United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
  ______________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-37822
______________________________________  
Advanced Emissions Solutions, Inc.
(Exact name of registrant as specified in its charter)
______________________________________    
Delaware
 
27-5472457
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
640 Plaza Drive, Suite 270, Highlands Ranch, CO
 
80129
(Address of principal executive offices)
 
(Zip Code)
(720) 598-3500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
______________________________________ 
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 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
Outstanding at November 1, 2017
Common stock, par value $0.001 per share
 
21,089,470




INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Part I. – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
As of
(in thousands, except share data)
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
26,823

 
$
13,208

Restricted cash
 

 
13,736

Receivables, net
 
1,631

 
8,648

Receivables, related parties, net
 
2,803

 
1,934

Costs in excess of billings on uncompleted contracts
 

 
25

Prepaid expenses and other assets
 
1,759

 
1,357

Total current assets
 
33,016

 
38,908

Property and equipment, net of accumulated depreciation of $1,419 and $2,920, respectively
 
443

 
735

Equity method investments
 
3,070

 
3,959

Deferred tax assets
 
50,310

 
61,396

Other long-term assets
 
2,292

 
2,298

Total Assets
 
$
89,131

 
$
107,296

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
1,317

 
$
1,920

Accrued payroll and related liabilities
 
1,296

 
2,121

Billings in excess of costs on uncompleted contracts
 
1,863

 
4,947

Legal settlements and accruals
 
4,482

 
10,706

Other current liabilities
 
3,318

 
4,017

Total current liabilities
 
12,276

 
23,711

Legal settlements and accruals, long-term
 

 
5,382

Other long-term liabilities
 
2,247

 
2,038

Total Liabilities
 
14,523

 
31,131

Commitments and contingencies (Note 5)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding
 

 

Common stock: par value of $.001 per share, 100,000,000 shares authorized, 22,464,566 and 22,322,022 shares issued, and 21,093,675 and 22,024,675 shares outstanding at September 30, 2017 and December 31, 2016, respectively
 
22

 
22

Treasury stock, at cost: 1,370,891 and -0- shares as of September 30, 2017 and December 31, 2016, respectively
 
(13,024
)
 

Additional paid-in capital
 
110,073

 
119,494

Accumulated deficit
 
(22,463
)
 
(43,351
)
Total stockholders’ equity
 
74,608

 
76,165

Total Liabilities and Stockholders’ Equity
 
$
89,131

 
$
107,296


See Notes to the Condensed Consolidated Financial Statements.

1



Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)  
 
 
Three Months Ended September 30,

Nine Months Ended September 30,
(in thousands, except per share data)
 
2017

2016

2017

2016
Revenues:
 
 
 
 
 
 
 
 
Equipment sales
 
$
1,577


$
14,869


$
31,304


$
44,788

Chemicals
 
717


670


3,844


1,717

Consulting services and other
 


171




492

Total revenues
 
2,294


15,710


35,148


46,997

Operating expenses:
 
 
 
 

 
 
 
Equipment sales cost of revenue, exclusive of depreciation and amortization
 
1,467


12,704


28,260


35,175

Chemicals cost of revenue, exclusive of depreciation and amortization
 
574


469


2,977


865

Consulting services and other cost of revenue, exclusive of depreciation and amortization
 


86




299

Payroll and benefits
 
1,679


2,809


5,894


10,567

Rent and occupancy
 
255


508


555


1,534

Legal and professional fees
 
1,062


1,615


3,316


6,581

General and administrative
 
862


818


2,934


2,920

Research and development, net
 
252


(524
)

30


(667
)
Depreciation and amortization
 
87


138


687


593

Total operating expenses

6,238


18,623


44,653


57,867

Operating loss

(3,944
)

(2,913
)

(9,505
)

(10,870
)
Other income (expense):

 
 
 

 
 
 
Earnings from equity method investments

12,120


10,735


36,089


30,066

Royalties, related party

2,804


2,064


6,425


3,922

Interest expense

(678
)

(969
)

(1,999
)

(4,496
)
Revision in estimated royalty indemnity liability
 

 

 
3,400

 

Other

(924
)

1,278


(908
)

3,960

Total other income

13,322


13,108


43,007


33,452

Income before income tax expense

9,378


10,195


33,502


22,582

Income tax expense

3,586


583


12,614


734

Net income

$
5,792


$
9,612


$
20,888


$
21,848

Earnings per common share (Note 1):

 
 
 

 
 
 
Basic

$
0.28


$
0.44


$
0.96


$
0.99

Diluted

$
0.28


$
0.43


$
0.96


$
0.97

Weighted-average number of common shares outstanding:

 
 
 

 
 
 
Basic

20,808


21,740


21,569


21,926

Diluted

20,854


22,098


21,598


22,209

Cash dividends declared per common share outstanding:
 
$
0.25

 
$

 
$
0.50

 
$


See Notes to the Condensed Consolidated Financial Statements.



2



Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended September 30,
( in thousands)
 
2017
 
2016
Cash flows from operating activities
 
 
 
 
Net income

$
20,888


$
21,848

Adjustments to reconcile net income to net cash used in operating activities:

 
 
 
Depreciation and amortization

687


593

Debt prepayment penalty and amortization of debt issuance costs

109


1,379

Impairment of property, equipment, inventory, and cost method investment

464


517

Stock-based compensation expense

1,648


2,238

Earnings from equity method investments

(36,089
)

(30,066
)
Gain on sale of equity method investment



(2,078
)
Gain on settlement of note payable and licensed technology



(1,910
)
Other non-cash items, net

436

 
61

Changes in operating assets and liabilities:






Receivables

7,027


(3,677
)
Related party receivables

(869
)

541

Prepaid expenses and other assets

(513
)

831

Costs incurred on uncompleted contracts

27,081


28,575

Deferred tax asset, net

11,086



Other long-term assets

(766
)

961

Accounts payable

(603
)

(3,837
)
Accrued payroll and related liabilities

(825
)

(2,245
)
Other current liabilities

(917
)

(2,094
)
Billings on uncompleted contracts

(30,140
)

(32,469
)
Other long-term liabilities

147


(2,967
)
Legal settlements and accruals

(11,606
)

1,454

Distributions from equity method investees, return on investment

3,675


6,850

Net cash used in operating activities

(9,080
)

(15,495
)

3



 
 
Nine Months Ended September 30,
( in thousands)
 
2017
 
2016
Cash flows from investing activities

 
 
 
Distributions from equity method investees in excess of cumulative earnings
 
33,363

 
24,650

Maturity of investment securities, restricted



336

Acquisition of property and equipment, net

(343
)

(147
)
Purchases of and contributions to equity method investees

(61
)

(223
)
Proceeds from sale of equity method investment



1,773

Net cash provided by investing activities

32,959


26,389

Cash flows from financing activities

 
 
 
Borrowings on Line of Credit

808



Repayments on Line of Credit

(808
)


Repayments on short-term borrowings and notes payable, related party



(14,496
)
Short-term borrowing loan costs and debt prepayment penalty



(807
)
Repurchase of common shares to satisfy tax withholdings

(518
)

(192
)
Dividends paid

(10,458
)


Repurchase of common shares

(13,024
)


Net cash used in financing activities

(24,000
)

(15,495
)
Decrease in Cash and Cash Equivalents and Restricted Cash

(121
)

(4,601
)
Cash and Cash Equivalents and Restricted Cash, beginning of period

26,944


20,973

Cash and Cash Equivalents and Restricted Cash, end of period

$
26,823


$
16,372

Supplemental disclosure of cash flow information:

 
 
 
Cash paid for interest

$
2,391


$
2,899

Cash paid for income taxes

$
1,160


$
46

Supplemental disclosure of non-cash investing and financing activities:

 
 
 
Stock award reclassification (liability to equity)

$


$
899

Settlement of RCM6 note payable

$


$
13,234

Non-cash reduction of equity method investment

$


$
11,156

Dividends payable
 
$
93

 
$


See Notes to the Condensed Consolidated Financial Statements.

4



Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
Nature of Operations
Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in Highlands Ranch, Colorado. The Company is principally engaged in providing environmental and emissions control equipment, technologies and specialty chemicals to the coal-burning electric power generation industry. The Company generates substantial earnings and tax credits under Section 45 of the Internal Revenue Code ("IRC") from its equity investments in certain entities and royalty payment streams related to technologies that are licensed to Tinuum Group, LLC, a Colorado limited liability company ("Tinuum Group"). Such technologies allow Tinuum Group to provide various solutions to reduce mercury and nitrogen oxide ("NO x ") emissions at select coal-fired power generators through the burning of Refined Coal ("RC"). The Company’s sales occur principally throughout the United States. See Note 10 for additional information regarding the Company's operating segments.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its direct and indirect, wholly-owned subsidiaries. Also included within the unaudited Condensed Consolidated Financial Statements are the Company's investments, Tinuum Group, Tinuum Services, LLC ("Tinuum Services"), and GWN Manager, LLC ("GWN Manager"), which are accounted for using the equity method of accounting. As discussed in Note 2 , the Company sold its equity investment in RCM6, LLC ("RCM6") in March 2016, which was also accounted for using the equity method prior to the sale.
Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated for all periods presented in this Quarterly Report.
In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K"). Significant accounting policies disclosed therein have not changed.
Earnings Per Share
Basic earnings per share is computed using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend and participating rights in undistributed earnings. The Company's restricted stock awards ("RSA's") granted prior to December 31, 2016 contain non-forfeitable rights to dividends or dividend equivalents and are deemed to be participating securities. RSA's granted subsequent to December 31, 2016 do not contain non-forfeitable rights to dividends and are not deemed to be participating securities.
Under the two-class method, net income for the period is allocated between common stockholders and the holders of the participating securities based on the weighted-average number of common shares outstanding during the period, excluding participating, unvested RSA's ("common shares"), and the weighted-average number of participating unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to arrive at basic earnings per common share and participating security for the period, respectively. Because the participating, unvested RSA's possess substantially the same rights to undistributed earnings as common shares outstanding, there is no difference between the calculated basic earnings per share for common shares and participating securities. Accordingly, and pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings per share attributable to participating securities in the Consolidated Statements of Operations.

5



Diluted earnings per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. Potentially dilutive securities consist of both unvested, participating and non-participating RSA's, as well as outstanding options to purchase common stock ("Stock Options") and contingent performance stock units ("PSU's") (collectively, "Potential Dilutive Shares"). The dilutive effect, if any, for non-participating RSA's, Stock Options and PSU's is computed using the treasury stock method. For participating RSA's, the dilutive effect, if any, is determined using the greater of dilution as calculated under the treasury stock method or the two-class method. Potential Dilutive Shares are excluded from diluted earnings per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential Dilutive Shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period.
Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSU's granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential Dilutive Shares related to PSU's is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to such PSU's. See Note 7 for additional information related to PSU's.
The following table sets forth the calculations of basic and diluted earnings per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
5,792

 
$
9,612

 
$
20,888

 
$
21,848

Less: Dividends and undistributed income allocated to participating securities
 
32

 
133

 
141

 
229

Income attributable to common stockholders
 
$
5,760

 
$
9,479

 
$
20,747

 
$
21,619

 
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
20,808

 
21,740

 
21,569

 
21,926

Add: dilutive effect of equity instruments
 
46

 
358

 
29

 
283

Diluted weighted-average shares outstanding
 
20,854

 
22,098

 
21,598

 
22,209

Earnings per share - basic
 
$
0.28

 
$
0.44

 
$
0.96

 
$
0.99

Earnings per share - diluted
 
$
0.28

 
$
0.43

 
$
0.96

 
$
0.97

For the three and nine months ended September 30, 2017 and 2016 , options to purchase 0.2 million shares of common stock for each of the periods presented were outstanding, but were not included in the computation of diluted net income per share because the exercise price exceeded the average price of the underlying shares and the effect would have been anti-dilutive. For the three and nine months ended September 30, 2017 and 2016 , options to purchase of 0.4 million , 0.2 million , 0.4 million and 0.2 million shares of common stock, respectively, which vest based on the Company achieving specified performance targets, were outstanding, but not included in the computation of diluted net income per share because they were determined not to be contingently issuable.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 2016 Form 10-K. Actual results could differ from these estimates.
Reclassifications
Certain balances have been reclassified from the prior year to conform to the current year presentation.

6



New Accounting Guidance
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and its related amendments are effective for reporting periods (including interim periods) beginning after December 31, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company will adopt the standard under the modified retrospective method effective January 1, 2018, which will be reflected in its financial statements as of and for the three months ended March 31, 2018.
As of the date of this filing, the Company has materially completed its assessment of ASU 2014-09 for the impact to the financial statements as of the adoption date, completed a detailed review of individual customer contracts, continued its review of controls and procedures that may need to be revised or added from the adoption of the standard, and updated its timeline for completion of the various phases of the implementation plan for the standard, including documentation of the standard's financial statement impact at adoption, financial statement presentation and disclosure changes and reviews over potential changes to existing revenue recognition policies, controls and procedures. As a result, the Company may revise its initial quantitative and qualitative assessments of the financial impacts on its current revenue streams and related costs.
Based on the Company's current assessment of ASU 2014-09, it has determined that the timing of revenue recognition for equipment sales will be accelerated and all deferred revenue and deferred project costs on all uncompleted equipment sales projects as of December 31, 2017 will be derecognized through a cumulative effect adjustment, which will reduce the Accumulated deficit as of the adoption date in the amount of approximately $2.2 million . In addition, as of the adoption date, the Company anticipates derecognizing deferred revenue and deferred project costs for a technology licensing arrangement through a cumulative effect adjustment, which will reduce the Accumulated deficit in the amount of approximately $1.7 million . The Company currently estimates that there will be no material financial statement impact as of the adoption date from either chemical sales or consulting services.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10) - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). This standard provides guidance on how entities measure certain equity investments and present changes in the fair value. This standard requires that entities measure certain equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. ASU 2016-01 is effective for fiscal years beginning after December 31, 2017. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date and have lease terms of more than 12 months. This topic retains the distinction between finance leases and operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and must be applied under a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, and must be adopted under a modified retrospective method approach. Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.

