolidation. Investments in partnerships, joint ventures, and less-than-majority ownedsubsidiaries in which the Company has significant influence are accounted for under the equity method.Accounting estimatesThe preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (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 liabilitiesat the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, theCompany evaluates the estimates used, including but not limited to those related to revenue recognition on long-term contracts, allowance for doubtful accounts,product warranties, valuation of goodwill and intangible assets acquired, impairment of long-lived assets to be disposed of, valuation of contingent considerationissued in business acquisitions, valuation of stock based compensation awards, and the recoverability of deferred tax assets. Actual results could differ from theseestimates.Business CombinationsBusiness combinations are accounted for in accordance with ASC 805, Business Combinations using the acquisition method. Under the acquisition method, theidentifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized at fair value on the acquisition date, which is thedate on which control is transferred to the Company. Any excess purchase price is recorded as goodwill. Transaction costs associated with business combinationsare expensed as incurred.Revenues and the results of operations of the acquired business are included in the accompanying consolidated statement of operations commencing on the date ofacquisition.Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under Accounting StandardsCodification (ASC) 805, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilitiesbased on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent considerationobligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidatedstatements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may resultfrom changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates, and changes in probability assumptions withrespect to the likelihood of achieving the various earn-out criteria.Revenue recognitionThe Company recognizes revenue through fixed price contracts for the sale of uniquely designed/customized systems containing hardware, software and othermaterials which generally apply to the Performance Improvement Solutions segment and time and material contracts for the Nuclear Industry Training andConsulting segment.In accordance with ASC 605-35 , Construction-Type and Production-Type Contracts (ASC 605 ) , the Performance Improvement Solutions segment primarilyaccounts for revenue under fixed-price contracts using the percentage-of-completion method. This methodology recognizes revenue and earnings as workprogresses on the contract and is based on costs incurred to date compared to total estimated cost to complete the project. Estimated contract earnings are reviewedand revised periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which the change is identified.Estimated losses are charged against earnings in the period such losses are identified. The Company recognizes revenue arising from contract claims either asincome or as an offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there is a legal basis ofthe claim.Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, softwaremodification and customer acceptance issues. The reliability of these cost estimates is critical to the Company's revenue recognition as a significant change in theestimates can cause the Company's revenue and related margins to change significantly from the amounts estimated in the early stages of the project.As the Company recognizes revenue under the percentage-of-completion method, it provides an accrual for estimated future warranty costs based on historical andprojected claims experience. The Company's long-term contracts generally provide for a one to two year warranty on parts, labor and any bug fixes as it relates tocustomized software embedded in the systems.Revenue from the sale of software licenses without other elements in the contract and which do not require significant modifications or customization for theCompany's modeling tools are recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection isconsidered probable. We utilize written contracts to establish the terms and conditions by which product support and services are sold to customers. Delivery isconsidered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs after a license key has been deliveredelectronically to the customer. The Company also recognizes revenue from the sale of software licenses from contracts with multiple deliverables. These software license sales are evaluatedunder ASC 985-605, Software Revenue Recognition . Contracts with multiple element arrangements typically include, but are not limited to, components such asinstallation, training, licenses, and post contract support (PCS) listed in the contract. The Company concluded that vendor specific objective evidence (VSOE) doesnot exist for all elements of its software license sales. If a PCS or professional services element exists in the software license arrangement, revenue is recognizedratably over the longest service period. If no PCS or professional services element exists in the arrangement, revenue is deferred until the last undelivered elementis delivered.The Company recognizes revenue under time and materials contracts primarily from the Nuclear Industry Training and Consulting segment and certain cost-reimbursable contracts. Revenue on time and material contracts is recognized as services are rendered and performed. Under a typical time-and-materials billingarrangement, customers are billed on a regularly scheduled basis, such as biweekly or monthly. Any unbilled amounts are typically billed the following month.Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed orperformance based. However, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not beable to obtain reimbursement for all such costs.34 Cash and cash equivalentsCash and cash equivalents represent cash and highly liquid investments including money market accounts with maturities of three months or less at the date ofpurchase.Restricted cashRestricted cash consists of the cash collateralization of outstanding letters of credit used for various advance payment, bid, surety and performance bonds, andnegative foreign exchange positions which have been segregated into restricted money market accounts with BB&T Bank. BB&T Bank has complete andunconditional control over the restricted money market accounts.At December 31, 2017 and 2016, the Company had approximately $1.0 million and $1.1 million, respectively, of cash in escrow accounts with BB&T Bank. Wehave classified all of our restricted cash as current assets at December 31, 2017 and 2016, respectively. The Company recorded interest income of $2,000 and$6,000 from the escrow accounts for the years ended December 31, 2017 and 2016, respectively. The interest earned on these restricted funds is added to therestricted cash balance. The Company classifies the restriction and release of the cash collateralization of outstanding letters of credit as an investing activity withinthe consolidated statements of cash flows, as these deposits are not related to borrowings against our line of credit.Contract receivables, netContract receivables include recoverable costs and accrued profit not billed which represents revenue recognized in excess of amounts billed. Billings in excess ofcosts and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets represent advanced billings to clients on contracts inadvance of work performed. Generally, such amounts will be earned and recognized over the next twelve months.Billed receivables are recorded at invoiced amounts. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, and specificidentification and review of customer accounts.Equipment, software and leasehold improvements, netEquipment and purchased software are recorded at cost and depreciated using the straight-line method with estimated useful lives ranging from three to ten years.Leasehold improvements are amortized over the life of the lease or the estimated useful life, whichever is shorter, using the straight-line method. Upon sale orretirement, the cost and related depreciation are eliminated from the respective accounts and any resulting gain or loss is included in operations. Maintenance andrepairs are charged to expense as incurred.Software development costsCertain computer software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software developmentcosts begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product iscommercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenue and isdetermined using the straight-line method over the remaining estimated economic life of the product, typically three years. On an annual basis, or more frequentlyas conditions indicate, the Company assesses the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expectedto 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-downthe carrying amount of such asset to its estimated fair value based on the future discounted cash flows. The excess of any unamortized computer software costsover the related fair value is written down and charged to operations.Development expendituresDevelopment expenditures incurred to meet customer specifications under contracts are charged to contract costs. Company sponsored development expendituresare either charged to operations as incurred and are included in research and development expenses or are capitalized as software development costs. See Note 9,Software development costs, net . The amounts incurred for Company sponsored development activities relating to the development of new products and servicesor the improvement of existing products and services, were approximately $1.6 million for the years ended December 31, 2017 and 2016, respectively. Of thisamount, the Company capitalized approximately $0.2 million for the years ended December 31, 2017 and 2016, respectively.Impairment of long-lived assetsLong-lived assets, such as equipment, purchased software, capitalized software development costs, and intangible assets subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized at the amount by which the carrying amountof the asset exceeds its fair value. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of thecarrying amount or fair value less costs to sell, and would no longer be depreciated.On December 27, 2017, the board of the Company approved an international restructuring plan to streamline and optimize the Company's global operations. As aresult, the Company will be closing its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. The Company's management conducted animpairment review of the assets to be disposed of under the plan. Based upon this review, we recorded an impairment loss of $0.2 million representing the net bookvalue of the equipment and intangible assets subject to amortization under the respective offices. See Note 3, Restructuring Expenses .Goodwill and intangible assetsThe Company's intangible assets include amounts recognized in connection with business acquisitions, including customer relationships, contract backlog and software. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization isrecognized on a straight-line basis over the estimated useful life of the intangible assets, except for contract backlog and contractual customer relationships whichare recognized in proportion to the related projected revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairmentarise. The Company does not have any intangible assets with indefinite useful lives.Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company reviews goodwill for impairment annually as of December31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with Accounting Standard sUpdate (ASU) 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment, and ASC 350, Intangibles — Goodwill and Other (ASC350). The Company tests goodwill at the reporting unit level.ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than itscarrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Under ASU 2011-08, an entity is not requiredto perform step one of the goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. For theannual goodwill impairment test as of December 31, 2017, the Company performed a quantitative step one goodwill impairment test and concluded that the fairvalues of each of the reporting units exceeded their respective carrying values. No goodwill impairment was recorded during 2017.35 Foreign currency translationThe United States Dollar (USD) is the functional currency of GSE and our subsidiaries operating in the United States. Our subsidiaries' financial statements aremaintained in their functional currencies. The functional currency of each of our foreign subsidiaries is the currency of the economic environment in which thesubsidiary primarily does business. Our foreign subsidiaries' financial statements are translated into USD using the exchange rates applicable to the dates of thefinancial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at theaverage exchange rate for the year. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are reported as acomponent of accumulated other comprehensive income (loss) included in the consolidated statements of changes in stockholders' equity. For any transaction thatis in a currency different from the entity's functional currency, we record a gain or loss based on the difference between the exchange rate at the transaction dateand the exchange rate at the transaction settlement date (or rate at period end, if unsettled) as foreign currency exchange gain (loss), net in the consolidatedstatements of operations.Accrued warrantyFor contracts that contain a warranty provision, the Company provides an accrual for estimated future warranty costs based on historical experience and projectedclaims. The Company's contracts may contain warranty provisions ranging from one to two years. The current portion of the accrued warranty is presentedseparately on the consolidated balance sheets within current liabilities whereas the noncurrent portion is included in other liabilities.The activity in the accrued warranty accounts is as follows:(in thousands)As of and for the years ended December 31, 2017 2016 Beginning balance$1,478 $1,614Current year provision 707 355Current year claims (245) (467)Currency adjustment 13 (24)Ending balance$1,953 $1,478Income taxesIncome taxes are provided under the asset and liability method. Under this method, deferred income taxes are determined based on the differences between theconsolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. A provision is made for the Company'scurrent liability for federal, state and foreign income taxes and the change in the Company's deferred income tax assets and liabilities.We establish accruals for uncertain tax positions taken or expected to be taken in a tax return when it is not more likely than not (i.e., a likelihood of more than fiftypercent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position isthen measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Favorable or unfavorableadjustment of the accrual for any particular issue would be recognized as an increase or decrease to income tax expense in the period of a change in facts andcircumstances. Interest and penalties related to income taxes are accounted for as income tax expense.Stock-based compensationShare-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation-StockCompensation . Compensation expense related to share based awards is recognized on a pro rata straight-line basis based on the value of share awards that arescheduled to vest during the requisite service period.Earnings per shareBasic earnings per share is based on the weighted average number of outstanding common shares for the period. Diluted earnings per share adjusts the weightedaverage shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised. Basic and diluted earnings per share isbased on the weighted average number of outstanding shares for the period.The number of common shares and common share equivalents used in the determination of basic and diluted earnings per share were as follows:(in thousands, except for per share data)Years ended December 31, 2017 2016 Numerator: Net income$5,384 $1,422 Denominator: Weighted-average shares outstanding for basic earnings per share 19,259,966 18,218,681 Effect of dilutive securities: Stock options and restricted stock units 345,461 293,585 Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share 19,605,427 18,512,266 Shares related to dilutive securities excluded because inclusion would be anti-dilutive 374,833 677,964 Conversion of certain outstanding stock options was not assumed for the years ended December 31, 2017 and 2016 because the impact would have been anti-dilutive.36 Significant customers and concentration of credit riskFor the year ended December 31, 2017, we have a concentration of revenue from two individual customers, which accounted for approximately 39.0% of ourconsolidated revenue. For the year ended December 31, 2016, we have a concentration of revenue from an individual customer, which accounted for 10.2% of ourconsolidated revenue. No other individual customer accounted for more than 10% of our consolidated revenue in 2017 or 2016.As of December 31, 2017, we have a one customer that accounted for 26.7% of the Company's consolidated contract receivables. As of December 31, 2016, theCompany did not have any customers that accounted for more than 10% of the Company's consolidated contract receivables.Fair values of financial instrumentsThe carrying amounts of current assets and current liabilities reported in the consolidated balance sheets approximate fair value due to their short term duration.Derivative instrumentsThe Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates. It isthe Company's policy to use such derivative financial instruments to protect against market risk arising in the normal course of business in order to reduce theimpact of these exposures. The Company minimizes credit exposure by limiting counterparties to nationally recognized financial institutions.As of December 31, 2017, the Company had foreign exchange contracts outstanding of approximately 162.5 million Japanese Yen, 0.2 million Australian Dollars,and 24,000 Euro. At December 31, 2016, the Company had foreign exchange contracts outstanding of approximately 281.4 million Japanese Yen, 0.6 millionAustralian Dollars, 0.5 million Canadian Dollars, and 0.1 million Euro at fixed rates. The contracts expire on various dates through December 2018. The Companyhad not designated the foreign exchange contracts as hedges and had recorded the estimated fair value of the contracts in the consolidated balance sheet as follows: December 31,(in thousands)2017 2016 Asset derivatives Prepaid expenses and other current assets $201 $57Other assets - 84 201 141 Liability derivatives Other current liabilities - (20) - (20) Net fair value$201 $121The changes in the fair value of the foreign exchange contracts are included in gain (loss) on derivative instruments, net in the consolidated statements ofoperations.The foreign currency denominated trade receivables, unbilled receivables, billings in excess of revenue earned and subcontractor accruals that are related to theoutstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of theperiod. The gain or loss resulting from such remeasurement is also included in gain (loss) on derivative instruments net in the consolidated statements ofoperations.For the years ended December 31, 2017 and 2016, the Company recognized a gain (loss) on its derivative instruments net as outlined below: Years ended December 31,(in thousands)2017 2016 Foreign exchange contracts- change in fair value$73 $51 Remeasurement of related contract receivables and billings in excess of revenue earned 26 (69) $99 $(18) ReclassificationsCertain prior year amounts have been reclassified to conform with the current year presentation. The Company reclassified the stock-based compensation related tomanagement and administrative employees from cost of revenue and research and development expenses to selling, general and administrative expenses.37 Accounting pronouncements recently adoptedIn July 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11). ASU2015-11 requires that an entity measure inventory at the lower of cost and net realizable value. This ASU does not apply to inventory measured using the last-in,first-out method. ASU 2015-11 was effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reportingperiod. We adopted ASU 2015-11 effective January 1, 20 17. The adoption of this standard did not have a significant impact on our consolidated financialposition, results of operations or cash flows.In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Topic 718: Improvements to Employee Share Based PaymentAccounting (ASU 2016-09). The new guidance is intended to simplify the accounting for share based payment award transactions. The amendments in the updateinclude the following aspects for share based accounting: accounting for income taxes, classification of excess tax benefits on the statement of cash flows,forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholdsshares for tax withholding purposes. The adoption of ASU 2016-09 was required for fiscal reporting periods beginning after December 15, 2016, including interimreporting periods within those fiscal years. We adopted ASU 2016-09 effective January 1, 2017. In the fourth quarter, the Company began providing forwardforecasting beyond one year which was incorporated into the scheduling analysis to support realization of the deferred tax assets. The adoption of this standardresulted in a $1.2 million increase in the opening balance of retained earnings due to the release of windfall tax benefits.Accounting pronouncements not yet adoptedIn May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. Thestandard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects theconsideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment andmake more estimates than under today's guidance. These may include identifying performance obligations in the contract, estimating the amount of variableconsideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance also requires enhanceddisclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This guidance will beeffective for the Company for the fiscal year ending December 31, 2018, and interim periods therein, using either of the following transition methods: (i) a fullretrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) aretrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnotedisclosures).Subsequent to issuing ASU 2014-09, the FASB has issued a series of subsequent updates to the revenue recognition guidance in Topic 606, including ASU No.2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , ASU No. 2016-08, Revenue from Contracts with Customers (Topic606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606):Identifying Performance Obligations and Licensing , ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements andPractical Expedients , ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers , and ASU No. 2017-13,Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SECParagraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments .The aforementioned amendments are effective for public entities for annual reporting periods beginning after December 15, 2017, and for interim periods withinthat reporting period.The Company has completed its evaluation of the new standard and has assessed the impacts of adoption on the consolidated financial statements and disclosuresbased on the evaluation of our current contracts and revenue streams, which are described below.During the implementation of the new standard, we identified three broad revenue streams: 1) System Design and Build (SDB), 2) Software, and 3) Consulting andTraining services.The SDB contracts typically consist of initial design, engineering, assembly and installation of training simulators which include hardware, software, labor, andPCS on the software. We primarily account for revenue under fixed-price SDB contracts using the percentage-of-completion method (input method). Thismethodology recognizes revenue and earnings as work progresses on the contract and is based on costs incurred to date compared to total estimated cost tocomplete the project. Under the new accounting standard, we identify two main performance obligations for a typical SDB contract: a fully functioning trainingsimulator (which includes hardware, software, and labor) and PCS. For a training simulator, we will continue to use the percentage-of-completion method (inputmethod) to account for revenue, and for PCS, we recognize revenue ratably over the term of the PCS.For the standalone sales of software and which do not require significant modifications or customization, revenue recognition is mostly consistent under both theprevious and new standard.A software license sale contract with multiple deliverables typically includes the following elements: license, installation and training services and PCS. Under thecurrent revenue recognition standard, due to the lack of VSOE, revenue is recognized