7



In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification in Topic 718. Under the standard, an entity does not apply modification accounting if the fair value, vesting conditions, and classification of the stock-based awards are the same immediately before and after the modification. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this standard. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for which financial statements have not yet been issued. The Company elected to adopt ASU 2017-09 effective with the beginning of its second fiscal quarter of 2017, April 1, 2017, and there was no material impact on the Company's financial statements or disclosures.
Note 2 - Equity Method Investments
Tinuum Group, LLC
The Company's ownership interest in Tinuum Group was 42.5% as of September 30, 2017 and December 31, 2016 . Tinuum Group supplies technology equipment and technical services to cyclone-fired and other boiler users, but Tinuum Group's primary purpose is to put into operation facilities that produce and sell RC that lower emissions and therefore qualify for tax credits available under Section 45 of the IRC ("Section 45 tax credits"). Tinuum Group has been determined to be a variable interest entity ("VIE"); however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined that the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.
The following table summarizes the results of operations of Tinuum Group:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Gross profit
 
$
23,812

 
$
22,645

 
$
70,895

 
$
70,325

Operating, selling, general and administrative expenses
 
5,174

 
4,996

 
14,975

 
15,464

Income from operations
 
18,638

 
17,649

 
55,920

 
54,861

Other expenses
 
(3,331
)
 
(3,583
)
 
(4,278
)
 
(7,618
)
Class B preferred return
 
(384
)
 
(905
)
 
(1,526
)
 
(3,101
)
Loss attributable to noncontrolling interest
 
11,953

 
8,881

 
29,240

 
14,788

Net income available to Class A members
 
$
26,876

 
$
22,042

 
$
79,356

 
$
58,930

ADES equity earnings from Tinuum Group
 
$
11,050

 
$
9,775


$
33,363


$
28,050

As of September 30, 2017 and December 31, 2016 , the amount of Tinuum Group's temporary Class B preferred equity was $7.4 million and $18.3 million , respectively.
The difference between the Company's proportionate share of Tinuum Group's Net income available to Class A members (at its equity interest of 42.5% ) as presented in the table below and the Company's earnings from its Tinuum Group equity method investment as reported in the Condensed Consolidated Statements of Operations relates to the Company receiving distributions in excess of the carrying value of the equity investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed below.

8



As shown in the tables below, the Company’s carrying value in Tinuum Group was reduced to zero for the three and nine months ended September 30, 2017 , as cumulative cash distributions received from Tinuum Group exceeded the Company's pro-rata share of cumulative earnings in Tinuum Group. The carrying value of the Company's investment in Tinuum Group shall remain zero as long as the cumulative amount of distributions received from Tinuum Group continues to exceed the Company's cumulative pro-rata share of Tinuum Group's Net income available to Class A members. For periods during which the ending balance of the Company's investment in Tinuum Group is zero, the Company only recognizes equity earnings from Tinuum Group to the extent that cash distributions are received from Tinuum Group during the period. For periods during which the ending balance of the Company's investment is greater than zero (e.g., when the cumulative earnings in Tinuum Group exceeds cumulative cash distributions received), the Company recognizes its pro-rata share of Tinuum Group's Net income available to Class A members for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period. During the three and nine months ended September 30, 2017 , the Company's cumulative amount of distributions received from Tinuum Group exceeded the Company's cumulative pro-rata share of Tinuum Group's Net income available to Class A members. As such, the Company recognized equity earnings from Tinuum Group for the three and nine months ended September 30, 2017 of $11.1 million and $33.4 million , respectively. During the three and nine months ended September 30, 2016 , the Company recognized equity earnings from Tinuum Group in the amount of $9.8 million and $28.1 million , respectively. As of September 30, 2017 and 2016 , the Company's carrying value in Tinuum Group was zero and zero , respectively.
Thus, the amount of equity earnings or loss reported on the Company's Condensed Consolidated Statement of Operations may differ from a mathematical calculation of net income or loss attributable to the equity interest based upon the factor of the equity interest and the Net income or loss attributable to Class A members as shown on Tinuum Group’s statement of operations. Additionally, for periods during which the carrying value of the Company's investment in Tinuum Group is greater than zero, distributions from Tinuum Group are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows. For periods during which the carrying value of the Company's investment in Tinuum Group is zero, such cash distributions are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees in excess of investment basis" within Investing cash flows.

9



The following tables presents the Company's investment balance, equity earnings and cash distributions in excess of the investment balance for the three and nine months ended September 30, 2017 and 2016 ( in thousands ):
Description
 
Date(s)
 
Investment balance
 
ADES equity earnings (loss)
 
Cash distributions
 
Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
Beginning balance
 
12/31/2016
 
$

 
$

 
$

 
$
(9,894
)
ADES proportionate share of income from Tinuum Group (1)
 
First Quarter
 
10,457

 
10,457

 

 

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
First Quarter
 
(9,894
)
 
(9,894
)
 

 
9,894

Cash distributions from Tinuum Group
 
First Quarter
 
(13,175
)
 

 
13,175

 

Adjustment for current year cash distributions in excess of investment balance
 
First Quarter
 
12,612

 
12,612

 

 
(12,612
)
Total investment balance, equity earnings (loss) and cash distributions
 
3/31/2017
 
$

 
$
13,175

 
$
13,175

 
$
(12,612
)
ADES proportionate share of income from Tinuum Group (1)
 
Second Quarter
 
$
11,761

 
$
11,761

 
$

 
$

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
Second Quarter
 
(11,761
)
 
(11,761
)
 

 
11,761

Cash distributions from Tinuum Group
 
Second Quarter
 
(9,138
)
 

 
9,138

 

Adjustment for current year cash distributions in excess of investment balance
 
Second Quarter
 
9,138

 
9,138

 

 
(9,138
)
Total investment balance, equity earnings (loss) and cash distributions
 
6/30/2017
 
$

 
$
9,138

 
$
9,138

 
$
(9,989
)
ADES proportionate share of income from Tinuum Group (1)
 
Third Quarter
 
$
11,393

 
$
11,393

 
$

 
$

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
Third Quarter
 
(9,989
)
 
(9,989
)
 

 
9,989

Cash distributions from Tinuum Group
 
Third Quarter
 
(11,050
)
 

 
11,050

 

Adjustment for current year cash distributions in excess of investment balance
 
Third Quarter
 
9,646

 
9,646

 

 
(9,646
)
Total investment balance, equity earnings (loss) and cash distributions
 
9/30/2017
 
$

 
$
11,050

 
$
11,050

 
$
(9,646
)

10



Description
 
Date(s)
 
Investment balance
 
ADES equity earnings (loss)
 
Cash distributions
 
Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
Beginning balance
 
12/31/2015
 
$

 
$

 
$

 
$
(3,263
)
ADES proportionate share of income from Tinuum Group  (1)
 
First Quarter
 
8,706

 
8,706

 

 

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
First Quarter
 
(3,263
)
 
(3,263
)
 

 
3,263

Cash distributions from Tinuum Group
 
First Quarter
 
(3,400
)
 

 
3,400

 

Total investment balance, equity earnings (loss) and cash distributions
 
3/31/2016
 
$
2,043

 
$
5,443

 
$
3,400

 
$

ADES proportionate share of income from Tinuum Group (1)
 
Second Quarter
 
$
6,758

 
$
6,758

 
$

 
$

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
Second Quarter
 

 

 

 

Cash distributions from Tinuum Group
 
Second Quarter
 
(14,875
)
 

 
14,875

 

Adjustment for current year cash distributions in excess of investment balance
 
Second Quarter
 
6,074

 
6,074

 

 
(6,074
)
Total investment balance, equity earnings (loss) and cash distributions
 
6/30/2016
 
$

 
$
12,832

 
$
14,875

 
$
(6,074
)
ADES proportionate share of income from Tinuum Group (1)
 
Third Quarter
 
$
9,300

 
$
9,300

 
$

 
$

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
Third Quarter
 
(6,074
)
 
(6,074
)
 

 
6,074

Cash distributions from Tinuum Group
 
Third Quarter
 
(9,775
)
 

 
9,775

 

Adjustment for current year cash distributions in excess of investment balance
 
Third Quarter
 
6,549

 
6,549

 

 
(6,549
)
Total investment balance, equity earnings (loss) and cash distributions
 
9/30/2016
 
$

 
$
9,775

 
$
9,775

 
$
(6,549
)
(1) For the three and nine months ended September 30, 2017 and 2016 , the amounts of the Company's 42.5% proportionate share of Net Income available to Class A members as shown in the table above differ from mathematical calculations of the Company’s 42.5% equity interest in Tinuum Group multiplied by the amounts of Net Income available to Class A members as shown in the table above of Tinuum Group results of operations due to adjustments related to the Redeemable Class B preferred return and, for the three months ended March 31, 2016, the elimination of Tinuum Group's earnings attributable to RCM6, of which the Company sold its 24.95% equity interest on March 3, 2016.
Tinuum Services, LLC

The Company has a 50% voting and economic interest in Tinuum Services, which is equivalent to the voting and economic interest of NexGen Refined Coal, LLC ("NexGen"). The Company has determined that Tinuum Services is not a VIE and has evaluated its consolidation analysis under the Voting Interest Model. Because the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. The Company’s investment in Tinuum Services as of September 30, 2017 and December 31, 2016 was $3.0 million and $4.0 million , respectively.

11



The following table summarizes the results of operations of Tinuum Services:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Gross loss
 
$
(17,344
)
 
$
(15,848
)
 
$
(47,472
)
 
$
(42,946
)
Operating, selling, general and administrative expenses
 
34,872

 
34,278

 
106,825

 
101,687

Loss from operations
 
(52,216
)
 
(50,126
)
 
(154,297
)
 
(144,633
)
Other income (expenses)
 
34

 
27

 
103

 
(13
)
Loss attributable to noncontrolling interest
 
54,305

 
52,019

 
159,627

 
149,792

Net income
 
$
2,123

 
$
1,920

 
$
5,433

 
$
5,146

ADES equity earnings from Tinuum Services
 
$
1,061

 
$
960


$
2,717


$
2,573

Included within the Consolidated Statements of Operations of Tinuum Services for the three and nine months ended September 30, 2017 and 2016 , respectively, were losses related to VIE's of Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are removed from the net losses of Tinuum Services as they are losses attributable to a noncontrolling interest.
Other
On March 3, 2016, the Company sold its 24.95% membership interest in RCM6 for a cash payment of $1.8 million and the assumption, by the buyer, of an outstanding note payable made by the Company in connection with its purchase of RCM6 membership interests from Tinuum Group. In doing so, the Company recognized a gain on the sale of $2.1 million for the nine months ended September 30, 2016 , which is included within the Other line item in the Condensed Consolidated Statements of Operations . As a result of the sale of its ownership interest, the Company ceased to be a member of RCM6 and, as such, is no longer subject to any quarterly capital calls and variable payments to RCM6. In addition, the Company has no future obligations related to the previously recorded note payable. However, the Company still receives its pro-rata share of income and cash distributions through its ownership in Tinuum Group based on the RCM6 lease payments made to Tinuum Group.
Prior to the sale of its ownership interest, the Company recognized equity losses related to its investment in RCM6 of $0.6 million for the three months ended March 31, 2016.
On July 27, 2017, the Company purchased a 50% membership interest in GWN Manager from Tinuum Group for an upfront payment of $0.1 million . GWN Manager owns a 0.2% membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Section 45 tax credits. Tinuum Group sold 49.9% of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining 49.9% . GWN Manager is subject to monthly capital calls based on estimated working capital needs.
The Company has determined that GWN Manager is not a VIE and has evaluated the consolidation analysis under the Voting Interest Model. Because the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in GWN Manager under the equity method of accounting.
As September 30, 2017 , the Company's ownership in GWN Manager was 50% . The Company's investment in GWN Manager as of September 30, 2017 , was $0.1 million .
The following table details the components of the Company's respective equity method investments included within the Earnings from equity method investments line item on the Condensed Consolidated Statements of Operations :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Earnings from Tinuum Group
 
$
11,050


$
9,775


$
33,363


$
28,050

Earnings from Tinuum Services
 
1,061


960


2,717


2,573

Earnings (losses) from other
 
9




9


(557
)
Earnings from equity method investments
 
$
12,120

 
$
10,735


$
36,089


$
30,066


12



The following table details the components of the cash distributions from the Company's respective equity method investments included in the Condensed Consolidated Statements of Cash Flows . Distributions from equity method investees are reported on the Condensed Consolidated Statements of Cash Flows as " Distributions from equity method investees, return on investment " within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as " Distributions from equity method investees in excess of cumulative earnings " within Investing cash flows.
 