ratably over the longest service period. Under the new revenue recognitionstandard, the total transaction price will be allocated to the identified performance obligations based on their relative standalone selling prices, and we willrecognize the revenue as the performance obligations are satisfied. Specially, we will recognize license revenue when the software license is delivered to thecustomer; installation and training revenue will be recognized when the installation and training is completed without regard to a detailed evaluation of the point intime criteria due to the short-term nature of the installation and training services (1 to 2 days on average); and PCS revenue will be recognized ratably over theservice period.The contracts within the consulting and training services revenue stream are primarily time and materials based in which customers are billed on a regular basis,such as weekly, biweekly or monthly. Revenue on time and material contracts is recognized as services are rendered and performed. Any unbilled amounts aretypically billed the following month. Under the new standard, we elect to apply the "right to invoice" practical expedient outlined in ASC 606-10-55-18. Theinvoice 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 such, theCompany will recognize revenue in the amount for which it has the right to invoice. Therefore, revenue recognition is mostly consistent under both the previous and new standard.We adopted the new standard effective January 1, 2018 to (i) all new contracts entered into after January 1, 2018 and (ii) all existing contracts for which all (orsubstantially all) of the revenue has not been recognized under legacy revenue guidance, using the modified retrospective transition method. The adoption of thenew standard resulted in an increase of $0.9 million to the opening balance of accumulated deficit, primarily due to software contracts and the acceleration ofsoftware license revenue recognition. The Company is currently assessing the tax impact upon adoption of the new standard. Consolidated revenues presented inthe comparative consolidated financial statements for periods prior to January 1, 2018 will not be revised.The disclosures in our notes to the consolidated financial statements related to revenue recognition will be significantly expanded under the new standard,specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation ofrevenue.38 In February 2016, the FASB issued ASU No. 2016-02, Leases . The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROUasset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, withclassification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15,2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating leasesexisting at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practicalexpedients available. We are still evaluating the impact of the pending adoption of the new standard on the consolidated financial statements, and we expect that,upon adoption, the recognition of ROU assets and lease liabilities could be material.In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses , which introduces new guidance for credit losses on instruments within itsscope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but notlimited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment modelfor 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 acredit 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 concludingwhether a credit loss exists. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscalyears. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. TheCompany is currently evaluating the effects, if any, that the adoption of this guidance will have on the Company's consolidated financial position, results ofoperations and cash flows.In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). The new guidance addresseseight specific cash flow issues and applies to all entities that are required to present a statement of cash flows. Adoption of ASU 2016-15 is required for fiscalreporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. We are currently evaluating the potentialimpact of the adoption of ASU 2016-15 on our consolidated financial statements.In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (ASU 2016-18). The new guidance applies to all entities that have restricted cash orrestricted cash equivalents and are required to present a statement of cash flows. This update is intended to reduce diversity in cash flow presentation of restrictedcash and restricted cash equivalents and requires entities to include all cash and cash equivalents, both restricted and unrestricted, in the beginning-of-period andend-of-period totals presented on the statement of cash flows. Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15,2017, including interim reporting periods within those fiscal years. We are currently evaluating the potential impact of the adoption of ASU 2016-18 on ourconsolidated financial statements.In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the definition of a Business , which amends the current definition of abusiness. Under ASU 2017-01, to be considered a business, an acquisition would have to include an input and a substantive process that together significantlycontributes to the ability to create outputs. ASU 2017-01 further states that when substantially all of the fair value of gross assets acquitted is concentrated in asingle asset (or a group of similar assets), the assets acquired would not represent a business. The new guidance also narrows the definition of the term "outputs" tobe consistent with how it is described in ASC 606, Revenue from Contracts with Customers . The changes to the definition of a business will likely result in moreacquisitions being accounted for as asset acquisitions. ASU 2017-01 is effective for acquisitions commencing on or after December 15, 2017, with early adoptionpermitted. Adoption of this guidance will be applied prospectively on or after the effective date.In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the accounting forgoodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairmentwill 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 effectivefor financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. We are currently evaluating the potential impact of theadoption of ASU 2017-04 on our consolidated financial statements.In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (ASU 2017-09). The new guidance is intended to provide clarity andreduce both (1) diversity in practice and (2) cost and complexity when applying the guidance on ASC 718, Compensation – Stock Compensation . Entities arerequired to apply modification accounting for any change to an award, except for a change that is deemed to be purely administrative in nature. ASU 2017-09provides guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in ASC 718. Theamendments in this update are effective for all entities and for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We are currentlyevaluating the potential impact of the adoption of ASU 2017-09 on our consolidated financial statements.39 2.AcquisitionOn September 20, 2017, GSE, through its wholly-owned subsidiary GSE Performance Solutions, Inc. (Performance Solutions), acquired 100% of the capital stockof Absolute Consulting, Inc. (Absolute) for $8.8 million pursuant to the Stock Purchase Agreement by and among Performance Solutions and the sellers ofAbsolute. The purchase price was subject to a customary working capital adjustment resulting in total consideration of $9.5 million. An indemnification escrow of$1.0 million was funded from the cash paid to the sellers and is available to GSE and Performance Solutions to satisfy indemnification claims until September 20,2019. The acquisition of Absolute was completed on an all-cash transaction basis.Absolute is a provider of technical consulting and staffing solutions to the global nuclear power industry. Located in Navarre, Florida, Absolute has establishedlong-term relationships with blue-chip customers primarily in the nuclear power industry. The acquisition of Absolute is expected to strengthen the Company'sglobal leadership in nuclear training and consulting solutions, add new capacities to our technical consulting and staffing solutions offerings and bring highlycomplementary customers, while deepening relationships with existing clients.The following table summarizes the consideration paid to acquire Absolute and the fair value of the assets acquired and liabilities assumed at the date of thetransaction. The following amounts except for Cash are all reflected in the consolidated statement of cash flow within the "Acquisition of Absolute Consulting,Inc., net of cash acquired" line caption. Absolute ( in thousands ) Total purchase price$9,521 Purchase price allocation: Cash$455Contract receivables 5,121Prepaid expenses and other current assets 68Property, and equipment, net 184Intangible assets 2,569Accounts payable, accrued expenses, and other liabilities (78)Accrued compensation (1,617)Total identifiable net assets 6,702 Goodwill 2,819 Net assets acquired$9,521The goodwill is primarily attributable to the additional capacities to offer broader solutions to new and existing customers and the expected enhanced cost andgrowth synergies as a result of the acquisition. The total amount of goodwill that is expected to be tax deductible is $2.8 million. All of the $2.8 million of goodwillwas assigned to our Nuclear Industry Training and Consulting segment.The fair value of the assets acquired includes gross trade receivables of $5.1 million, of which the Company has collected in full subsequent to the acquisition.GSE did not acquire any other class of receivable as a result of the acquisition of Absolute.The Company identified $2.6 million of other intangible assets, including customer relationships and trademarks/names with amortization periods of three to tenyears. The following table summarizes the fair value of intangibles assets acquired at the date of acquisition and the related weighted average amortization period:Intangible AssetsWeighted average amortization period Fair Value (in years) (in thousands)Customer relationships10$1,856Trademarks/Names3 713Total $2,569Unaudited Pro Forma Financial InformationThe acquired business contributed revenue of $8.7 million and earnings of $0.6 million to GSE for the period from September 20, 2017 to December 31, 2017. Thefollowing unaudited pro forma summary presents consolidated information of GSE as if the business combination had occurred on January 1, 2016. The unauditedpro forma financial information was prepared based on historical financial information.These pro forma amounts have been calculated after applying GSE's accounting policies and adjusting the results of Absolute to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to fixed assets and intangible assets had been applied from January 1, 2016,with the consequential tax effects. In 2017, GSE and Absolute have incurred $0.5 million of acquisition-related costs. These expenses are included in general andadministrative expense on GSE's consolidated statements of operations and are reflected in pro forma earnings for the year ended December 31, 2016, in the tablebelow. The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completedon January 1, 2016, nor is it intended to be an indication of future operating results.(in thousands)(unaudited) Year Ended December 31, 20172016Revenue$99,484$93,147Net income 5,735 1,36240 3.Restructuring expensesOn December 27, 2017, the board of GSE Systems, Inc. approved an international restructuring plan to streamline and optimize the Company's global operations.Beginning in December 2017, GSE will consolidate its engineering services and R&D activities to Maryland and cease an unprofitable non-core business in theU.K. As a result, the Company will be closing its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improveCompany productivity by eliminating duplicate employee functions and increasing GSE's focus on its core business, improving efficiency and maintaining the fullrange of engineering capabilities while reducing costs and organizational complexity. GSE will eliminate approximately 40 positions due to these changes, primarily in Europe and India, and will undertake other cost-savings measures. Therestructuring plan is expected to be completed in 2018. As a result of these efforts, GSE expects to record a restructuring charge of approximately $1.7 million,primarily related to workforce reductions, contracts termination costs and asset write-offs due to the exit activities. We recorded a restructuring charge of $0.7million for the year ended December 31, 2017, and we expect to record the remaining charges, primarily reflecting the office closure costs, in the first quarter of2018. The following table summarize the restructuring costs. The amounts to be transferred from cumulative translation adjustments and included in determiningnet income for the period, in which the liquidation of these foreign entities are completed (2018), are not included in the table below.