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
Distributions from equity method investees, return on investment
 
 
 
 
Tinuum Group
 
$

 
$
3,400

Tinuum Services
 
3,675

 
3,450

 
 
$
3,675

 
$
6,850

Distributions from equity method investees in excess of investment basis
 
 
 
 
Tinuum Group
 
$
33,363

 
$
24,650

 
 
$
33,363

 
$
24,650

Note 3 - Borrowings
Line of Credit
On November 30, 2016, ADA-ES, Inc., a wholly-owned subsidiary of the Company ("ADA"), as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment (the "Tenth Amendment") to the 2013 Loan and Security Agreement (the "Line of Credit" or "LOC"). The Tenth Amendment increased the Line of Credit to $15 million , extended the maturity date of the Line of Credit to September 30, 2017 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") related to equipment projects, the Royalty Award, as defined in Note 5 , and certain other agreements. Additionally, this amendment secured the Line of Credit with amounts due to the Company from an additional existing Refined Coal facility lease, which amounts also factor into the borrowing base limitation, and amended certain financial covenants. Pursuant to the Tenth Amendment, the Company was required to maintain a deposit account with the Lender, initially with a minimum balance of $6.0 million , which was reduced to $3.0 million based on the Company meeting certain conditions and maintaining minimum trailing twelve month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Tenth Amendment) of $24.0 million . The minimum deposit balance was classified as Restricted Cash on the Condensed Consolidated Balance Sheets as of December 31, 2016 .
On September 30, 2017, ADA, as borrower, the Company, as guarantor, and the Lender entered into an amendment (the "Eleventh Amendment") to the LOC. The Eleventh Amendment decreased the LOC to $10 million due to decreased collateral requirements for the Company's outstanding LC's, extended the maturity date of the LOC to September 30, 2018, and permitted the LOC to be used as collateral (in place of restricted cash) for LC's up to $8 million related to equipment projects, the Royalty Award and certain other agreements. Additionally, under the Eleventh Amendment there is no minimum balance requirement based on the Company meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Eleventh Amendment) of $24.0 million .
As of September 30, 2017 , there were no outstanding borrowings under the Line of Credit, however, LC's in the aggregate amount of $4.5 million were secured under the Line of Credit, resulting in borrowing availability of $5.5 million and LC availability of $3.5 million .
Letters of Credit
The Company has LC's related to equipment projects, the Royalty Award and certain other agreements. During March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million , which was funded by borrowing availability under the LOC. The Company subsequently repaid this amount to the Lender as of March 31, 2017. The Company is contesting the draw on this LC and is pursuing actions to recover this amount from the customer. This amount is included in Other long-term assets on the Condensed Consolidated Balance Sheets .

13



The following tables summarize the LC's outstanding and collateral, by asset type, reported on the Condensed Consolidated Balance Sheets :
 
 
As of September 30, 2017
(in thousands)
 
LC Outstanding
 
Utilization of LOC Availability
 
Restricted Cash
Royalty Award
 
$
4,500

 
$
4,500

 
$

Total LC outstanding
 
$
4,500

 
$
4,500

 
$


 
As of December 31, 2016
(in thousands)
 
LC Outstanding
 
Utilization of LOC Availability
 
Restricted Cash
Contract performance - equipment systems
 
$
1,855

 
$
1,776

 
$
86

Royalty Award
 
7,150

 

 
7,150

Total LC outstanding
 
$
9,005

 
$
1,776

 
$
7,236

Credit Agreement
On June 30, 2016, the Company, the required lenders and the administrative lender under a $15.0 million short-term loan (the "Credit Agreement") agreed to terminate the Credit Agreement prior to the maturity date of July 8, 2016, effective upon the Company’s prepayment on June 30, 2016 of $9.9 million , which was comprised of the total principal balance of the loan and advances made to or for the benefit of the Company, together with all accrued but unpaid interest, and the total amount of all fees, costs, expenses and other amounts owed by the Company thereunder, including a prepayment premium.
Tinuum Group - RCM6 Note Payable
The Company acquired a 24.95% membership interest in RCM6 from Tinuum Group in February 2014 through an up-front payment and a note payable (the "RCM6 Note Payable"). Due to the payment terms of the note purchase agreement, the RCM6 Note Payable periodically added interest to the outstanding principal balance. The stated rate associated with the RCM6 Note Payable was 1.65% and the effective rate of the RCM6 Note Payable at inception was 20% . As discussed in Note 2 , on March 3, 2016, the Company sold its 24.95% membership interest in RCM6 and, as a result, the Company has no future obligations related to the previously recorded RCM6 Note Payable.
DSI Business Owner
In February 2016, the Company entered into an agreement to settle an outstanding note payable of approximately $1.1 million for $0.3 million with the former owner of a business ("DSI Business Owner") acquired by the Company in 2012, which was paid during the first quarter of 2016. The Company recognized a gain related to the settlement of $0.9 million , which is included in the Other line item in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016 .
Note 4 - Fair Value Measurements
Fair value of financial instruments
The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, deposits and accrued expenses, approximate fair value due to the short maturity of these instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:
 
 
As of September 30, 2017
 
As of December 31, 2016
(in thousands)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial Instruments:
 
 
 
 
 
 
 
 
Cost method investment (1)
 
$
552

 
$
552

 
$
1,016

 
$
1,016

Highview technology license payable
 
$
210

 
$
210

 
$
207

 
$
207

(1) Fair value is based on the investee's equity raise at £1.00 per share that commenced during the three months ended September 30, 2017 and the equity raise at £2.00 per share as of December 31, 2016 . Refer to Note 9 for further discussion of this investment. The fair value measurement represents a Level 3 measurement as it is based on significant inputs not observable in the market.

14



Concentration of credit risk
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, which were held at one and two financial institutions as of September 30, 2017 and December 31, 2016 , respectively. If those institutions were to be unable to perform their obligations, the Company would be at risk regarding the amount of cash and investments in excess of the Federal Deposit Insurance Corporation limits (currently $250 thousand ) that would be returned to the Company.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2017 and December 31, 2016 , the Company had no financial instruments carried and measured at fair value on a recurring basis.
Note 5 - Commitments and Contingencies
Legal Proceedings
The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below.
Securities class action lawsuit: United Food and Commercial Workers Union v. Advanced Emissions Solutions, Inc. , No. 14-cv-01243-CMA-KMT (U.S. District Court, D. Colo.)
As of December 31, 2016 , the Company had a recorded liability and insurance receivable of $4.0 million in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. On February 10, 2017, the Company received an order and final judgment that the lawsuit was settled, and the entire case had been dismissed with prejudice. The Company's insurance carriers funded the full settlement in November 2016. As of March 31, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.
Stockholder derivative lawsuits: In Re Advanced Emissions Solutions, Inc. Shareholder Derivative Litigation , No. 2014CV-30709 (District Court, Douglas County, Colorado) (consolidated actions).
As of December 31, 2016 , the Company had a recorded liability and insurance receivable of $0.6 million in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. A settlement for this lawsuit was approved and the case was closed on January 4, 2017, and the Company's insurance carriers funded the full settlement in January 2017. As of March 31, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.
SEC Inquiry
On March 29, 2017, the Company and the Securities and Exchange Commission reached a settlement to resolve a previously disclosed investigation into certain accounting issues, as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Without admitting or denying the SEC’s allegations, the Company agreed to the terms of the settlement and agreed to pay a civil monetary penalty of $0.5 million . The Company had fully reserved for this penalty as of June 30, 2016. The penalty was paid in the first quarter of 2017.
Settlement and royalty indemnity
In August 2008, Norit International N.V. f/k/a Norit N.V. ("Norit") filed a lawsuit against the Company asserting claims for misappropriation of trade secrets and other claims related to the Company's ADA Carbon Solutions, LLC joint venture ("Carbon Solutions") that built an activated carbon manufacturing plant (the “Red River Plant”). In August 2011 , the Company and Norit entered into a settlement agreement whereby the Company paid amounts related to the non-solicitation breach of contract claim, and ADA was also required to pay additional damages related to certain future revenues generated from the Red River Plant through the second quarter of 2018 (the "Royalty Award"). Payments of amounts due under the Royalty Award for each quarter are payable three months after such quarter ends. In October 2011 , an arbitration panel endorsed and confirmed the terms of the settlement agreement.

15



Additionally, during November 2011, the Company entered into an Indemnity Settlement Agreement whereby the Company agreed to settle certain indemnity obligations asserted against the Company related to the Norit litigation and relinquished all of its equity interest in Carbon Solutions to Carbon Solutions and amended the Intellectual Property License Agreement dated October 1, 2008 between the Company and Carbon Solutions. Under a provision of the Royalty Award, in the event that the Company declares or otherwise issues a dividend to any or all of its stockholders prior to January 1, 2018, other than repurchases of common stock under employee stock plans, the Company must increase its LC amounts as collateral for payments due to Norit, equal to 50% of the aggregate fair market value of such dividends (the "Dividends Provision"). Additionally, the first time that the Company achieves earnings in excess of $20.0 million for a fiscal year ended prior to January 1, 2018, the Company would be required increase its LC amounts as collateral by $5.0 million for payments due to Norit (the "Earnings Provision"). Any increase due to the Dividends Provision or the Earnings Provision should not cause the outstanding LC's to exceed the remaining estimated Royalty Award. Based on the Company's achievement of $97.7 million of net income for the fiscal year ended December 31, 2016, in March 2017 and pursuant to the Earnings Provision, the Company provided an additional LC of $5.0 million that is secured under the Line of Credit as of September 30, 2017 . Although the Company executed a stock repurchase and declared dividends during the nine months ended September 30, 2017 , the Company was not required to increase its outstanding LC amounts as the existing LC’s are of a sufficient amount to support future estimated payments due related to the Royalty Award.
During the nine months ended September 30, 2017 , the Company revised its estimate for future Royalty Award payments based in part on an updated forecast provided to the Company from Carbon Solutions. This forecast included a material reduction in estimated future revenues generated at the Red River Plant. Based primarily on the updated forecast, the Company recorded a $3.4 million reduction to the Royalty Award accrual.
As of September 30, 2017 and December 31, 2016 , the Company carried the components of the Royalty Award in Legal settlements and accruals in the Condensed Consolidated Balance Sheets of $4.5 million and $5.7 million , respectively, and in Legal settlements and accruals, long-term of zero and $5.4 million , respectively. Future amounts to be paid related to the Royalty Award may differ from current estimates due to future adjusted sales of activated carbon from the Red River Plant.
The following table summarizes the Company's legal settlements and accruals as described above, which are presented in the Condensed Consolidated Balance Sheets :
 
 
As of
(in thousands)
 
September 30,
2017
 
December 31,
2016
Settlement and Royalty Indemnification
 
$
4,482

 
$
5,656

Legal settlements
 

 
5,050

Legal settlements and accruals
 
4,482

 
10,706

Settlement and Royalty Indemnification, long-term
 

 
5,382

Legal settlements and accruals, long-term
 

 
5,382

Total legal settlements and accruals
 
$
4,482

 
$
16,088


Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan
The Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan (the “Plan”) is subject to the jurisdiction of the Internal Revenue Service ("IRS") and the Department of Labor ("DOL"). The DOL opened an investigation into the Plan, and the Company is responding to all requests for documents and information from the DOL. The DOL has not issued any formal findings as of the date of this report. Although the Company believes there has been no breach of fiduciary duty with respect to the Plan, the Company believes that it is probable that the DOL will require some payment to the Plan in order to close the investigation.  The Company determined that this amount is reasonably estimable and, as such, the Company has accrued $0.5 million as of September 30, 2017 . The liability was recorded in the  Other current liabilities  line item on the Condensed Consolidated Balance Sheets. The expense recognized related to this accrual was included in the  Other  line item in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. The estimate is based on information currently available and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual payment may exceed the accrued amount.

16



Other Commitments and Contingencies
Tinuum Group
The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen and two entities affiliated with NexGen have provided an affiliate of the Goldman Sachs Group, Inc. with limited guaranties (the "Tinuum Group Party Guaranties") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contributions from the other party equal to 50% of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guaranties.
Performance Guarantee on Equipment Systems
In the normal course of business related to ACI and DSI systems, the Company may guarantee certain performance thresholds during a discrete performance testing period that do not extend beyond six months from the initial test date, the commencement of which is determined by the customer. Performance thresholds include such matters as the achievement of a certain level of mercury removal and other emissions based upon the injection of a specified quantity of a qualified activated carbon or other chemical at a specified rate given other plant operating conditions, and availability of equipment and electric power usage. In the event the equipment fails to perform as specified during the testing period, the Company may have an obligation to correct or replace the equipment. In the event the performance thresholds are not achieved, the Company may have a “make right” obligation within the contract limits. During the three and nine months ended September 30, 2017 , the Company was not presented with any performance guarantees nor did it incur any additional claims. Additional performance guarantee claims, if incurred, are included within the Equipment sales cost of revenue line in the Condensed Consolidated Statements of Operations.
Note 6 - Stockholders' Equity
Stock Repurchase
On May 5, 2017 , the Company’s Board of Directors ("Board") authorized the commencement of a modified Dutch Auction tender offer ("Tender Offer") to purchase for cash up to 925,000 shares of the Company's common stock at a price per share of not less than $9.40 nor greater than $10.80 , for a maximum aggregate purchase price of $10.0 million , with an option to purchase an additional 2% of the outstanding shares of common stock if the Tender Offer was oversubscribed. The Tender Offer expired on June 6, 2017 and a total of 2,858,425 shares were validly tendered and not properly withdrawn at or below the final purchase price of $9.40 per share.