( in thousands )Total Expected Costs Costs for the Year Expected Costs RemainingEmployee termination benefits$499 $465 $34Lease termination costs 665 - 665Assets write-offs 222 222 -Other restructuring costs 303 46 257Total$1,689 $733 $956The restructuring costs related to our Performance Improvement Solutions segment and were included in the consolidated statement of operations within the"Restructuring charges" line caption. The accrued employee termination benefits of $0.5 million were reflected in the "Accrued compensation" line in theconsolidated balance sheet. No payment had been made as of December 31, 2017. 4. Goodwill and Intangible AssetsGoodwillThe Company reviews goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of anasset 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 operatingsegment, as defined by U.S. GAAP. After the acquisition of Hyperspring on November 14, 2014, the Company determined that it had two reporting units, whichare the same as our two operating segments: (i) Performance Improvement Solutions; and (ii) Nuclear Industry Training and Consulting (which includesHyperspring and Absolute). As of December 31, 2017 and 2016, goodwill of $8.4 million and $5.6 million, respectively, related to the Nuclear Industry Trainingand Consulting segment. The increase in the carrying amount of goodwill during the year ended December 31, 2017 was due to the acquisition of Absolute. Noimpairment of goodwill was recorded in 2017 or 2016.41 Intangible Assets Subject to AmortizationAs discussed in Note 2, Acquisition , we recognized finite-lived intangible assets of $2.6 million upon acquisition of Absolute on September 20, 2017, includingcustomer relationships and trademarks/names with amortization periods of five years. Amortization is recognized on a straight-line basis over the estimated usefullife of the intangible assets.As discussed in Note 3, Restructuring Expenses , on December 27, 2017, the board of the Company approved an international restructuring plan to streamline andoptimize the Company's global operations. As a result, the Company will be closing its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK,thus the Company's management conducted an impairment test of the assets to be disposed of under the plan.The intangible assets under the plan mainly included contractual and non-contractual customer relationships at our UK location. As the intangible assets have novalue for sale or value in use, we recognized an impairment loss of $0.1 million representing the net book value of the intangible assets as of December 31, 2017.The write-off of the intangible assets was included in the consolidated statement of operations within the "Restructuring charges" line caption.The following table shows the gross carrying amount and accumulated amortization of definite-lived intangible assets:(in thousands)As of December 31, 2017 Gross Carrying Amount Accumulated Amortization NetAmortized intangible assets : Customer relationships$3,074 $(1,218) $1,856Trade names 713 (33) 680Developed technology 471 (412) 59Non-contractual customer relationships 433 (426) 7Others 167 (165) 2Total$4,858 $(2,254) $2,604 (in thousands)As of December 31, 2016 Gross Carrying Amount Accumulated Amortization NetAmortized intangible assets : Customer relationships$1,425 $(1,235) $190Non-contractual customer relationships 911 (674) 237Developed technology 471 (353) 118Others 217 (211) 6Foreign currency translation (145) 48 (97)Total$2,879 $(2,425) $454Amortization expense related to definite-lived intangible assets totaled $335,000 and $289,000 for the years ended December 31, 2017 and 2016, respectively. Thefollowing table shows the estimated amortization expense of the definite-lived intangible assets for the next five years:(in thousands) Years ended December 31,: 2018$7342019 5782020 4722021 2292022 168Thereafter 423 $2,60442 5. Contract ReceivablesContract receivables represent balances due from a broad base of both domestic and international customers. All contract receivables are considered to becollectible within twelve months. Recoverable costs and accrued profit not billed represent costs incurred and associated profit accrued on contracts that willbecome billable upon future milestones or completion of contracts. The components of contract receivables are as follows:(in thousands)December 31, 2017 2016Billed receivables$8,154 $13,325Recoverable costs and accrued profit not yet billed 5,980 5,555Allowance for doubtful accounts (137) (17)Total contract receivables, net$13,997 $18,863During January 2018, the Company invoiced $4.7 million of the unbilled amounts related to the balance at December 31, 2017.On March 29, 2017, Westinghouse, a customer of our Performance Improvement Solutions segment, filed for Chapter 11 bankruptcy protection in the UnitedStates Bankruptcy Court for the Southern District of New York, Case No. 17-10751. During the second quarter of 2017, Westinghouse assumed one of ourcontracts related to Southern Nuclear Company. Therefore, we have not recorded a reserve for outstanding receivables related to this contract. On July 31, 2017,South Carolina Electric and Gas Company announced that it will cease construction of new nuclear plants at the V.C. Summer Nuclear Station, one of the facilitiesfor which the Company has an executory contract with Westinghouse for the provision of simulator software and equipment. Although there has been no formalrejection of the contract as part of the Westinghouse bankruptcy process, GSE now considers it likely that Westinghouse will reject the parties' contract pertainingto the V.C. Summer Nuclear Station. Therefore, at June 30, 2017, GSE reserved 100% of accounts receivable, unbilled receivables, and billings in excess related tothe V.C. Summer Nuclear Station, resulting in a net bad debt charge of $118,000.At December 31, 2017, in addition to the foregoing amounts associated with the V.C. Summer Nuclear Station, the Company had approximately $31,000 in netbilled and unbilled pre-petition receivables attributable to Westinghouse, and it was fully collected in January 2018. Therefore, none of the remaining outstandingamounts have been reserved at December 31, 2017.The activity in the allowance for doubtful accounts is as follows:(in thousands)As of and for the years ended December 31, 2017 2016 Beginning balance$17 $103 Current year provision 118 - Current year write-offs - (86) Currency adjustment 2 - Ending balance$137 $17 43 6. Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following:(in thousands)December 31, 2017 2016Inventory$755 $-Income tax receivable 418 446Prepaid expenses 549 422Other current assets 1,073 1,184Total$2,795 $2,052Inventory is being purchased to support the construction of three major nuclear simulation projects related to a significant contract that was executed during thefirst quarter of 2016. Inventory is recorded at the lower of cost or net realizable value in accordance with ASC 330, Inventory. Cost is determined using specificidentification. At December 31, 2016, inventory related to the simulation projects was classified as a long-term asset within other assets on the consolidatedbalance sheets. The earliest completion date of these projects is expected to occur in the second quarter of 2018.Other current assets primarily includes value-added tax receivables and cash deposited in a Swedish tax account.7. Equipment, Software and Leasehold Improvements, netEquipment, software and leasehold improvements, net consist of the following:(in thousands)December 31, 2017 2016Computer equipment$2,101 $2,988Software 1,598 1,511Leasehold improvements 454 527Furniture and fixtures 629 1,733 4,782 6,759Accumulated depreciation (3,719) (5,527)Equipment, software and leasehold improvements, net$1,063 $1,232Depreciation expense was $342,000 and $383,000 for the years ended December 31, 2017 and 2016, respectively.As discussed in Note 3, Restructuring Expenses , on December 27, 2017, the board of the Company approved an international restructuring plan to streamline andoptimize the Company's global operations. As a result, the Company will be closing its offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK,accordingly, the Company's management conducted an impairment test of the assets to be disposed of under the plan.The fixed assets under the respective offices primarily included computers, office equipment and furniture, software and leasehold improvements. As a result ofthis test, the Company concluded that these assets were no longer recoverable. Accordingly, we recorded a $0.1 million write-off of the fixed assets whichrepresented the net book value of the respective assets.448. Other AssetsOther assets consist of the following:(in thousands)December 31, 2017 2016Inventory$- $1,443Other 37 131Total$37 $1,574As of December 31, 2016, other assets are comprised primarily of inventory that was being purchased to support the construction of three simulation projectsrelated to a significant contract that was executed during the first quarter of fiscal year 2016. The inventories are to be relieved and charged to the project upondelivery and customer acceptance, which is expected during the second quarter of 2018 and beyond. As of December 31, 2017, inventory is classified as prepaidexpenses and other current assets.9. Software Development Costs, netSoftware development costs, net consist of the following:(in thousands)December 31, 2017 2016Beginning balance$982 $1,145 Additions 177 245Amortization (469) (408)Ending balance$690 $982 Software development costs capitalized were $0.2 million for the years ended December 31, 2017 and 2016, respectively. Amortization of capitalized softwaredevelopment costs was $0.5 million and $0.4 million for the years ended December 31, 2017 and 2016, respectively, and was included in cost of revenue in theconsolidated statements of operations.4510. Fair Value of Financial InstrumentsASC 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 exitprice) in the principle or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs whenmeasuring 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 measurementdate.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 mustbe observable for substantially the full term of the asset or liability.Level 3: inputs are unobservable and reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset orliability.The Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable andaccounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2017 and 2016 based upon the short-term nature of theassets and liabilities.The Company had $2.3 million and $15.3 million deposited in unrestricted money market accounts on December 31, 2017 and 2016, respectively.As of December 31, 2017, the Company had three standby letters of credit totaling $0.9 million which represent performance bonds on three contracts. TheCompany has deposited the full value of the standby letters of credit into money market escrow accounts, which have been restricted in that the Company may notaccess these funds until the related letters of credit have expired. The cash has been recorded on the Company's consolidated balance sheet as restricted cash incurrent assets based on the expiration date of the underlying letters of credit.46 The following table presents assets and liabilities measured at fair value at December 31, 2017: Quoted Pricesin Active Marketsfor Identical Assets SignificantOther ObservableInputs SignificantUnobservableInputs (in thousands)(Level 1) (Level 2) (Level 3) Total Money market funds$3,240 $- $- $3,240Foreign exchangecontracts - 201 - 201 Total assets$3,240 $201 $- $3,441 Contingentconsideration liability - - (1,701) (1,701) Total liabilities$- $- $(1,701) $(1,701)The following table presents assets and liabilities measured at fair value at December 31, 2016: Quoted Pricesin Active Marketsfor Identical Assets SignificantOther ObservableInputs SignificantUnobservableInputs (in thousands)(Level 1) (Level 2) (Level 3) Total Money market funds$16,435 $- $- $16,435Foreign exchange contracts - 141 - 141 Total assets$16,435 $141 $- $16,576 Foreign exchange contracts$- $(20) $- $(20)Contingent considerationliability - - (2,105) (2,105) Total liabilities$- $(20) $(2,105) $(2,125)For the years ended December 31, 2017 and 2016, the Company did not have any transfers between fair value Level 1 and Level 2. The Company did not hold anynon-financial assets or non-financial liabilities subject to fair value measurements on a recurring basis at December 31, 2017 or 2016.During the years ended December 31, 2017 and 2016, the Company did not have any transfers into or out of the Level 3 contingent consideration liability.The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the year ended December 31, 2017:(in thousands)Balance, January 1, 2017 $2,105Payments made on contingent liabilities (850Change in fair value 446Balance, December 31, 2017 $1,701The Company made the last payment of the contingent consideration in January 2018.47 11. Long-Term DebtAt December 31, 2017 and 2016, the Company had no long-term debt.Line of CreditBB&T BankWe previously had a Master Loan and Security Agreement and Revolving Credit Note with BB&T that provided a $7.5 million revolving line of credit for thepurpose of issuing stand-by letters of credit and providing working capital. Working capital advances accrued interest at a rate equal to the Wall Street JournalPrime Rate of Interest, floating with a floor of 4.5%.In connection with the Citizen's Bank credit facility noted below, this agreement was modified in December 2016 to terminate the revolving line of credit, butmaintain the outstanding letters of credit.At December 31, 2017, the Company had three letters of credit with BB&T totaling $0.9 million, which have expired and are pending release by the bank andcustomer.At December 31, 2017 and 2016, the cash collateral account totaled $1.0 million and $1.1 million, respectively, and was classified as restricted cash on theconsolidated balance sheets.Citizen's BankIn December 2016, the Company entered into a three-year, $5.0 million revolving line of credit facility (RLOC) with Citizen's Bank on December 29, 2016, tofund general working capital needs, including acquisitions. Working capital advances bear interest of one-month LIBOR plus 2.25% per annum and letter of creditfees are 1.25% per annum. The Company is not required to maintain a restricted cash collateral account at Citizen's Bank for outstanding letters of credit andworking capital advances. The credit facility agreement is subject to standard financial covenants and reporting requirements.The maximum availability under the RLOC is subject to a borrowing base equal to 80% of eligible accounts receivable, and is reduced for any issued andoutstanding letters of credit and working capital advances. At December 31, 2017, there were no outstanding borrowings on the RLOC and three letters of credittotaling $0.8 million. The amount available at December 31, 2017, after consideration of the borrowing base, letters of credit and working capital advances wasapproximately $4.0 million.The credit facility agreement is subject to standard financial covenants and reporting requirements. At December 31, 2017, the Company was in compliance withits financial covenants.4812. Income TaxesThe consolidated income before income taxes, by domestic and foreign sources, is as follows:(in thousands)Years ended December 31, 2017 2016Domestic$1,580 $2,873Foreign (1,176) (1,101)Total $404 $1,772The (benefit) provision for income taxes is as follows:(in thousands)Years ended December 31, 2017 2016Current: Federal$459 $-State 47 6Foreign 19 221Subtotal 525 227 Deferred: Federal (4,694) 127State (942) 19Foreign 131 (23)Subtotal (5,505) 123Total$(4,980) $350 The effective income tax rate for the years ended December 31, 2017 and 2016 differed from the statutory federal income tax rate as presented below: Effective Tax Rate Percentage (%) Years ended December 31, 2017 2016Statutory federal income tax rate34.0% 34.0%State income taxes, net of federal tax benefit(184.9)% 1.3%Effect of foreign operations55.6% 8.6%Change in valuation allowance(2,045.3)% (46.9)%Change in tax rate619.1% 0.0%Uncertain tax positions338.6% 11.8%Worthless stock deduction(257.6%) 0.0%Stock-based compensation(51.7)% 0.2%Transfer pricing adjustments117.5% (0.4)%162(m) limit on compensation52.3% 4.1%Change in APB 23 liability46.2% 0.0%Meals and entertainment37.8% 7.7%Other permanent differences5.7% (0.6)%Effective tax rate(1,232.7)% 19.8%The difference between the effective rate and statutory rate in 2017 primarily resulted from the release of valuation allowance and change in the statutory tax ratefrom 34% to 21%, effective for tax years beginning after December 31, 2017 due to the Tax Cuts and Jobs Act.49 Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financialstatements. A summary of the tax effect of the significant components of the deferred income tax assets and liabilities is as follows:(in thousands)As of December 31, 2017 2016Deferred tax assets: Net operating loss carryforwards$5,009 $7,868Capital loss carryforwards 383 549Accruals 487 183Reserves 514 514Alternative minimum tax credit carryforwards 299 203Stock-based compensation expense 1,002 1,224Intangibles 433 391Undistributed earnings of foreign subsidiary - 37Other 135 71Total deferred tax asset 8,262 11,040Valuation allowance (1,095) (10,477)Total deferred tax asset less valuation allowance 7,167 563 Deferred tax liabilities: Undistributed earnings of foreign subsidiary (149) -Software development costs (188) (382)Fixed Assets (91) (161)Indefinite-lived intangibles (337) (316)Other (45) (27)Total deferred tax liability (810) (886) Net deferred tax asset$6,357 $(323)Deferred tax liabilities are included in "Other liabilities" on the consolidated balance sheet.In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not berealized. The Company's ability to realize its deferred tax assets depends primarily upon the preponderance of positive evidence that could be demonstrated bythree year cumulative positive earnings, reversal of existing deferred temporary differences; and generation of sufficient future taxable income to allow for theutilization of deductible temporary differences.As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view with regard tofuture realization of deferral tax assets to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. This analysis isperformed on a jurisdiction by jurisdiction basis. In the fourth quarter, the Company began providing forward forecasting beyond one year which was incorporatedinto the scheduling analysis to support realization of the deferred tax assets.Based on the assessment the Company's management performed as of December 31, 2017, we conclude that critical pieces of positive evidence supporting therealization of deferred tax assets exist including the strength of three year cumulative positive earnings, reversal of existing deferred temporary differences andfuture taxable income for the U.S. entities. As a result, the Company has determined that a portion of the historic valuation allowance should be released asrealization of the associated asset is more likely than not. Accordingly, we reversed $9.4 million of valuation allowance against the deferred tax assets related to theU.S. entities. Because a portion of the deferred tax assets are capital in nature, the Company must assess the realizability of these assets separately from thedeferred tax assets that are ordinary in nature. The Company determined that it would not be able to generate sources of capital income and, therefore, would needto continue to assess a valuation allowance in the amount of $0.4 million.The Company currently does not have sufficient object evidence to substantiate the recovery of the deferred tax assets for U.K. Swedish and Chinese deferred taxassets at December 31, 2017, accordingly, a full valuation allowance of $0.7 million has been established on these deferred tax assets, predominantly comprised ofnet operating losses.At December 31, 2017, the Company's largest deferred tax asset of $5.8 million primarily relates to a U.S. net operating loss carryforward of $5.0 million whichexpires in various amounts between 2020 and 2035, and and excludes the impact of uncertain tax positions. The amount of U.S. loss carryforward which can beused by the Company each year is limited due to changes in the Company's ownership which occurred in 2003. However, the Company does not anticipate that anyof the loss carryforward will expire unutilized.On December 22, 2017, the United States enacted tax reform legislation known as the H.R.1, commonly referred to as the "Tax Cuts and Jobs Act" (the Act),resulting in significant modifications to existing law.The Company follows the guidance in SEC Staff Accounting Bulletin 118 (SAB 118), which provides additional clarification regarding the application of ASC740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting forcertain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reportingperiod that includes the Act's enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete theaccounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date. The Company has completed the accounting for the effects of the Act. Our financial statements for the year ended December 31, 2017, reflect certain effects of theAct predominantly related to the reduction in the corporate tax rate from 34% to 21%. As a result of the changes to the tax laws and tax rates under the Act, theCompany incurred incremental income tax expense of $2.5 million during the year ended December 31, 2017 which consisted of the remeasurement of its netdeferred tax asset from 34% to 21%. The Company has not recorded a charge related to the one-time deemed repatriation transition tax on unrepatriated foreignearnings given an estimated net negative earnings and profits position. The Company is evaluating available accounting policy alternatives to either record theU.S. income tax effect of future global intangible low-tax income (GILTI) inclusions in the period in which they arise or establish deferred taxes with respect to theexpected future tax liabilities associated with future GILTI inclusions, but has not yet made a policy election.As of December 31, 2017 and 2016, the Company's consolidated cash and cash equivalents totaled $19.1 million and $21.7 million, respectively, including cashand cash equivalents held at non-U.S. entities totaling $5.4 million and $4.2 million, respectively. The non-U.S. entities include operating subsidiaries located inChina, United Kingdom, Sweden and India. Of these, the Company does not assert permanent reinvestment in the UK, Sweden or India. Accordingly, theCompany analyzed the cumulative earnings and profits and determined no US deferred liability exists given aggregated accumulated deficits. A deferred taxliability in the amount of $149,000 has been recorded for India with respect to the undistributed earnings related to India's application of a Dividend DistributionsTax. Undistributed earnings in China are considered indefinitely reinvested as of December 31, 2017, to fund the Company's ongoing international operations. IfChina were to repatriate the funds it would not incur any tax due to an accumulated earnings and profits deficit.The Company has made an entity classification (CTB) election to treat GSE UK as a disregarded entity effective January 1, 2018. GSE UK is deemed to distributeall its assets and liabilities to GSE in liquidation. The liquidation will be deemed to occur immediately before the close of December 31, 2017, the day before theelection is effective. The provision includes a $3.0 million worthless stock deduction representing the Company's tax basis at the time of liquidation. Seediscussion regarding treatment of this item as an uncertain tax position.50 Uncertain Tax PositionsForeign Uncertain Tax PositionsDuring 2017 and 2016, the Company recorded tax liabilities for certain foreign tax contingencies. During 2016, the Company also determined that South Koreashould be included in this inventory. The Company recorded these uncertain tax positions in other current liabilities on the consolidated balance sheets.During 2017, the Company recorded a tax liability for an uncertain tax position related to the worthless stock deduction on liquidation of GSE UK. The uncertaintax position is recorded as a component of current and deferred liability.The following table outlines the Company's foreign uncertain tax liabilities, including accrued interest and penalties for each jurisdiction: China Ukraine South Korea U.S. (in thousands)Tax Interest andPenalties Tax Interest andPenalties Tax Interest andPenalties Tax Total Balance, January 1, 2016$225 $152 $21 $15 $- $-$- $413Increases - 57 68 13 129 8 - 275Decreases 23 - - - - - - 23Balance, December 31, 2016$202 $209 $89 $28 $129 $8$- $665Increases 14 53 11 - 212 37 833 