Because the tender offer was oversubscribed, the Company purchased a prorated portion of the shares properly tendered by each tendering stockholder (other than "odd lot" holders whose shares were purchased on a priority basis) at the final per share purchase price. Accordingly, the Company acquired  1,370,891  shares of its common stock ("Tendered Shares") at a price of  $9.40  per share, for a total cost of approximately  $12.9 million , excluding fees and other expenses related to the tender offer. The Tendered Shares represented approximately  6.2%  of the Company's outstanding shares prior to the tender offer. The Tendered Shares include the  925,000  shares the Company initially offered to purchase and  445,891  additional shares that the Company elected to purchase pursuant to its right to purchase up to an additional 2% of its outstanding shares of common stock. The Company recorded the Tendered Shares at cost, which included fees and expenses related to the Tender Offer, and reported the Tendered Shares as Treasury Stock on the Condensed Consolidated Balance Sheet as of September 30, 2017 .

The Company’s Board and executive officers did not participate in the Tender Offer, except for one director of the Board, who is a manager of a financial institution and holds dispositive powers over the shares of the Company's common stock held by the financial institution that tendered 70,178 of its shares of the Company's common stock in order to continue to own less than 4.99% of the outstanding shares of the Company's common stock upon the expiration of the Tender Offer.
Quarterly Cash Dividend
The Company declared cash dividends (the "Dividends") of $0.25 per common share on each of June 14, 2017 and August 7, 2017 , payable to stockholders of record as of the close of business on June 28, 2017 and August 21, 2017 , respectively, which were paid on July 17, 2017 and September 7, 2017 , respectively. The total amount of quarterly cash dividends paid by the Company during the three and nine months ended September 30, 2017 was $10.5 million . A portion of the Dividends remains accrued subsequent to the payment dates and represents dividends accumulated on nonvested shares of common stock held by employees of the Company that contain forfeitable dividend rights that are not payable until the underlying shares of common stock vest. These amounts are included in both Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet as of September 30, 2017 ,

17



Tax Asset Protection Plan
On May 5, 2017, the Board approved a Tax Asset Protection Plan designed to protect the Company’s ability to utilize its net operating losses and tax credits, which totaled approximately $113 million as of December 31, 2016.
United States federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if ADES experiences an “ownership change” (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of ADES by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period.
The Tax Asset Protection Plan is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of the Company’s outstanding common stock and will expire on the earlier of (a) May 4, 2018, or (b) the date of the 2018 Annual Meeting of Stockholders. The Tax Asset Protection Plan may also be terminated earlier in accordance with the terms thereof.
Note 7 - Stock-Based Compensation
The Company grants equity based awards to employees and non-employee directors. Equity based awards include RSA's, Stock Options, PSU's and Stock Appreciation Rights ("SAR's"). Stock-based compensation expense related to employees is included within the Payroll and benefits line item in the Condensed Consolidated Statements of Operations . Stock-based compensation expense related to non-employee directors is included within the General and administrative line item in the Condensed Consolidated Statements of Operations .
Total stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016 was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Restricted stock award expense
 
$
298

 
$
633

 
$
1,103

 
$
1,615

Stock option expense
 
143

 
(21
)
 
443

 
118

PSU expense
 
34

 
83

 
102

 
399

SAR expense
 

 

 

 
106

Total stock-based compensation expense
 
$
475

 
$
695

 
$
1,648

 
$
2,238

The amount of unrecognized compensation cost as of September 30, 2017 , and the expected weighted-average period over which the cost will be recognized is as follows:
 
 
As of September 30, 2017
( in thousands )
 
Unrecognized Compensation Cost
 
Expected Weighted-
Average Period of
Recognition (in years)
Restricted stock award expense
 
$
1,985

 
2.16

Stock option expense
 
288

 
0.22

PSU expense
 
35

 
0.26

Total unrecognized stock-based compensation expense
 
$
2,308

 
1.89


18



Restricted Stock Awards
Restricted stock is typically granted with vesting terms of three years. The fair value of restricted stock awards is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for restricted stock awards is recognized over the entire vesting period on a straight-line basis. A summary of restricted stock award activity under the Company's various stock compensation plans for the nine months ended September 30, 2017 is presented below:
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Non-vested at January 1, 2017
 
297,347

 
$
8.03

Granted
 
185,616

 
$
9.52

Vested
 
(190,524
)
 
$
7.99

Forfeited
 
(1,687
)
 
$
9.17

Non-vested at September 30, 2017
 
290,752

 
$
9.00

Stock Options
Stock options generally vest over three years and have a contractual limit of five years from the date of grant to exercise. The fair value of stock options granted is determined on the date of grant using the Black-Scholes option pricing model and the related expense is recognized on a straight-line basis over the entire vesting period.
A summary of option activity for the nine months ended September 30, 2017 is presented below:
 
 
Number of Options
Outstanding and
Exercisable
 
Weighted-Average
Exercise Price
 
Aggregate Intrinsic Value
 
Weighted-Average
Remaining Contractual
Term (in years)
Options outstanding, January 1, 2017
 
632,446

 
$
11.61

 
 
 
 
Options granted
 

 

 
 
 
 
Options exercised
 

 

 
 
 
 
Options expired / forfeited
 

 

 
 
 
 
Options outstanding, September 30, 2017
 
632,446

 
$
11.61

 
$
648

 
2.45
Options exercisable as of September 30, 2017
 
254,448

 
$
13.48

 
$
124

 
2.58
Performance Share Units
Compensation expense is recognized for PSU awards on a straight-line basis over the applicable service period, which is generally three years, based on the estimated fair value at the date of grant using a Monte Carlo simulation model. There were no PSU's granted during the nine months ended September 30, 2017 .
A summary of PSU activity for the nine months ended September 30, 2017 is presented below:
 
 
Units
 
Weighted-Average
Grant Date
Fair Value
Non-vested at January 1, 2017
 
49,516

 
$
25.20

Granted
 

 

Vested / Settled (1)
 
(30,110
)
 
$
(28.59
)
Forfeited / Canceled
 

 

Non-vested at September 30, 2017
 
19,406

 
$
19.95

(1) The number of units shown in the table above are based on target performance. The final number of shares of common stock issued may vary depending on the achievement of market conditions established within the awards, which could result in the actual number of shares issued ranging from zero to a maximum of two times the number of units shown in the above table. The following table shows the PSU's that were settled by issuing shares of the Company's common stock relative to a broad stock index and a peer group performance index.

19



 
 
Year of Grant
 
Net Number of Issued Shares upon Vesting
 
Shares Withheld to Settle Tax Withholding Obligations
 
TSR Multiple Range
 
Russell 3000 Multiple
 
 
 
 
 
Low
 
High
 
Low
 
High
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
6,476

 
3,573

 
0.75

 
1.00

 

 

 
 
2015
 
3,869

 
2,310

 
0.60

 
0.60

 

 

Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
38,706

 
1,572

 
0.63

 
1.00

 

 

 
 
2014
 
11,487

 

 
0.63

 
0.63

 

 

 
 
2015
 
13,529

 

 
0.50

 
0.50

 

 

Note 8 - Income Taxes
For the three and nine months ended September 30, 2017 , the Company recorded income tax expense of $3.6 million and $12.6 million , respectively, compared to income tax expense of $0.6 million and $0.7 million for the three and nine months ended September 30, 2016 , respectively. The income tax expense recorded for the three and nine months ended September 30, 2017 was comprised of estimated federal income tax expense of $3.2 million and $11.9 million , respectively, and estimated state income tax expense of $0.4 million and $0.7 million , respectively. The income tax expense recorded for the three and nine months ended September 30, 2016 was comprised of estimated state income tax expense.

For the three and nine months ended September 30, 2017 and 2016 , the Company's income tax expense and effective tax rates based on forecasted pretax income were:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except for rate)
 
2017
 
2016
 
2017
 
2016
Income tax expense
 
$
3,586

 
$
583

 
$
12,614

 
$
734

Effective tax rate
 
38
%
 
6
%
 
38
%
 
3
%
The effective tax rate for the three and nine months ended September 30, 2017 was different from the federal statutory rate primarily due to state income tax expense, net of federal benefit.
The effective tax rate for the three and nine months ended September 30, 2016 was different from the statutory rate primarily due to the utilization of a portion of the federal operating losses and the Company's full valuation allowances against federal and state net operating losses and federal tax credits, offset by estimated state income tax expense.
The Company assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.

20



Note 9 - Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of Prepaid expenses and other assets and Other long-term assets as presented in the Condensed Consolidated Balance Sheets:
 
 
As of
(in thousands)
September 30,
2017
 
December 31,
2016
Prepaid expenses and other assets:
 
 
 
 
   Prepaid expenses
 
$
1,635

 
$
1,169

   Other
 
124

 
188

 
 
$
1,759

 
$
1,357

Other long-term assets:
 
 
 
 
   Deposits
 
$
223

 
$
263

   Intangibles
 
788

 
696

   Cost method investment
 
552

 
1,016

   Other
 
729

 
323

 
 
$
2,292

 
$
2,298

Included within Other long-term assets is the Company's cost method investment. In November 2014, the Company acquired 411,765 shares of common stock, representing approximately an 8% ownership interest, in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage, for $2.8 million in cash (the "Highview Investment"). The Company evaluated the Highview Investment and determined that it should account for the investment under the cost method. The Highview Investment is evaluated for impairment upon an indicator of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. As of December 31, 2016 , the Company recorded an impairment charge of $1.8 million based on an estimated fair value of £2.00 per share, compared to the carrying value prior to the impairment charge of £4.25 per share. The estimated fair value as of December 31, 2016 was based on an equity raise that was completed during the first quarter of 2017 at a price of £2.00 per share.
As of September 30, 2017 , the Company recorded an impairment charge of $0.5 million , which is included in the Other line item in the Condensed Consolidated Statement of Operations, based on an estimated fair value of £1.00 per share, compared to the carrying value prior to the impairment charge of £2.00 per share. The estimated fair value as of September 30, 2017 was based on an equity raise that commenced during the third quarter of 2017 at a price of £1.00 per share.

21



The following table details the components of Other current liabilities and Other long-term liabilities as presented in the Condensed Consolidated Balance Sheets:
 
 
As of
(in thousands)
 
September 30,
2017
 
December 31,
2016
Other current liabilities:
 
 
 
 
Taxes payable
 
$
1,064

 
$
244

Estimated Company contribution to the Plan (1)
 
500

 

Accrued losses on revenue contracts
 
124

 
183

Accrued interest
 
63

 
618

Dividends payable
 
31

 

Warranty liabilities
 
374

 
287

Deferred rent
 

 
369

Asset retirement obligation
 

 
1,312

Other
 
1,162

 
1,004

 
 
$
3,318

 
$
4,017

Other long-term liabilities:
 
 
 
 
Deferred rent
 
185

 
38

Deferred revenue, related party
 
2,000

 
2,000

Dividends payable
 
62

 

 
 
$
2,247

 
$
2,038

(1) See Note 5 for further discussion on the Plan.
The tables below detail additional components of Other current liabilities as presented above:
The changes in the carrying amount of the Company’s warranty obligations from December 31, 2016 through September 30, 2017 are as follows:
 
 
As of
(in thousands)
 
September 30,
2017
Balance, beginning of period
 
$
287

Warranties accrued, net
 
580

Consumption of warranty obligations accrued
 
(524
)
Change in estimate related to previous warranties accrued
 
31

Balance, end of period
 
$
374

Included within Other current liabilities as of December 31, 2016 is the Company's asset retirement obligation. Changes in the Company's asset retirement obligations are as follows:
 
 
As of
(in thousands)
 
September 30,
2017
Asset retirement obligation, beginning of period
 
$
1,312

Accretion
 
37

Liabilities settled
 
(527
)
Changes due to amount and timing of reclamation
 
(822
)
Asset retirement obligations, end of period
 
$


22



The Company's estimate for its asset retirement obligation was reduced during the nine months ended September 30, 2017 as the scope of the asset retirement obligation was reduced. The change in estimate was recorded within the Research and development, net line item of the Condensed Consolidated Statements of Operations as the asset retirement obligation related to a research project of which expenses were originally recorded within the same line item.
Supplemental Condensed Consolidated Statements of Operations Information
The following table details the components of Interest expense in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
453A interest
 
$
614

 
$
889

 
$
1,646


$
2,034

Interest on RCM6 note payable, related party
 

 

 


263

Credit agreement interest
 
64

 

 
137

 
2,112

Other
 

 
80

 
216

 
87

 
 
$
678

 
$
969

 
$
1,999

 
$
4,496

The following table details the components of the Other line item of the Condensed Consolidated Statements of Operations :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Impairment of cost method investment
 
$
(464
)
 
$

 
$
(464
)
 
$

Gain on sale of equity method investment
 

 

 

 
2,078

Gain on settlement of note payable and licensed technology
 

 

 

 
869

Gain on termination of sales-type lease
 

 
900

 

 
900

Other (expense) income
 
(460
)
 
378

 
(444
)
 
113

 
 
$
(924
)
 
$
1,278

 
$
(908
)
 
$
3,960

Note 10 - Business Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision making group, in deciding how to allocate resources and in assessing financial performance. As of September 30, 2017 , the Company's CODM was the Company's CEO. The Company's operating and reportable segments are organized by products and services provided.
As of September 30, 2017 , the Company has two reportable segments: (1) Refined Coal ("RC"); and (2) Emissions Control ("EC").
The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2016 Form 10-K, except as described below.
RC segment revenue includes the Company's equity method earnings and losses from the Company's equity method investments. RC segment revenue also includes the Company's royalty earnings from Tinuum Group.
Segment operating income (loss) includes the Company's equity method earnings and losses from the Company's equity method investments, royalty earnings from Tinuum Group, gains related to sales of equity method investments and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits , Rent and occupancy , Legal and professional fees , and General and administrative .
All items not included in operating income are excluded from the RC and EC segments.

23



As of September 30, 2017 and December 31, 2016 , substantially all of the Company's material assets are located in the U.S. and all significant customers are either U.S. companies or the U.S. Government. The following table presents the Company's operating segment results for the three and nine months ended September 30, 2017 and 2016 :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
 
 
Earnings in equity method investments
 
$
12,120

 
$
10,735

 
$
36,089

 
$
30,066

Royalties
 
2,804

 
2,064

 
6,425

 
3,922

 
 
14,924

 
12,799

 
42,514

 
33,988

Emissions Control:
 
 
 
 
 
 
 
 
Equipment sales
 
1,577


14,869


31,304


44,788

Chemicals
 
717


670


3,844


1,717

Consulting services
 


171




492

 
 
2,294

 
15,710

 
35,148

 
46,997

Total segment reporting revenues
 
17,218

 
28,509

 
77,662

 
80,985

Adjustments to reconcile to reported revenues:
 
 
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
 
 
Earnings in equity method investments
 
(12,120
)
 
(10,735
)
 
(36,089
)
 
(30,066
)
Royalties
 
(2,804
)
 
(2,064
)
 
(6,425
)
 
(3,922
)
 
 
(14,924
)
 
(12,799
)
 
(42,514
)
 
(33,988
)
Total reported revenues
 
$
2,294

 
$
15,710

 
$
35,148

 
$
46,997

 
 
 
 
 
 
 
 
 
Segment operating income (loss):
 
 
 
 
 
 
 
 
Refined Coal (1)
 
$
13,991

 
$
11,913


$
40,149


$
33,974

Emissions Control
 
(895
)
 
2,956

 
1,265

 
9,656

Total segment operating income
 
$
13,096

 
$
14,869

 
$
41,414

 
$
43,630

(1) Included within the RC segment operating income for the three months ended September 30, 2017 and 2016 is 453A interest expense of $0.6 million and $0.9 million , respectively. Included within the RC segment operating income for the nine months ended September 30, 2017 and 2016 are 453A interest expense of $1.6 million and $2.0 million , respectively, and interest expense related to the RCM6 note payable of zero and $0.3 million , respectively. Additionally, included within the RC segment operating income for the nine months ended September 30, 2016 is a $2.1 million gain on the sale of RCM6.

24



A reconciliation of reportable segment operating income to the Company's consolidated net income is as follows:  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016

 
 
 
 
 
 
 
 
Segment operating income
 
$
13,096

 
$
14,869

 
$
41,414

 
$
43,630

Adjustments to reconcile to net income attributable to ADES
 
 
 
 
 
 
 
 
Corporate payroll and benefits
 
(1,222
)
 
(2,034
)
 
(4,375
)
 
(7,946
)
Corporate rent and occupancy
 
(91
)
 
(306
)
 
(208
)
 
(807
)
Corporate legal and professional fees
 
(964
)
 
(1,606
)
 
(3,091
)
 
(6,515
)
Corporate general and administrative
 
(857
)
 
(818
)
 
(2,513
)
 
(2,965
)
Corporate depreciation and amortization
 
(38
)
 
(93
)
 
(296
)
 
(351
)
Corporate interest (expense) income, net
 
(46
)
 
(78
)
 
(329
)
 
(2,200
)
Other (expense) income, net
 
(500
)
 
261

 
2,900

 
(264
)
Income tax expense
 
(3,586
)
 
(583
)
 
(12,614
)
 
(734
)
Net income
 
$
5,792

 
$
9,612

 
$
20,888

 
$
21,848

Corporate general and administrative expenses listed above include certain costs that benefit the business as a whole but are not directly related to one of the Company's segments. Such costs include, but are not limited to, accounting and human resources staff, information systems costs, legal fees, facility costs, audit fees and corporate governance expenses. 
Segment assets were as follows as of the dates presented:
 
 
As of
(in thousands)
 
September 30,
2017
 
December 31,
2016
Refined Coal
 
$
6,352

 
$
6,310

Emissions Control
 
3,936

 
24,551

All Other and Corporate
 
78,843

 
76,435

Consolidated
 
$
89,131

 
$
107,296

Note 11 - Restructuring
The Company recorded restructuring charges during the three and nine months ended September 30, 2016 in connection with a reduction in force, the departure of certain executive officers and management's further alignment of the business with strategic objectives. These charges related to severance arrangements with departing employees and executives, as well as non-cash charges related to the acceleration of vesting of certain stock awards. There were no material restructuring charges during the three and nine months ended September 30, 2017 .

25



A summary of the net pretax charges, incurred by segment, excluding facility charges shown below, is as follows:
 
 
 
 
Pretax Charge
(in thousands, except employee data)
 
Approximate Number of Employees
 
Refined Coal
 
Emissions Control
 
All Other and Corporate
 
Total
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Restructuring charges
 
17
 
$

 
$
700

 
$
290

 
$
990

Changes in estimates
 
 
 

 

 
(276
)
 
(276
)
Total pretax charge, net of reversals
 
 
 
$

 
$
700

 
$
14

 
$
714

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Restructuring charges
 
39
 
$

 
$
1,169

 
$
889

 
$
2,058

Changes in estimates
 
 
 

 

 
(276
)
 
(276
)
Total pretax charge, net of reversals
 
 
 
$

 
$
1,169

 
$
613

 
$
1,782


The following table summarizes the Company's change in restructuring accruals for the nine months ended September 30, 2017 :
(in thousands)
 
Employee Severance
 
Facility Closures
Remaining accrual as of December 31, 2016
 
$
452

 
$
247

Expense provision
 
81

 

Cash payments and other
 
(498
)
 
(250
)
Change in estimates
 
(25
)
 
3

Remaining accrual as of September 30, 2017
 
$
10

 
$


Restructuring accruals are included within the Accrued payroll and related liabilities line item in the Condensed Consolidated Balance Sheets . Restructuring expenses are included within the Payroll and benefits line item in the Condensed Consolidated Statements of Operations .
Note 12 - Subsequent Events
Unless disclosed elsewhere within the notes to the Condensed Consolidated Financial Statements, the following are the significant matters that occurred subsequent to September 30, 2017 .
Dividends
On November 6, 2017 , the Company's Board of Directors declared a quarterly dividend of $0.25 per share of common stock, which is payable on December 6, 2017 to stockholders of record at the close of business on November 17, 2017
Other
On November 6, 2017 , the Company entered into a settlement agreement with a former third-party service provider to the Company in the amount of $3.5 million . The settlement amount is expected to be paid to the Company during the fourth quarter of 2017.

26




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read together with the unaudited Condensed Consolidated Financial Statements and notes of Advanced Emissions Solutions, Inc. ("ADES" or the "Company") included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and the related notes of ADES included in the Company's 2016 Form 10-K.
Overview
ADES serves as the holding entity for a family of companies that provide emissions solutions to customers in the coal-fired power generation and industrial boiler industries. Through our subsidiaries and equity investments, we are a leader in emissions control ("EC") technologies and associated equipment, chemicals and services. Our proprietary environmental technologies enable our customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and pending EC regulations.
Our major activities include:
Development and sale of equipment, specialty chemicals and other products designed to reduce emissions of mercury, acid gases, metals and other pollutants, and the providing of technology services in support of our customers' emissions compliance strategies;
Through Tinuum Group LLC ("Tinuum Group"), an unconsolidated entity, the reduction of mercury and nitrogen oxide ("NO X ") emissions at select coal-fired power generators through the burning of refined coal ("RC") produced by RC facilities placed in service by Tinuum Group. We benefit from Tinuum Group's production and sale of RC, which lowers emissions and generates tax credits, as well as the revenue from selling or leasing RC facilities to tax equity investors. See the separately filed financial statements of Tinuum Group within the 2016 Form 10-K; and
Development and sale of technology, through a licensing arrangement with Tinuum Group, to reduce emissions and improve operations of coal-fired boilers used for power generation and industrial processes.
Results of Operations
For the three and nine months ended September 30, 2017 , we recognized net income of $5.8 million and $20.9 million , respectively, compared to net income of $9.6 million and $21.8 million , respectively, for the three and nine months ended September 30, 2016 .

Generally, this performance during the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 is attributable to a combination of factors, including:
Continued performance in our RC business segment, principally related to distributions, equity earnings and royalties from our Tinuum Group and Tinuum Services, LLC ("Tinuum Services") equity investments;
Growth in revenue from our chemical offerings;
Reduction in revenues and margin contribution for equipment systems in 2017 compared to 2016 due to the completion of the most significant portion of equipment systems occurring during prior periods;
Reductions in various categories of expenses, driven by restructuring activities in April and July 2016, a reduction in resources to complete the re-audit and restatement of prior financial statements (the "Restatement"), with such activities related to the Restatement being substantially completed by April 2016, the elimination of debt from the balance sheet, and our move to a smaller corporate headquarters location; and
During the three and nine months ended September 30, 2017 , we recognized an increase in income tax expense due to the partial release of the deferred tax asset valuation allowance as of December 31, 2016.
The following sections provide additional information regarding these comparative periods. For comparability purposes, the following tables set forth our results of operations for the periods presented in the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report. The period-to-period comparison of financial results may not be indicative of financial results to be achieved in future periods.

27



Comparison of the Three Months Ended September 30, 2017 and 2016
Total Revenue and Cost of Revenue
A summary of the components of our revenues and cost of revenue for the three months ended September 30, 2017 and 2016 is as follows:
 
 
Three Months Ended September 30,
 
Change
(in thousands, except percentages)
 
2017
 
2016
 
($)
 
(%)
Revenues:
 
 
 
 
 
 
 
 
Equipment sales
 
$
1,577

 
$
14,869

 
$
(13,292
)
 
(89
)%
Chemicals
 
717

 
670

 
47

 
7
 %
Consulting services and other
 

 
171

 
(171
)
 
(100
)%
Total revenues
 
$
2,294

 
$
15,710

 
$
(13,416
)
 
(85
)%
Operating expenses:
 
 
 
 
 
 
 
 
Equipment sales cost of revenue, exclusive of depreciation and amortization
 
$
1,467

 
$
12,704

 
$
(11,237
)
 
(88
)%
Chemicals cost of revenue, exclusive of depreciation and amortization
 
$
574

 
$
469

 
$
105

 
22
 %
Consulting services and other cost of revenue, exclusive of depreciation and amortization
 
$

 
$
86

 
$
(86
)
 
(100
)%

Equipment sales and Equipment sales cost of revenue, exclusive of items shown separately below
During the three months ended September 30, 2017 and 2016 , we did not enter into any long-term (six months or longer) fixed price contracts to supply Activated Carbon Injection ("ACI") systems. During the three months ended September 30, 2016 , we completed two ACI systems, recognizing revenues $6.6 million and cost of revenue of $5.7 million . During the three months ended September 30, 2016 , change orders on ACI systems positively impacted contract revenue by $0.9 million . We did not recognize any loss provisions, included within costs of revenue, for contracts related to ACI systems during the three months ended September 30, 2016 . All contracted ACI systems outstanding at December 31, 2016 were completed prior to the three months ended September 30, 2017 .
During the three months ended September 30, 2017 and 2016 , we did not enter into any long-term (six months or longer) fixed price contracts to supply Dry Sorbent Injection ("DSI") systems. During the three months ended September 30, 2016 , change orders on DSI systems positively impacted contract revenue by $0.8 million . The aggregate contract values on existing contracts may change due to the relative sizes of DSI systems and the contracts related thereto. During the three months ended September 30, 2017 , we completed one DSI system, recognizing revenue of $1.6 million and cost of revenue of $1.5 million . During the three months ended September 30, 2016 , we completed four DSI systems, recognizing revenue of $8.0 million and cost of revenue of $6.9 million . Certain of the DSI system long-term fixed price contracts were expected to be completed with losses. During the three months ended September 30, 2016 , we recorded $0.1 million in loss provisions included in cost of revenue related to DSI system contracts.
Demand for ACI and DSI system contracts historically was driven by coal-fired power plant utilities that need to comply with Federal Mercury and Air Toxics Standards ("MATS") and Maximum Achievable Control Technology Standards ("MACT"). As the deadline for these standards has passed, we do not expect to enter into any future long-term fixed price contracts for ACI and DSI systems.
Chemicals and Chemicals cost of revenue
During the three months ended September 30, 2017 and 2016 , revenues increased quarter over quarter primarily due to an overall increase in pounds of our chemicals sold. Gross margins on sales of chemicals for the three months ended September 30, 2017 were lower than the comparable period in 2016 due to price compression and ongoing field testing with multiple customers that did not occur in the comparable period in 2016 . Future period revenues are expected to be negatively impacted as a major customer discussed in previous filings is not expected to purchase chemicals going forward as well as the effects of continued price compression compared to historical periods. As we continue to expand our customer base and attempt to increase the volume, size and duration of chemical sale arrangements, we are faced with the challenge of a competitive market with a long lead-to-sale cycle. Increasing future sales of chemicals is our primary focus of the EC business at this time.
Consulting services and Consulting services cost of revenue
We also may provide consulting services related to emissions regulations but reported no revenue for the three months ended September 30, 2017 . Due to diminishing market demand related to historical services provided, we do not believe this revenue component will be material in the near term.