1,160Decreases - - - - - - - -Balance, December 31, 2017$216 $262 $100 $28 $341 $45$833 $1,82551 13. Capital StockThe Company's Board of Directors has authorized 32,000,000 total shares of capital stock, of which 30,000,000 are designated as common stock and 2,000,000 aredesignated as preferred stock. The Board of Directors has the authority to establish one or more classes of preferred stock and to determine, within any class ofpreferred stock, the preferences, rights and other terms of such class.As of December 31, 2017, the Company has reserved 4,301,854 shares of common stock for issuance; 1,046,833 are reserved for shares upon exercise ofoutstanding stock options and 1,634,663 are reserved for shares upon vesting of restricted stock units. The Company has 1,620,358 shares available for futuregrants under the Company's 1995 Long-Term Incentive Plan.14. Stock-Based CompensationLong-term incentive planDuring 1995, the Company established the 1995 Long-Term Incentive Stock Option Plan (the Plan), which permits the granting of stock options (includingincentive stock options and nonqualified stock options) stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards orany combination of these to employees, directors or consultants. The Plan expires on April 21, 2026; the total number of shares that could be issued under the Planis 7,500,000. As of December 31, 2017, 3,198,146 shares have been issued under the Plan, 1,046,833 stock options and 1,634,663 restricted stock units (RSUs)were outstanding under the Plan, while 1,620,358 shares remain for future grants under the Plan.The Company recognizes compensation expense on a pro rata straight-line basis over the requisite service period for stock-based compensation awards with bothgraded and cliff vesting terms. The Company recognizes the cumulative effect of a change in the number of awards expected to vest in compensation expense inthe period of change. The Company has not capitalized any portion of its stock-based compensation.During the years ended December 31, 2017 and 2016, the Company recognized $2,472,000 and $1,550,000, respectively, of stock-based compensation expenseunder the fair value method. During the years ended December 31, 2017 and 2016, there were approximately $74,000 and $151,000 of stock-based compensationexpense related to cash-settled RSUs.Stock optionsOptions to purchase shares of the Company's common stock under the Plan expire in either seven or ten years from the date of grant and become exercisable inthree, five, or seven installments with a certain percentage of options vesting on the first anniversary of the grant date and additional options vesting on each of thesubsequent anniversaries of the grant date, subject to acceleration under certain circumstances.52 Information with respect to stock option activity as of and for the year ended December 31, 2017 is as follows: Numberof Shares WeightedAverageExercisePrice AggregateIntrinsicValue (in thousands) WeightedAverageRemainingContractual Life(Years) Options outstanding at January 1, 20171,556,833 $3.15 Options granted- - Options exercised(320,000) 2.05 Options forfeited(190,000) 4.01 Options outstanding at December 31, 20171,046,833 3.33 $928 1.28Options expected to vest24,000 1.90 $33 4.72Options exercisable at December 31, 20171,022,833 $3.36 $895 1.20Information with respect to stock option activity as of and for the year ended December 31, 2016 is as follows: Numberof Shares WeightedAverageExercisePrice AggregateIntrinsicValue (in thousands) WeightedAverageRemainingContractual Life(Years) Options outstanding at January 1, 20162,222,333 $3.01 Options granted40,000 2.25 Options exercised(492,200) 1.86 Options forfeited(213,300) 4.77 Options outstanding at December 31, 20161,556,833 3.15 $1,573 2.05Options expected to vest72,000 1.87 $117 5.45Options exercisable at December 31, 20161,484,833 $3.21 $1,456 1.8953 A summary of the status of the Company's nonvested options as of and for the year ended December 31, 2017 is presented below. Number of Shares Weighted Average Fair Value Nonvested options at January 1, 201772,000 $0.97Options granted- -Options forfeited- -Options vested during the period(48,000) 0.97 Nonvested options at December 31, 201724,000 $0.97A summary of the status of the Company's nonvested options as of and for the year ended December 31, 2016 is presented below. Number of Shares Weighted Average Fair Value Nonvested options at January 1, 2016218,522 $0.89Options granted40,000 1.15Options forfeited(32,300) 0.91Options vested during the period(154,222) 0.92 Nonvested options at December 31, 201672,000 $0.9754 The Company uses a Black-Scholes valuation model to estimate the fair value of the options at grant date based on the assumptions noted in the following table.Volatility represents an average of market estimates for implied volatility of the Company's common stock. The expected life is estimated based on an analysis ofoptions already exercised and any foreseeable trends or changes in recipients' behavior. The risk-free interest rate is an interpolation of the relevant U.S. Treasurysecurity maturities as of each applicable grant date: Years ended December 31, 2017 2016 [1] Risk-free interest rates- 1.53%Dividend yield 0%Expected life- 7 yearsVolatility- 49.05%Weighted average volatility 49.05%[1] The Company did not grant stock options during the year ended December 31, 2017.The Company received cash for the exercise price associated with stock options exercised of $209,000 and $833,000 during the years ended December 31, 2017and 2016, respectively. The total intrinsic value realized by participants on stock options exercised was $364,974 and $407,566 during the years ended December31, 2017 and 2016, respectively.55 Restricted Stock UnitsDuring the years ended December 31, 2017 and 2016, the Company issued RSUs to employees which vest upon the achievement of specific market-based or time-based measures. The fair value for RSU's is calculated based on the stock price on the grant date and expensed ratably over the requisite service period, whichranges between one and five years. The following table summarizes the information about vested and unvested restricted stock units for the years ended December31, 2017 and 2016. Number of Shares Weighted Average Fair Value Nonvested RSUs at January 1, 20171,688,480 $1.45RSUs granted644,677 3.24RSUs forfeited(5,500) 3.40RSUs vested(692,994) 1.89 Nonvested RSUs at December 31, 20171,634,663 $1.96 Nonvested RSUs at January 1, 20161,367,500 $0.76RSUs granted1,537,399 1.52RSUs forfeited(505,000) 0.76RSUs vested(711,419) 0.76 Nonvested RSUs at December 31, 20161,688,480 $1.45As of December 31, 2017, the Company had $1.6 million of unrecognized compensation expense related to the RSUs expected to be recognized on a pro-ratastraight line basis over a weighted average remaining service period of approximately 3.9 years.56 15. Commitments and ContingenciesLeasesThe Company is obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelableoperating leases as of December 31, 2017 are as follows: (in thousands)Gross Future Minimum Lease Payments 2018$1,5062019 7932020 7022021 7162022 709Thereafter 541Total$4,967Total rent expense under operating leases for the years ended December 31, 2017 and 2016, was approximately $0.8 million, respectively.Standby letters of credit, bank guarantees, surety bonds and performance bondsAs discussed in Note 11, Long-Term Debt, as of December 31, 2017, the Company had three letters of credit with BB&T bank, totaling $0.9 million and had threeletters of credit with Citizen's Bank totaling $0.8 million. The Company was contingently liable for these letters of credit.ContingenciesVarious actions and proceedings are presently pending to which the Company is a party. In the opinion of management, the aggregate liabilities, if any, arisingfrom such actions are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company.16. Employee BenefitsThe Company has a qualified defined contribution plan that covers all U.S. employees under Section 401(k) of the Internal Revenue Code. Under this plan, theCompany's stipulated basic contribution matches a portion of the participants' contributions based upon a defined schedule for GSE Performance ImprovementSolutions employees. The Company's contributions to the plan were approximately $305,000 and $207,000 for the years ended December 31, 2017 and 2016,respectively.57 17. Segment InformationThe Company has two reportable business segments. The Performance Improvement Solutions segment provides simulation, training and engineering productsand services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example trainingapplications include turnkey and custom training services, while engineering services include plant design verification and validation. The Company provides theseservices across all market segments. Contract terms are typically less than two years.The Nuclear Industry Training and Consulting segment provides specialized workforce solutions primarily to the nuclear industry, working at clients' facilities.This business is managed through our Hyperspring and newly acquired Absolute subsidiaries. The business model, management focus, margins and other factorsclearly separate this business line from the rest of the GSE product and service portfolio.On September 20, 2017, the Company acquired Absolute Consulting, Inc., now a wholly-owned subsidiary of GSE Performance Solutions, Inc. Absolute is aprovider of technical consulting and staffing solutions to the global nuclear power industry and employs approximately 160 professionals with expertise inprocedures writing, engineering, technical support, project management, training, project controls, and corrective actions. This acquisition brings a naturaladjacency to GSE, fits well with our growth strategy, and benefits our customers from expanded capabilities and offerings. For reporting purposes, Absolute wasaggregated with Hyperspring into our Nuclear Industry Training and Consulting segment due to similarities in services provided including training and staffaugmentation to the nuclear energy sector. In addition, both entities report to the same management team and share support staff such as sales, recruiting andbusiness development. As such, 100% of the goodwill acquired was allocated to the Nuclear Industry Training and Consulting segment.The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue toconsolidated revenue and operating results to consolidated (loss) income before income taxes.(in thousands)Years ended December 31, 2017 2016Revenue: Performance Improvement Solutions$39,899 $35,474Nuclear Industry Training and Consulting 30,981 17,627 $70,880 $53,101 Operating income Performance Improvement Solutions$(2,745) $(856)Nuclear Industry Training and Consulting 3,420 2,224Change in fair value of contingent consideration, net (446) 207 Operating income$229 $1,575 Interest income, net 80 85Gain (loss) on derivative instruments, net 99 (18)Other (expense) income, net (4) 130Income before income taxes$404 $1,772 58 Additional information relating to segments is as follows:(in thousands)December 31, 2017 2016 Performance Improvement Solutions$34,107 $42,383Nuclear Industry Training and Consulting 22,748 11,249Intercompany receivable elimination - 24Total assets$56,855 $53,656For the years ended December 31, 2017 and 2016, 83% and 73%, respectively, of the Company's consolidated revenue was from customers in the nuclear powerindustry. The Company designs, develops and delivers business and technology solutions to the energy industry worldwide. Revenue, operating income (loss) andtotal assets for the Company's United States, European, and Asian subsidiaries as of and for the years ended December 31, 2017 and 2016 are as follows:(in thousands)Year ended December 31, 2017 United States Europe Asia Eliminations Consolidated Revenue$66,249 $3,196 $1,435 $- $70,880Transfers betweengeographic locations 1,953 - 668 (2,621) -Total revenue$68,202 $3,196 $2,103 $(2,621) $70,880Operating income (loss)$1,930 $(1,585) $(116) $- $229Total assets, at December 31$149,390 $5,057 $4,313 $(101,905) $56,855 (in thousands)Year ended December 31, 2016 United States Europe Asia Eliminations Consolidated Revenue$46,149 $4,143 $2,809 $- $53,101Transfers betweengeographic locations 2,639 22 1,139 (3,800) -Total revenue$48,788 $4,165 $3,948 $(3,800) $53,101Operating loss$2,921 $(896) $(450) $- $1,575Total assets, at December 31$121,728 $4,859 $4,064 $(76,995) $53,656 Revenues by geographic location above are attributed to the contracting entity. Therefore, revenues from a foreign customer that contracted directly with our U.S.entity are included in revenues from the United States. In Europe, total revenues attributable to our U.K. and Sweden subsidiaries were $1.6 million, respectively.All revenues in Asia were attributable to our Chinese subsidiary.Alternatively, revenues from customers domiciled in foreign countries were approximately 16% and 33%, of the Company's consolidated 2017 and 2016 revenue,respectively. Revenues from foreign countries where our customers reside were all individually less than 10% of the Company's consolidated revenues during2017 and 2016.18. Supplemental Disclosure of Cash Flow Information(in thousands)Year ended December 31, 2017 2016 Cash paid: Interest$- $13 Income taxes$155 $370 59 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .None.ITEM 9A.CONTROLS AND PROCEDURES .