28



Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in Note 10 to the Condensed Consolidated Financial Statements.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the three months ended September 30, 2017 and 2016 is as follows:
 
 
Three Months Ended September 30,
 
Change
(in thousands, except percentages)
 
2017
 
2016
 
($)
 
(%)
Operating expenses:
 
 
 
 
 
 
 
 
Payroll and benefits
 
$
1,679

 
$
2,809

 
$
(1,130
)
 
(40
)%
Rent and occupancy
 
255

 
508

 
(253
)
 
(50
)%
Legal and professional fees
 
1,062

 
1,615

 
(553
)
 
(34
)%
General and administrative
 
862

 
818

 
44

 
5
 %
Research and development, net
 
252

 
(524
)
 
776

 
(148
)%
Depreciation and amortization
 
87

 
138

 
(51
)
 
(37
)%
 
 
$
4,197

 
$
5,364

 
$
(1,167
)
 
(22
)%

Payroll and benefits
Payroll and benefits expenses decreased during the three months ended September 30, 2017 compared to the same quarter in 2016 primarily due to a reduction in restructuring expenses in connection with the departure of certain executive officers and employees impacted by management's alignment of the business with strategic objectives during 2016. During the three months ended September 30, 2017 and September 30, 2016 , we recorded net restructuring charges of zero and $0.7 million , respectively. Stock-based compensation also decreased by $0.2 million during the three months ended September 30, 2017 compared to the same quarter in 2016 . Additionally, the remaining decrease is attributable to a decrease in average headcount of approximately 27% between the applicable periods.
Rent and occupancy
Rent and occupancy expense decreased during the three months ended September 30, 2017 compared to the same quarter in 2016 primarily due to lower rent and occupancy expense from relocating our corporate office in the first quarter of 2017.
Legal and professional fees
Legal and professional fees expenses decreased during the three months ended September 30, 2017 compared to the same quarter in 2016 as a result of a decrease in costs related to outsourced shared service costs, including accounting consultants, legal fees and audit fees.
General and administrative
General and administrative expenses remained relatively flat during the three months ended September 30, 2017 compared to the same quarter in 2016 due to decreases in general operating expenses, including a decrease in outsourced IT costs. These decreases were offset by $0.1 million incurred during the three months ended September 30, 2017 for expenses associated with a new enterprise resource planning ("ERP") system.
Research and development, net
Research and development expenses, net increased during the three months ended September 30, 2017 compared to the same quarter in 2016 primarily due to an increase in research and development activities related to continued product development for our ongoing business. In addition, research and development expenses, net during the three months ended September 30, 2016 were positively impacted by a final billing to the Department of Energy ("DOE") for one R&D contract.
Depreciation and amortization
Depreciation and amortization expense decreased during the three months ended September 30, 2017 compared to the same quarter in 2016 due to a reduction in certain assets, including leasehold improvements and office furniture, which were subject to acceleration of depreciation and disposed of in connection with our office relocation in the first quarter of 2017.


29



Other Income (Expense), net
A summary of the components of our other income (expense), net for the three months ended September 30, 2017 and 2016 is as follows:
 
 
Three Months Ended September 30,
 
Change
(in thousands, except percentages)
 
2017
 
2016
 
($)
 
(%)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings from equity method investments
 
$
12,120

 
$
10,735

 
$
1,385

 
13
 %
Royalties, related party
 
2,804

 
2,064

 
740

 
36
 %
Interest expense
 
(678
)
 
(969
)
 
291

 
(30
)%
Other
 
(924
)
 
1,278

 
(2,202
)
 
(172
)%
Total other income
 
$
13,322

 
$
13,108

 
$
214

 
2
 %

Earnings from equity method investments
The following table details the components of our respective equity method investments included within the Earnings from equity method investments line item on the Condensed Consolidated Statements of Operations :
 
 
Three Months Ended September 30,
(in thousands)
 
2017
 
2016
Earnings from Tinuum Group
 
$
11,050

 
$
9,775

Earnings from Tinuum Services
 
1,061

 
960

Earnings from other
 
9

 

Earnings from equity method investments
 
$
12,120

 
$
10,735


Earnings from equity method investments, and changes related thereto, are impacted by our most significant equity method investees: Tinuum Group and Tinuum Services. Earnings from equity method investments increased during the three months ended September 30, 2017 compared to the same quarter in 2016 primarily due to an increase in cash distributions from Tinuum Group in excess of our investment balance.

During the three months ended September 30, 2017 , we recognized $11.1 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $11.4 million for the quarter. During the three months ended September 30, 2016 , we recognized $9.8 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $9.3 million for the quarter. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations is the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognize such excess distributions as equity method earnings in the period the distributions occur, as discussed in more detail below.

The carrying value of our investment in Tinuum Group was zero as of September 30, 2017 , as cumulative cash distributions received from Tinuum Group exceeded our pro-rata share of cumulative earnings in Tinuum Group. The carrying value of our investment in Tinuum Group will remain zero as long as the cumulative amount of distributions received from Tinuum Group continues to exceed our cumulative pro-rata share of Tinuum Group's net income. For quarterly periods during which the ending balance of our investment in Tinuum Group is zero, we only recognize equity earnings from Tinuum Group to the extent that cash distributions are received from Tinuum Group during the period. For quarterly periods during which the ending balance of our investment is greater than zero (e.g., when the cumulative earnings in Tinuum Group exceeds cumulative cash distributions received), we recognize our pro-rata share of Tinuum Group's net income for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding quarter. See additional information related to our investment balance, equity earnings (losses) and cash distributions in Note 2 of the Condensed Consolidated Financial Statements.

As of September 30, 2017 and 2016 , Tinuum Group had 15 and 13 invested RC facilities, respectively, that were generating rental income. There were no 100% retained RC facilities as of September 30, 2017 or December 31, 2016 , except for temporary operations of a retained RC facility prior to its lease/sale or as discussed below related to GWN Manager, LLC ("GWN Manager").


30



Equity earnings from our interest in Tinuum Services increased by $0.1 million during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 , and for those quarters, Tinuum Services provided operating and maintenance services to 14 and 13 operating RC facilities, respectively. Tinuum Services derives earnings both from fixed-fee arrangements as well as fees that are based on actual RC production, depending upon the specific RC facility operating and maintenance agreement.
On July 27, 2017, we purchased a 50% membership interest in GWN Manager from Tinuum Group for an upfront payment of $0.1 million. GWN Manager owns a 0.2% membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Internal Revenue Code Section 45 tax credits ("Section 45 tax credits"). Tinuum Group sold 49.9% of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining 49.9%. We are subject to monthly capital calls to GWN Manager based on estimated working capital needs.
Our investment in GWN Manager as of September 30, 2017 , was $0.1 million . Equity earnings from our interest in GWN Manager included our share of net income from inception to September 30, 2017 .

We earned the following Section 45 tax credits related to the production of RC that may be available for future benefit:
 
 
Three Months Ended September 30,
(in thousands)
 
2017
 
2016
Section 45 tax credits earned
 
$
1,044

 
$
93


The increase in Section 45 tax credits earned during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was primarily due to the Company's investment in GWN Manager and Tinuum Group's ongoing retained RC facility operations that commenced during the three months ended September 30, 2017 . During the three months ended September 30, 2016 , we only generated Section 45 tax credits from the temporary operations of a retained RC facility prior to its lease/sale to a tax investor. Additional information related to our equity method investees is included in Note 2 of the Condensed Consolidated Financial Statements.

Royalties, related party
During the three months ended September 30, 2017 and 2016 , there were 6.9 million tons and 5.9 million tons, respectively, of RC produced using M-45 TM and M-45-PC TM technologies ("M-45 Technology"), which Tinuum Group licenses from us ("M-45 License"). The increase in royalty income was primarily due to obtaining additional third-party investors for two new RC facilities during the first and third quarters of 2017, both of which use our M-45 License. Therefore, this resulted in an increase in rent payments to Tinuum Group and the related tons subject to the M-45 License.

Interest expense
During the three months ended September 30, 2017 , interest expense decreased $0.3 million compared to the three months ended September 30, 2016 primarily due to a reduction in the deferred balance related to the Internal Revenue Code section 453A ("453A"), which requires taxpayers using the installment method for income tax purposes to pay an interest charge on the portion of the tax liability that is deferred under the installment method.

Other
The Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan (the “Plan”) is subject to the jurisdiction of the Internal Revenue Service ("IRS") and the Department of Labor ("DOL"). The DOL opened an investigation into the Plan, and we are responding to all requests for documents and information from the DOL. The DOL has not issued any findings as of the date of this report. Although, we believe there has been no breach of fiduciary duty, we believe a liability for contributions to the Plan is probable and reasonably estimable and, as such, we have accrued $0.5 million as September 30, 2017 . The estimate of this amount is based on information currently available and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual payment to the Plan may exceed the accrued amount.

Income tax expense
For the three months ended September 30, 2017 , we recorded income tax expense of $3.6 million compared to income tax expense of $0.6 million for three months ended September 30, 2016 . The income tax expense recorded for the three months ended September 30, 2017 was comprised of estimated federal income tax expense of $3.2 million and estimated state income tax expense of $0.4 million .


31



For the three months ended September 30, 2016 , we did not record any federal income tax expense primarily due to the utilization of federal net operating losses and the Company's full valuation allowance against federal net operating losses and federal tax credits. Income tax expense for three months ended September 30, 2016 included only state income tax expense.

We concluded that, as of December 31, 2016, it is more likely than not we will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize a significant portion of our net deferred tax assets and, therefore, reversed a portion of the valuation allowance as of December 31, 2016. As a result, for periods in which we report income before tax, we will recognize federal and state income tax expense.
Comparison of the Nine Months Ended September 30, 2017 and 2016
Total Revenue and Cost of Revenue
A summary of the components of our revenues and cost of revenue for the nine months ended September 30, 2017 and 2016 is as follows:
 
 
Nine Months Ended September 30,
 
Change
(in thousands, except percentages)
 
2017
 
2016
 
($)
 
(%)
Revenues:
 
 
 
 
 
 
 
 
Equipment sales
 
$
31,304

 
$
44,788

 
$
(13,484
)
 
(30
)%
Chemicals
 
3,844

 
1,717

 
2,127

 
124
 %
Consulting services and other
 

 
492

 
(492
)
 
(100
)%
Total revenues
 
$
35,148

 
$
46,997

 
$
(11,849
)
 
(25
)%
Operating expenses:
 
 
 
 
 
 
 
 
Equipment sales cost of revenue, exclusive of depreciation and amortization
 
$
28,260

 
$
35,175

 
$
(6,915
)
 
(20
)%
Chemicals cost of revenue, exclusive of depreciation and amortization
 
$
2,977

 
$
865

 
$
2,112

 
244
 %
Consulting services and other cost of revenue, exclusive of depreciation and amortization
 
$

 
$
299

 
$
(299
)
 
(100
)%

Equipment sales and Equipment sales cost of revenue, exclusive of items shown separately below
During the nine months ended September 30, 2017 and 2016 , we entered into zero and five long-term (six months or longer) fixed price contracts to supply ACI systems with aggregate contract values, net of change orders during the period, of zero and $2.9 million , respectively. During the nine months ended September 30, 2017 , change orders on ACI systems negatively impacted contract revenue by $0.1 million . During the nine months ended September 30, 2017 and 2016 , we completed four and 15 ACI systems, recognizing revenues of $3.4 million and $26.1 million and cost of revenue of $2.3 million and $19.8 million , respectively. The ACI systems completed during the nine months ended September 30, 2017 represented all contracted ACI systems that were outstanding as of December 31, 2016.
During the nine months ended September 30, 2017 and 2016 , we did not enter into any long-term (six months or longer) fixed price contracts to supply DSI systems. During the nine months ended September 30, 2016 , change orders on DSI systems negatively impacted contract revenue by $1.4 million . The aggregate contract values on existing contracts may change due to the relative sizes of DSI systems and the contracts related thereto. During the nine months ended September 30, 2017 and 2016 , we completed five and ten DSI systems, recognizing revenues of $27.8 million and $14.8 million , respectively, and cost of revenue of $25.9 million and $13.9 million , respectively. Certain of the DSI system long-term fixed price contracts were expected to be completed with losses. During the nine months ended September 30, 2017 and 2016 , we recorded zero in loss provisions and a reduction of $0.2 million to previously recorded loss provisions, respectively, which are included in cost of revenue related to DSI system contracts.
Demand for ACI and DSI system contracts has historically been driven by coal fired power plant utilities that need to comply with Federal MATS and MACT. As the deadline for these standards has passed, we do not expect to enter into any future long-term fixed price contracts for ACI and DSI systems.

32



Chemicals and Chemicals cost of revenue
During the nine months ended September 30, 2017 and 2016 , revenues increased period over period primarily due to an overall increase in pounds of our chemicals sold. Gross margins on sales of chemicals for the nine months ended September 30, 2017 were lower than the comparable period in 2016 due to price compression and ongoing field testing with multiple customers that did not occur in the comparable period in 2016 . Future period revenues are expected to be negatively impacted as a major customer discussed in previous filings is not expected to purchase chemicals going forward as well as the effects of continued price compression compared to historical periods. As we continue to expand our customer base and attempt to increase the volume, size and duration of chemical sale arrangements, we are faced with the challenge of a competitive market with a long lead-to-sale cycle. Increasing future sales of chemicals is our primary focus of the EC business at this time.
Consulting services and Consulting services cost of revenue
We reported no revenue related to consulting services for the nine months ended September 30, 2017 . Due to diminishing market demand related to historical services provided, we do not believe this revenue component will be material in the near term.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in Note 10 to the Condensed Consolidated Financial Statements.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the nine months ended September 30, 2017 and 2016 is as follows:
 
 
Nine Months Ended September 30,
 
Change
(in thousands, except percentages)
 
2017
 
2016
 
($)
 
(%)
Operating expenses:
 
 
 
 
 
 
 
 
Payroll and benefits
 
$
5,894

 
$
10,567

 
$
(4,673
)
 
(44
)%
Rent and occupancy
 
555

 
1,534

 
(979
)
 
(64
)%
Legal and professional fees
 
3,316

 
6,581

 
(3,265
)
 
(50
)%
General and administrative
 
2,934

 
2,920

 
14

 
 %
Research and development, net
 
30

 
(667
)
 
697

 
(104
)%
Depreciation and amortization
 
687

 
593

 
94

 
16
 %
 
 
$
13,416

 
$
21,528

 
$
(8,112
)
 
(38
)%

Payroll and benefits
Payroll and benefits expenses decreased during the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to a decrease in average headcount of approximately 45% to approximately 25 employees as of September 30, 2017 . Additionally, restructuring expenses decreased during the nine months ended September 30, 2017 compared to the same period in 2016 in connection with the departure of certain executive officers and employees impacted by management's alignment of the business with strategic objectives during 2016. During the nine months ended September 30, 2017 and September 30, 2016 , we recorded net restructuring charges of zero and $1.8 million , respectively. In addition, bonuses and stock-based compensation decreased by $1.2 million for the nine months ended September 30, 2017 compared to the same period in 2016 .
Rent and occupancy
Rent and occupancy expense decreased during the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to the acceleration of deferred rent and tenant improvement allowances in connection with the termination of the lease agreement of our former corporate office. Effective during the first quarter of 2017, we relocated our corporate office, which resulted in lower rent and occupancy expense during the nine months ended September 30, 2017 .
Legal and professional fees
Legal and professional fees expenses decreased during the nine months ended September 30, 2017 compared to the same period in 2016 as a result of the conclusion of the Restatement of our consolidated financial statements, which was substantially completed in April of 2016 and required significant professional resources. Expenses related to the Restatement during the nine months ended September 30, 2016 were $1.9 million. Additional decreases for the nine months ended September 30, 2017 were driven by a decrease in costs related to outsourced shared services costs, including accounting consultants, legal fees and audit fees.

33



General and administrative
General and administrative expenses remained relatively flat during the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to decreases in general operating expenses, including travel and professional expenses and impairment charges recognized on property and equipment and inventory of $0.5 million during the nine months ended September 30, 2016 . Offsetting the decrease in General and administrative expenses period over period was an allowance recorded against a long-term receivable during the nine months ended September 30, 2017 .
Research and development, net
Research and development expenses, net increased during the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to an increase in research and development activities related to continued product development for our ongoing business. The net increase in 2017 was offset by a decrease in our asset retirement obligation estimate during the nine months ended September 30, 2017 , which was driven by a reduction in the scope of the obligation, whereas the nine months ended September 30, 2016 was positively impacted by final billings to the DOE for one R&D contract.
Depreciation and amortization
Depreciation and amortization expense increased during the nine months ended September 30, 2017 compared to the same period in 2016 due to the acceleration of depreciation related to certain assets, including leasehold improvements and office furniture, which were disposed of in connection with our office relocation in the first quarter of 2017.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the nine months ended September 30, 2017 and 2016 is as follows:
 
 
Nine Months Ended September 30,
 
Change
(in thousands, except percentages)
 
2017
 
2016
 
($)
 
(%)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings from equity method investments
 
$
36,089

 
$
30,066

 
$
6,023

 
20
 %
Royalties, related party
 
6,425

 
3,922

 
2,503

 
64
 %
Interest expense
 
(1,999
)
 
(4,496
)
 
2,497

 
(56
)%
Revision in estimated royalty indemnity liability
 
3,400

 

 
3,400

 
*

Other
 
(908
)
 
3,960

 
(4,868
)
 
(123
)%
Total other income
 
$
43,007

 
$
33,452

 
$
9,555

 
29
 %
* Calculation not meaningful

Earnings from equity method investments
The following table details the components of our respective equity method investments included within the Earnings from equity method investments line item on the Condensed Consolidated Statements of Operations :
 
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
Earnings from Tinuum Group
 
$
33,363

 
$
28,050

Earnings from Tinuum Services
 
2,717

 
2,573

Earnings (losses) from other
 
9

 
(557
)
Earnings from equity method investments
 
$
36,089

 
$
30,066


Earnings from equity method investments, and changes related thereto, are impacted by our most significant equity method investees: Tinuum Group and Tinuum Services. Earnings from equity method investments increased during the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to an increase in cash distributions from Tinuum Group in excess of our investment balance.


34



During the nine months ended September 30, 2017 , we recognized $33.4 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $33.6 million for the period. During the nine months ended September 30, 2016 , we recognized $28.1 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $24.8 million for the period. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations is the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognize such excess distributions as equity method earnings in the period the distributions occur, as discussed in more detail below.

Equity earnings from our interest in Tinuum Services increased during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 . Tinuum Services provided operating and maintenance services to 14 and 13 operating RC facilities, respectively. Tinuum Services derives earnings both from fixed-fee arrangements as well as fees that are based on actual RC production, depending upon the specific RC facility operating and maintenance agreement.

On March 3, 2016, we sold our 24.95% membership interest in RCM6 for a cash payment of $1.8 million and assumption of the outstanding note payable made by us in connection with our purchase of the RCM6 membership interest from Tinuum Group in February 2014. Through March 3, 2016, we recognized equity losses related to our investment in RCM6 of $0.6 million.
On July 27, 2017, we purchased a 50% membership interest in GWN Manager from Tinuum Group for an upfront payment of $0.1 million. GWN Manager owns a 0.2% membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Section 45 tax credits. Tinuum Group sold 49.9% of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining 49.9%. We are subject to monthly capital calls to GWN Manager based on estimated working capital needs.
Our investment in GWN Manager as of September 30, 2017 , was $0.1 million. Equity earnings from our interest in GWN Manager included our share of net income from inception to September 30, 2017 .

We earned the following Section 45 tax credits related to the production of RC that may be available for future benefit:
 
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
Section 45 tax credits earned
 
$
1,141

 
$
2,920


The decrease in Section 45 tax credits earned during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to suspending operations on retained facilities in 2016, as well as the sale of RCM6 in March 2016. This was offset by our investment in GWN Manager, which generates Section 45 tax credits and commenced operations during the three months ended September 30, 2017 . Additional information related to our equity method investees is included in Note 2 of the Condensed Consolidated Financial Statements.

Royalties, related party
During the nine months ended September 30, 2017 and 2016 , there were 14.5 million tons and 12.2 million tons, respectively, of RC produced using our M-45 Technology. The increase in royalty income was primarily due to obtaining additional third party investors for two new RC facilities during the first and third quarter of 2017, both of which use our M-45 License. Therefore, this resulted in an increase in rent payments to Tinuum Group and the related tons subject to the M-45 License.

Interest expense
During the nine months ended September 30, 2017 , interest expense decreased $2.5 million compared to the nine months ended September 30, 2016 primarily due to interest expense incurred during 2016 related to the Credit Agreement that was terminated in June 2016. Additional decreases in interest expense related to section 453A, which requires taxpayers using the installment method for income tax purposes to pay an interest charge on the portion of the tax liability that is deferred under the installment method, and the elimination of the RCM6 note payable in March 2016 . The decreases in interest expense related to 453A and RCM6 were $0.4 million and $0.3 million , respectively, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 .


35



Revision in estimated royalty indemnity liability
During the nine months ended September 30, 2017 , management revised its estimate for future Royalty Award payments based in part on an updated forecast provided to us by a former equity method investment. As discussed in Note 5 to the Condensed Consolidated Financial Statements, we are required to pay additional damages related to certain future revenues generated from the former equity method investment. This forecast included a material reduction in estimated future revenues generated at the specific activated carbon plant from which the royalties are generated. Based primarily on the updated forecast, management recorded a $3.4 million reduction to its Royalty Award accrual during the nine months ended September 30, 2017 .

Other
Gain on sale of equity method investment
On March 3, 2016, we sold our 24.95% membership interest in RCM6 for a cash payment of $1.8 million and the assumption by the buyer of a note payable, which we entered into in connection with our purchase of RCM6 membership interests from Tinuum Group in February 2014. The outstanding balance on the note payable at the time of the sale was $13.2 million . With the sale of our membership interest in RCM6, we recognized a gain on the sale of $2.1 million for the nine months ended September 30, 2016 , which is included within the Other line item in the Condensed Consolidated Statements of Operations.

Gain on settlement of note payable
During the first quarter of 2016, we entered into an agreement to settle the remaining amounts owed to the DSI Business Owner, resulting in a gain of approximately $0.9 million.

Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan
As discussed above, as of September 30, 2017 , the Company has accrued $0.5 million for contribution to the Plan related to the DOL investigation of the Plan.
Income tax expense
For the nine months ended September 30, 2017 , we recorded income tax expense of $12.6 million compared to income tax expense of $0.7 million for nine months ended September 30, 2016 . The income tax expense recorded for the nine months ended September 30, 2017 was comprised of estimated federal income tax expense of $11.9 million and estimated state income tax expense of $0.7 million .

For the nine months ended September 30, 2016 , we did not record any federal income tax expense primarily due to the utilization of federal net operating losses and the Company's full valuation allowance against federal net operating losses and federal tax credits. Income tax expense for the nine months ended September 30, 2016 included only state income tax expense.

We concluded that, as of December 31, 2016, it is more likely than not we will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize a significant portion of our net deferred tax assets and, therefore, reversed a portion of the valuation allowance. As a result, for periods in which we report income before tax, we will recognize federal and state income tax expense.


36



Business Segments
As of September 30, 2017 , we have two reportable segments: (1) RC and (2) EC. The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.
Segment revenue includes our equity method earnings and losses from our equity method investments. Segment revenue also includes our royalty earnings from Tinuum Group and income related to sales-type leases.
Segment operating income (loss) includes our equity method earnings and losses from our equity method investments, royalty earnings from Tinuum Group, gains related to sales of equity method investments and an allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits , Rent and occupancy , Legal and professional fees , and General and administrative .
All items not included in operating income are excluded from the RC and EC segments.
The principal products and services of our segments are:
1.
RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NO X and mercury from the burning of coals. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services as well as other immaterial equity method investments. Segment revenues include our equity method earnings (losses) from our equity method investments and royalty earnings from Tinuum Group. These earnings are included within the Earnings from equity method investments and Royalties, related party line items in the Condensed Consolidated Statements of Operations . Key drivers to RC segment performance are operating and retained produced and sold RC, royalty-bearing tonnage, and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments.
2.
EC - Our EC segment includes revenues and related expenses from the sale of ACI and DSI equipment systems, chemical sales, consulting services and other sales related to the reduction of emissions in the coal-fired electric generation process and the electric utility industry. These amounts are included within the respective revenue and cost of revenue line items in the Condensed Consolidated Statements of Operations .
Management uses segment operating income (loss) to measure profitability and performance at the segment level. Management believes segment operating income (loss) provides investors with a useful measure of our operating performance and underlying trends of the businesses. Segment operating income (loss) may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our Condensed Consolidated Statements of Operations .