(a) Evaluation of Disclosure Controls and ProceduresThe Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in its reports filed orsubmitted pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission's rules and forms and that information required to be disclosed by the Company in its Exchange Actreports is accumulated and communicated to management, including the Company's Chief Executive Officer (CEO), who is its principal executive officer, andChief Financial Officer (CFO), who is its principal financial officer, to allow timely decisions regarding required disclosure. Based on an evaluation of ourdisclosure controls and procedures as of December 31, 2017, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures wereeffective.On September 20, 2017, the Company completed the acquisition of Absolute Consulting, Inc. Absolute constitutes 22.1% of total assets of the Company atDecember 31, 2017, and 12.3% of the Company's consolidated revenue for the year ended December 31, 2017. As permitted by SEC guidance for newly acquiredbusinesses, because it was not possible to complete an effective assessment of the acquired company's controls by the year-end, the Company's management hasexcluded Absolute from its evaluation of disclosure controls and procedures and management's report on internal control over financial reporting and changestherein below from the date of such acquisition through December 31, 2017. Our management is in the process of reviewing the operations of Absolute andimplementing GSE's internal control structure over the acquired operations.( b) Management's Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule13a-15(f). Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples.Management, including our CEO and CFO, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. Inmaking this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework (2013). Based on management's assessment, management has concluded that the Company's internal control over financialreporting was effective as of December 31, 2017.(c) Changes in Internal Control over Financial ReportingIn connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2015, we had identified a material weaknessin our internal control over financial reporting related to our controls over revenue recognition. Since the second quarter 2017, the Company has executed on itsremediation plan for this material weakness and the material weakness has been remediated. As part of this remediation plan, the Company implemented internalcontrols over revenue recognition with improved documentation and additional review procedures. Other than this and excluding the acquisition of Absolute, therewere no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of theExchange Act that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.ITEM 9B.OTHER INFORMATION .None.ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.The information required by this item, including items 401, 405, 406 and 407 of Regulation S-K, is incorporated by reference to the section captioned "Directorsand Executive Officers" in the definitive Proxy Statement for the Company's 2018 Annual Meeting of Shareholders and incorporated herein by reference or will beprovided in an amendment to this Annual Report on Form 10-K.The Company has adopted a Conduct of Business Policy that applies to its directors, officers and employees, including its principal executive officer, and principalfinancial officer. The Conduct of Business Policy is available on the Company's website at www.gses.com. In addition, the Company has adopted a Code of Ethicsfor its principal executive officer and senior financial officers which is also available on the Company's website. The Company will post on its website informationabout any amendment to, or waiver from, any provision of the Code of Ethics that applies to its principal executive officer, principal financial officer, or principalaccounting officer.60 ITEM 11.EXECUTIVE COMPENSATION.The information required by this item will either be set forth under the "Executive Compensation" section in the definitive Proxy Statement for the 2018 AnnualMeeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.The information required by this item will be either set forth under the sections captioned "Voting Securities and Principal Holders Thereof," and "ExecutiveCompensation" in the definitive Proxy Statement for the 2018 Annual Meeting of Shareholders and incorporated herein by reference or will be provided in anamendment to this Annual Report on Form 10-K.The following table sets forth the equity compensation plan information for the year ended December 31, 2017:Plan Category Number of Securities tobe Issued Upon Exercise ofOutstanding Options,Warrants and Rights(a) Weighted Average ExercisePrice ofOutstanding Options,Warrants and Rights(b) Number of SecuritiesRemainingAvailable for Future IssuanceUnder Equity CompensationPlans(Excluding SecuritiesReflected in Column (a))(c)Equity compensation plans approved bysecurity holders Options 1,046,833 $3.33 RSUs 1,379,663 $1.96 2,426,496 $2.55 1,620,358Equity compensation plans not approved bysecurity holders -- $-- --Total 2,426,496 $2.55 1,620,358Table above excludes 255,000 RSUs granted under the Company's 1995 Long-Term Incentive Plan that are settled in cash instead of shares.For a description of the material terms of our stock-based compensation plans, see Note 14 to the consolidated financial statements in Item 8 of this report.61 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.The information required by this item will be either set forth under the "Directors and Executive Officers" section in the definitive Proxy Statement for the 2018Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.The information required by this item will be either set forth under the "Audit Committee Pre-Approval of Audit and Non-Audit Services" section in the definitiveProxy Statement for the 2018 Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report onForm 10-K.ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.(a) (1) List of Financial StatementsThe following financial statements are included in Item 8:GSE Systems, Inc. and Subsidiaries Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2017 and 2016Consolidated Statements of Operations for the years ended December 31, 2017 and 2016Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 and 2016Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017 and 2016Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016Notes to Consolidated Financial Statements(a) (2) List of SchedulesAll other schedules to the consolidated financial statements are omitted as the required information is presented in the consolidated financial statements or relatednotes.(a) (3) List of ExhibitsThe Exhibits which are filed with this report or which are incorporated by reference are set forth in the Exhibit index hereto.62 ITEM 16.FORM 10-K SUMMARY.None.ExhibitDescription of Exhibits 2.Plan of acquisition, reorganization, arrangement, liquidation, or succession 2.1Stock Purchase Agreement, dated as of January 1, 2011 among GSE Systems, Inc., Toshi Shinohara, Santosh Joshi, Hideo Shinohara, andEnVision Systems, Inc., previously filed with Form 8-K as filed with the Securities and Exchange Commission on January 10, 2011 andincorporated herein by reference. 2.2Membership Interests Purchase Agreement, dated as of November 14, 2014, by and between Dale Jennings, Paul Abbott, Shawn McKeeverand Mickey Ellis and GSE Performance Solutions, Inc. Incorporated herein by reference to Exhibit 2.1 of GSE Systems, Inc. Form 8-K filedwith the Securities and Exchange Commission on November 17, 2014. 2.3IntelliQlik, LLC Operating Agreement, dated as of November 14, 2014. Incorporated herein by reference to Exhibit 2.2 of GSE Systems, Inc.Form 8-K filed with the Securities and Exchange Commission on November 17, 2014. 2.4Amendment to Membership Interests Purchase Agreement, dated as of May 13, 2015. Previously filed in connection with the GSE Systems,Inc. Form 10-Q filed with the Securities and Exchange Commission on May 14, 2015 and incorporated herein by reference. 2.5Stock Purchase Agreement, dated as of September 20, 2017, by and among GSE Systems, Inc., through its wholly owned subsidiary GSEPerformance Solutions, Inc., Richard and Cynthia Linton (and certain trusts owned thereby) and Absolute Consulting, Inc. Incorporatedherein by reference to Exhibit 2.1 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on September 20,2017. 2.6GSE Systems, Inc. 2017 International Restructuring Plan, as approved on December 27, 2017. Incorporated herein by reference toExhibit 99.1 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on December 27, 2017. 3.Articles of Incorporation and Bylaws3.1Restatement of Certificate of Incorporation dated November 14, 2016. Previously filed in connection with the GSE Systems, Inc. Form 10-Qfiled with the Securities and Exchange Commission on November 14, 2016 and incorporated herein by reference. 3.2Certificate of the Elimination of the Series A Cumulative Convertible Preferred Stock dated November 14, 2016. Previously filed inconnection with the GSE Systems, Inc. Form 10-Q filed with the Securities and Exchange Commission on November 14, 2016 andincorporated herein by reference. 3.3Third Amended and Restated Bylaws of GSE Systems, Inc. Incorporated herein by reference to Exhibit 3.2 of GSE Systems, Inc. Form 8-Kfiled with the Securities and Exchange Commission on September 16, 2016. 63 10.Material Contracts 10.1Agreement among ManTech International Corporation, National Patent Development Corporation, GPS Technologies, Inc., General PhysicsCorporation, Vattenfall Engineering AB and GSE Systems, Inc. (dated as of April 13, 1994). Previously filed in connection with the GSESystems, Inc. Form S-1 Registration Statement as filed with the Securities and Exchange Commission on April 24, 1995 and incorporatedherein by reference. 10.2Form of Option Agreement Under the GSE Systems, Inc. 1995 Long-Term Incentive Plan. Previously filed in connection with the GSESystems, Inc. Form 10-K as filed with the Securities and Exchange Commission on March 22, 1996 and incorporated herein by reference. * 10.3Office Lease Agreement between 1332 Londontown, LLC and GSE Systems, Inc. (dated as of February 27, 2008). Previously filed inconnection with the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission on March 11, 2008 and incorporatedherein by reference. 10.4Amendment of Lease to Office Lease Agreement, dated May 28, 2008. Incorporated herein by reference to Exhibit 10.20 of GSE Systems,Inc. Form 10-K filed with the Securities and Exchange Commission on March 19, 2015. 10.5Second Amendment of Lease to Office Lease Agreement, dated July 22, 2010. Incorporated herein by reference to Exhibit 10.21 of GSESystems, Inc. Form 10-K filed with the Securities and Exchange Commission on March 19, 2015. 10.6$7,500,000 Revolving Credit Note, dated November 22, 2011. Previously filed in connection with the GSE Systems, Inc. Form 8-K filed withthe Securities and Exchange Commission on November 29, 2011 and incorporated herein by reference. 10.7Third Amendment of Lease to Office Lease Agreement, dated May 15, 2012. Incorporated herein by reference to Exhibit 10.22 of GSESystems, Inc. Form 10-K filed with the Securities and Exchange Commission on March 19, 2015. 10.8Extension of the $7,500,000 Revolving Credit Note, dated July 29, 2013. Incorporated herein by reference to Exhibit 10.14 ofGSE Systems, Inc. Form 10-K filed with the Securities and Exchange Commission on March 26, 2014. 10.9GSE Systems, Inc. 1995 Long-Term Incentive Plan, amended and restated as of March 6, 2014. Incorporated herein by reference to Exhibit Aof GSE Systems, Inc. Form DEF 14A filed with the Securities and Exchange Commission on April 29, 2014. * 10.10Fourth Amendment of Lease to Office Lease Agreement, dated April 15, 2014. Incorporated herein by reference to Exhibit 10.1 ofGSE Systems, Inc. Form 10-Q filed with the Securities and Exchange Commission on May 5, 2014. 10.11Extension to Revolving Credit Note, dated June 30, 2014. Previously filed in connection with the GSE Systems, Inc. Form 10-Q filed withthe Securities and Exchange Commission on August 14, 2014 and incorporated herein by reference. 10.12Amendment No. 3 to the Susquehanna Bank Agreement, dated August 9, 2014. Previously filed in connection with the GSE Systems, Inc.Form 10-Q filed with the Securities and Exchange Commission on November 14, 2014 and incorporated herein by reference. 10.13Amendment No. 4 to the Susquehanna Bank Agreement, dated as of December 31, 2014. Incorporated herein by reference to Exhibit 10.14of GSE Systems, Inc. Form 10-K filed with the Securities and Exchange Commission on March 19, 2015. 10.14Extension of the $7,500,000 Revolving Credit Note, dated May 12, 2015. Previously filed in connection with the GSE Systems, Inc. Form10-Q filed with the Securities and Exchange Commission on May 14, 2015 and incorporated herein by reference. 10.15Amendment No. 5 to the Susquehanna Bank Agreement, dated as of July 31, 2015. Previously filed in connection with the GSE Systems,Inc. Form 10-Q filed with the Securities and Exchange Commission on August 13, 2015 and incorporated herein by reference. 10.16Form of Restricted Share Unit Agreement pursuant to the GSE Systems, Inc. 1995 Long-Term Incentive Plan, as amended and restated datedas of April 22, 2016. Previously filed in connection with the GSE Systems, Inc. Form 10-Q filed with the Securities and ExchangeCommission on November 14, 2016 and incorporated herein by reference.* 10.17Form of Amendment to Restricted Share Unit Agreement, dated July 1, 2016. Incorporated herein by reference to Exhibit 99.1 of GSESystems, Inc. Form 8-K filed with the Securities and Exchange Commission on July 1, 2016. * 10.18Employment Agreement, dated July 1, 2016, between GSE Systems, Inc. and Emmett A. Pepe. Incorporated herein by reference to Exhibit99.1 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on July 5, 2016. * 10.19Employment Agreement between Christopher D. Sorrells and GSE Systems, Inc. dated as of August 15, 2016. Incorporated herein byreference to Exhibit 10.1 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on August 19, 2016. * 10.20 Letter dated October 31, 2016, from Branch Banking and Trust Company, agreeing to extend the Revolving Credit Expiration Date as definedin the Master Loan and Security Agreement dated November 22, 2011, between the Company, GSE Performance Solutions (as co-borrowers), and Branch Banking and Trust Company (as successor by merger to Susquehanna Bank), until March 31, 2017. Previously filedin connection with the GSE Systems, Inc. Form 10-Q filed with the Securities and Exchange Commission on November 14, 2016 andincorporated herein by reference. 10.21$5,000,000 Revolving Line of Credit facility, dated December 29, 2016. Previously filed in connection with the GSE Systems, Inc. Form 8-Kfiled with the Securities and Exchange Commission on January 4, 2017 and incorporated herein by reference. 10.22Amendment and Reaffirmation Agreement, date February 22, 2017, and effective as of December 29, 2016. Incorporated herein by referenceto Exhibit 10.36 of GSE Systems, Inc. Form 10-K file with the Securities and Exchange Commission on March 28, 2017. 10.23Employment Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of December 1, 2015. Incorporated herein by referenceto Exhibit 10.1 of GSE Systems, Inc. Form 10-Q filed with the Securities and Exchange Commission on May 15, 2017.* 10.24Restricted Share Unit Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of December 1, 2015. Incorporated herein byreference to Exhibit 10.2 of GSE Systems, Inc. Form 10-Q filed with the Securities and Exchange Commission on May 15, 2017.* 10.25Amendment to Restricted Share Unit Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of July 1, 2016. Incorporatedherein by reference to Exhibit 10.3 of GSE Systems, Inc. Form 10-Q filed with the Securities and Exchange Commission on May 15, 2017.* 10.26Amendment No. 2 to Employment Agreement between Kyle Loudermilk and GSE Systems, Inc. dated as of June 12, 2017. Incorporatedherein by reference to Exhibit 99.1 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 16, 2017.* 10.27Amendment to Employment Agreement between Christopher D. Sorrells and GSE Systems, Inc. dated as of June 12, 2017. Incorporatedherein by reference to Exhibit 99.2 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 16, 2017.* 10.28Amendment to Employment Agreement between Bahram Meyssami and GSE Systems, Inc. dated as of June 12, 2017. Incorporated herein byreference to Exhibit 99.3 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 16, 2017.* 10.29Amendment to Employment Agreement between Emmett Pepe and GSE Systems, Inc. dated as of June 12, 2017. Incorporated herein byreference to Exhibit 99.4 of GSE Systems, Inc. Form 8-K filed with the Securities and Exchange Commission on June 16, 2017.* 64 14Code of Ethics 14.1Code of Ethics for the Principal Executive Officer and Senior Financial Officers. Previously filed in connection with the GSE Systems, Inc.Form 10-K filed with the Securities and Exchange Commission on March 31, 2006 and incorporated herein by reference. 21Subsidiaries. 21.1List of Subsidiaries of Registrant at December 31, 2017, filed herewith. 23Consent of Independent Registered Public Accounting Firm 23.1 Consent of BDO USA, LLP, filed herewith. 24Power of Attorney 24.1Power of Attorney for Directors' and Officers' Signatures on SEC Form 10-K, filed herewith. 31Certifications 31.1Certification of Chief Executive Officer of the Company pursuant to Securities and Exchange Act Rule 13d-14(a)/15(d-14(a), as adoptedpursuant to Section 302 and 404 of the Sarbanes-Oxley Act of 2002, filed herewith. 31.2Certification of Chief Financial Officer of the Company pursuant to Securities and Exchange Act Rule 13d-14(a)/15(d-14(a), as adoptedpursuant to Section 302 and 404 of the Sarbanes-Oxley Act of 2002, filed herewith. 32Section 1350 Certifications 32.1Certification of Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350 as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, file herewith. * Management contracts or compensatory plans required to be filed as exhibits pursuant to Item 15(b) of this report.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized. GSE Systems, Inc. By: / s / Kyle J. Loudermilk Kyle J. Loudermilk Chief Executive Officer Pursuant to the requirements of the Securities Act, this report has been signed by the following persons in the capacities and on the dates indicated.Date: March 15, 2018 / s / KYLE J. LOUDERMILK Kyle J. Loudermilk, Chief Executive Officer (Principal Executive Officer) Date: March 15, 2018 / s / EMMETT A. PEPE Emmett A. Pepe, Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 15, 2018 / s / CHRIS SORRELLS Chris Sorrells, Chief Operating Officer Date: March 15, 2018(Jane Bryant Quinn, Chairman of the Board)By:/ s / EMMETT A. PEPE (Jim Stanker, Chairman of the Audit Committee) Emmett A. Pepe (John D. Fuller, Director) Attorney-in-Fact (Joseph W. Lewis, Director) (Suresh Sundaram, Director) A Power of Attorney, dated March 15, 2018 authorizing Emmett A. Pepe to sign this Annual Report on Form 10-K for the fiscal year ended December 31, 2017 onbehalf of certain of the directors of the Registrant is filed as Exhibit 24.1 to this Annual Report.65 66 Exhibit 21.1SUBSIDIARIES OF REGISTRANT AT DECEMBER 31, 2017The following are significant subsidiaries of GSE Systems, Inc. as of December 31, 2017 and the states or jurisdictions in which they are organized. GSE Systems,Inc. owns, directly or indirectly, at least 99% of the voting securities of substantially all of the subsidiaries included below. The names of particular subsidiarieshave been omitted because, considered in the aggregate as a single subsidiary, they would not constitute, as of the end of the year covered by this report, a"significant subsidiary" as that term is defined in Regulation S-X under the Securities Exchange Act of 1934.Name Place of Incorporation or Organization GSE Systems Engineering (Beijing) Company, Ltd Peoples Republic of ChinaGSE Power Systems AB SwedenGSE Process Solutions, Inc. State of DelawareGSE Services Company L.L.C. State of DelawareGSE Systems Ltd. United KingdomGSE Performance Solutions, Inc. State of DelawareEnVision Systems (India) Pvt. Ltd. IndiaHyperspring, LLC State of AlabamaAbsolute Consulting, Inc. State of Florida Exhibit 23.1Consent of Independent Registered Public Accounting FirmGSE Systems, Inc.Sykesville, MarylandWe hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-212241, 333-183427, 333-150249 and 333-138702) ofGSE Systems, Inc. of our report dated March 15, 2018, relating to the consolidated financial statements, which appears in this Form 10-K./s/ BDO USA, LLPMcLean, VirginiaMarch 15, 2018 Exhibit 24.1POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kyle J. Loudermilk and Emmett A.Pepe, and each of them, with full power of substitution and reconstitution and each with full power to act for him and without the other, as his true and lawfulattorney-in-fact and agent, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission or any state, grantingunto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to bedone in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Security Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in thecapacities and on the date indicated.Date: March 15, 2018/s/ Kyle J. Loudermilk Kyle J. Loudermilk Chief Executive Officer Date: March 15, 2018/s/ Emmett A. Pepe Emmett A. Pepe Chief Financial Officer Date: March 15, 2018/s/ Chris Sorrells Chris Sorrells Chief Operating Officer Date: March 15, 2018/s/ Jane Bryant Quinn Jane Bryant Quinn Chairman of the Board Date: March 15, 2018/s/ Jim Stanker Jim Stanker Director Date: March 15, 2018/s/ Joseph W. Lewis Joseph W. Lewis Director Date: March 15, 2018/s/ Suresh Sundaram Suresh Sundaram Director Date: March 15, 2018/s/ John D. Fuller John D. Fuller Director Exhibit 31.1Certification of the Chief Executive OfficerI, Kyle J. Loudermilk, certify that:1.I have reviewed this annual report on Form 10-K 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 statementsmade, 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 annual report, fairly present in all material respects thefinancial 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 ActRules 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 andhave:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance 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 ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that hasmaterially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and5.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'sauditors 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 toadversely affect the registrant's ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting.Date: March 15, 2018 /s/ Kyle J. Loudermilk Kyle J. Loudermilk Chief Executive Officer(Principal Executive Officer) Exhibit 31.2Certification of the Chief Financial OfficerI, Emmett A. Pepe, certify that:1.I have reviewed this annual report on Form 10-K 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 statementsmade, 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 financialcondition, 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 ActRules 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 andhave:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance 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 ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and5.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'sauditors 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 toadversely affect the registrant's ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting.Date: March 15, 2018 /s/ Emmett A. Pepe Emmett A. Pepe Chief Financial Officer(Principal Financial and Accounting Officer) Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of GSE Systems, Inc. (the "Company") for the year ended December 31, 2017 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Kyle J. Loudermilk, Chief Executive Officer of the Company, and I, Emmett A. Pepe, Chief FinancialOfficer, 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; and2.To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations ofthe Company.Date: March 15, 2018/s/ Kyle J. Loudermilk /s/ Emmett A. Pepe Kyle J. Loudermilk Emmett A. Pepe Chief Executive Officer Chief Financial Officer
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