37



The following table presents our operating segment results for the three and nine months ended September 30, 2017 and 2016 :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
 
 
Earnings in equity method investments
 
$
12,120

 
$
10,735

 
$
36,089

 
$
30,066

Royalties
 
2,804

 
2,064

 
6,425

 
3,922

 
 
14,924

 
12,799

 
42,514

 
33,988

Emissions Control:
 
 
 
 
 
 
 
 
Equipment sales
 
1,577

 
14,869

 
31,304

 
44,788

Chemicals
 
717

 
670

 
3,844

 
1,717

Consulting services
 

 
171

 

 
492

 
 
2,294

 
15,710

 
35,148

 
46,997

Total segment reporting revenues
 
17,218

 
28,509

 
77,662

 
80,985

Adjustments to reconcile to reported revenues:
 
 
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
 
 
Earnings in equity method investments
 
(12,120
)
 
(10,735
)
 
(36,089
)
 
(30,066
)
Royalties
 
(2,804
)
 
(2,064
)
 
(6,425
)
 
(3,922
)
 
 
(14,924
)
 
(12,799
)
 
(42,514
)
 
(33,988
)
Total reported revenues
 
$
2,294

 
$
15,710

 
$
35,148

 
$
46,997

 
 
 
 
 
 
 
 
 
Segment operating income (loss):
 
 
 
 
 
 
 
 
Refined Coal (1)
 
$
13,991

 
$
11,913

 
$
40,149

 
$
33,974

Emissions Control
 
(895
)
 
2,956

 
1,265

 
9,656

Total segment operating income
 
$
13,096

 
$
14,869

 
$
41,414

 
$
43,630


(1) Included within the RC segment operating income for the three months ended September 30, 2017 and 2016 is 453A interest expense of $0.6 million and $0.9 million , respectively. Included within the RC segment operating income for the nine months ended September 30, 2017 and 2016 , are 453A interest expense of $1.6 million and $2.0 million , respectively, and interest expense related to the RCM6 note payable of zero and $0.3 million , respectively. Additionally, included within the RC segment operating income for the nine months ended September 30, 2016 is a $2.1 million gain on the sale of RCM6.

RC
The following table details the segment revenues of our respective equity method investments:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Earnings from Tinuum Group
 
$
11,050

 
$
9,775

 
$
33,363

 
$
28,050

Earnings from Tinuum Services
 
1,061

 
960

 
2,717

 
2,573

Earnings (losses) from other
 
9

 

 
9

 
(557
)
Earnings from equity method investments
 
$
12,120

 
$
10,735

 
$
36,089

 
$
30,066


For the three months ended September 30, 2017 and September 30, 2016
RC earnings increased primarily due to increased equity earnings in Tinuum Group during the three months ended September 30, 2017 compared to the same quarter in 2016 , as presented above. For the  three months ended September 30, 2017 , Tinuum Group consolidated earnings increased  $4.8 million  compared to the same quarter in 2016 primarily due to an increase in operating RC facilities. Distributions received from Tinuum Group for the three months ended September 30, 2017 and 2016 were recorded directly to earnings, as our investment was in a memo account as discussed in Note 2 .


38



As discussed above and in Note 2 of the Condensed Consolidated Financial Statements, our earnings in Tinuum Group may not equal our pro-rata share due to the accounting related to our equity method investment. As such, our earnings in Tinuum Group increased by $1.3 million during the three months ended September 30, 2017 compared to the same quarter in 2016 due to $11.1 million of cash distributions received that were in excess of our pro-rate share of cumulative earnings in Tinuum Group.

Earnings from Tinuum Services for the three months ended September 30, 2017 were relatively consistent compared to the same period in 2016.

RC earnings were positively impacted during the three months ended September 30, 2017 by an increase in royalties related to Tinuum Group's use of our M-45 License. During the three months ended September 30, 2017 and 2016 , there were 6.9 million tons and 5.9 million tons, respectively, of RC produced using the M-45 Technology. The increase in Royalty revenue was driven by the increase in rent payments to Tinuum Group and the related tons subject to the M-45 License.

For the nine months ended September 30, 2017 and September 30, 2016
RC earnings increased primarily due to increased equity earnings in Tinuum Group during the nine months ended September 30, 2017 compared to the same period in 2016 , as presented above. For the nine months ended September 30, 2017 , Tinuum Group's consolidated earnings increased $20.4 million compared to the same period in 2016 due to an increase in both coal sales and lease revenues as well as a decrease in operating expenses related to the suspension of operations of all retained RC facilities in 2016. Distributions received from Tinuum Group for the nine months ended September 30, 2017 were recorded as earnings, as our investment was in a memo account during this period as discussed in Note 2 . During the same period in 2016 , a portion of the distributions were recorded as a reduction of the investment balance, resulting in lower earnings for that period.

As discussed above and in Note 2 of the Condensed Consolidated Financial Statements, our earnings in Tinuum Group may not equal our pro-rata share due to the accounting related to our equity method investment. As such, our earnings in Tinuum Group increased by $5.3 million during the nine months ended September 30, 2017 compared to the same period in 2016 due to $33.4 million of cash distributions received that were in excess of our pro-rata share of cumulative earnings in Tinuum Group.

RC earnings were positively impacted during the nine months ended September 30, 2017 due to lower operating losses associated with our RCM6 equity method investment, which was sold during the first quarter of 2016. Earnings from Tinuum Services for the nine months ended September 30, 2017 were consistent compared to the same period in 2016.

RC earnings were also positively impacted during the nine months ended September 30, 2017 by an increase in royalties related to Tinuum Group's use of our M-45 License. During the nine months ended September 30, 2017 and 2016 , there were 14.5 million tons and 12.2 million tons, respectively, of RC produced using the M-45 Technology. The increase in Royalty revenue was driven by the increase in rent payments to Tinuum Group and the related tons subject to the M-45 License.
Additional discussion of our equity method investments is included above within our consolidated results and in Note 2 of the Condensed Consolidated Financial Statements.
EC
Discussion of revenues derived from our EC segment and costs related thereto are included above within our consolidated results.
For the three months ended September 30, 2017 and September 30, 2016
EC segment operating income decreased during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 primarily due to the decrease in revenue, as discussed above within the consolidated results. The decrease in EC operating income was offset by decreases in operating expenses quarter over quarter. Specifically, Payroll and benefits decreased quarter over quarter by $0.4 million . This decrease was due to decreased headcount quarter over quarter, which was largely due to management restructuring during 2016.

For the nine months ended September 30, 2017 and September 30, 2016
EC segment operating income decreased during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to the decrease in revenue, as discussed above within the consolidated results. The decrease in EC operating income was offset by decreases in operating expenses period over period. Specifically, Payroll and benefits decreased period over period by $1.2 million . This decrease was due to decreased headcount, which was largely due to management restructuring in 2016. Offsetting these expense decreases period over period was the settlement in 2016 of the remaining amounts owed to the former DSI Business Owner, resulting in a reduction of EC segment expenses of $0.9 million during the nine months ended September 30, 2016 as well as an impairment charge of $0.5 million recorded during 2017 related to our cost method investment.

39



Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During the nine months ended September 30, 2017 , our liquidity position was positively affected primarily due to distributions from Tinuum Group and Tinuum Services and borrowing availability under our bank ("Lender") line of credit ("Line of Credit" or "LOC").
Our principal sources of liquidity include:
cash on hand;
cash provided by our operations, including the release of restricted cash;
distributions from Tinuum Group and Tinuum Services;
royalty payments from Tinuum Group; and
our Line of Credit
Our principal uses of liquidity during the nine months ended September 30, 2017 included:

repurchases of shares of common stock pursuant to a modified Dutch Auction tender offer ("Tender Offer");
payment of dividends;
our business operating expenses, including federal and state tax payments;
delivering on our existing contracts and customer commitments; and
repayments on our Line of Credit.

On May 5, 2017 , our Board authorized the commencement of a Tender Offer to purchase for cash up to 925,000 shares of our common stock at a price per share of not less than $9.40 nor greater than $10.80 , for a maximum aggregate purchase price of $10.0 million , with an option to purchase an additional 2% of the outstanding shares of common stock if the Tender Offer was oversubscribed. The Tender Offer expired on June 6, 2017 and a total of 2,858,425 shares were validly tendered and not properly withdrawn at or below the final purchase price of $9.40 per share.
Because the tender offer was oversubscribed, we purchased a prorated portion of the shares properly tendered by each tendering stockholder (other than "odd lot" holders whose shares were purchased on a priority basis) at the final per share purchase price. Accordingly, we acquired  1,370,891  shares of our common stock ("Tendered Shares") at a price of  $9.40  per share, for a total cost of approximately  $12.9 million , excluding fees and other expenses related to the Tender Offer. The Tendered Shares represented approximately  6.2%  of our outstanding shares of our common stock prior to the Tender Offer. The Tendered Shares include the  925,000  shares we initially offered to purchase and  445,891  additional shares that we elected to purchase pursuant to our right to purchase up to an additional 2% of our outstanding shares of common stock.
Our Board declared quarterly cash dividends (the "Dividends") of $0.25 per share on the outstanding shares of our common stock on each of June 14, 2017 and August 7, 2017 , payable to stockholders of record as of the close of business on June 28, 2017 and August 21, 2017 , respectively. The payments of $5.2 million and $5.3 million were subsequently made in July and September 2017, respectively. The total amount of Dividends paid by the Company during the three and nine months ended September 30, 2017 was $10.5 million . A portion of the Dividends remains accrued and represents dividends accumulated on nonvested shares of our common stock held by our employees and directors that contain dividend rights that are forfeitable and not payable until the underlying shares vest.

During the third quarter of 2017, we amended our Line of Credit ("Eleventh Amendment") with the Lender. The Eleventh Amendment decreased the LOC to $10 million due to decreased collateral requirements for the Company's outstanding letters of credit ("LC's"), extended the maturity date of the LOC to September 30, 2018, and permitted the LOC to be used as collateral (in place of restricted cash) for LC's up to $8 million related to equipment projects, the Royalty Award and certain other agreements. Additionally, under the Eleventh Amendment there is no minimum balance requirement based on the Company meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Eleventh Amendment) of $24.0 million .

As of September 30, 2017 , there were no outstanding borrowings under the LOC, however, LC's in the aggregate amount of $4.5 million were secured under the LOC, resulting in borrowing availability of $5.5 million . As of September 30, 2017 , pursuant to amendments contained in the Eleventh Amendment, we provided LC's ("Royalty Award LC's") totaling $4.5 million , related to obligations due under the Royalty Award that were secured under the LOC, resulting in remaining LC availability of $3.5 million . As of December 31, 2016, we had Royalty Award LC's totaling $7.2 million collateralized by restricted cash as the LOC was not available to secure LC’s as of that date.

40



During March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million , which was funded by borrowing availability under the Line of Credit. We subsequently repaid this amount to the Lender during the three months ended March 31, 2017. We are contesting the draw on this LC and are pursuing actions to recover this amount from the customer.
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, as well as future expected dividend payments and potential future share repurchases, depends upon several factors, including executing on our contracts and initiatives, receiving royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, and increasing our share of the market for EC products, and, in particular EC chemicals sales. Increased distributions from Tinuum Group will likely be dependent upon both preserving existing contractual relationships and the securing of additional tax equity investors for those Tinuum Group facilities that are currently not operating.
Sources and Uses of Cash
Nine Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016
Cash and cash equivalents increased from $13.2 million as of December 31, 2016 to $26.8 million as of September 30, 2017 . Restricted cash decreased from $13.7 million as of December 31, 2016 to zero as of September 30, 2017 . The following table summarizes our cash flows for the nine months ended September 30, 2017 and 2016 , respectively:
 
 
Nine Months Ended September 30,
 
 
( in thousands)
 
2017
 
2016
 
Change
Cash and cash equivalents and restricted cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(9,080
)
 
$
(15,495
)
 
$
6,415

Investing activities
 
32,959

 
26,389

 
6,570

Financing activities
 
(24,000
)
 
(15,495
)
 
(8,505
)
Net change in cash and cash equivalents and restricted cash
 
$
(121
)
 
$
(4,601
)
 
$
4,480


Additionally, the following table summarizes the cash flows of Tinuum Group, whose cash distributions most significantly impact our consolidated cash flow results, for the nine months ended September 30, 2017 and 2016 , respectively:
 
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
Tinuum Group cash and cash equivalents, beginning of year
 
$
10,897

 
$
6,183

Cash provided by (used in):
 
 
 
 
Operating activities
 
45,868

 
52,447

Investing activities
 
(4,456
)
 
(2,473
)
Financing activities
 
(40,024
)
 
(47,590
)
Net change in cash and cash equivalents
 
1,388

 
2,384

Tinuum Group cash and cash equivalents, end of period
 
$
12,285

 
$
8,567

Cash flow from operating activities
Cash flows used in operating activities reflect operating losses as well as the timing of our working capital requirements, in addition to other items discussed herein.
Deferred revenue and project costs resulted in a change in providing of operating cash flows on a net basis of $0.8 million due to production and completion of ACI and DSI equipment systems.

41



Our operating cash flows may also be significantly impacted by distributions from our equity method investees, which are classified as either a return on investment within operating cash flows or a return in excess of investment basis within investing cash flows. For the nine months ended September 30, 2017 , we received $5.5 million more in total cash distributions from equity method investees than we did for the nine months ended September 30, 2016 due to the suspension of operations of retained RC facilities that began in 2016, a decrease in RC facility installations by Tinuum Group that began in 2016 and an increase in invested facilities that commenced during the second half of 2016. Distributions received from our equity method investees reported as return on investment within operating cash flows decreased by $3.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 as a result of all distributions received from Tinuum Group being reported under investing cash flows for the nine months ended September 30, 2017 . All distributions received from Tinuum Services were reported as return on investment within operating cash flows for the nine months ended September 30, 2017 and 2016 .
Our cash spend for legal and professional fees for the nine months ended September 30, 2017 decreased by $2.2 million compared to the same period in 2016 as a result of the conclusion of the Restatement of our consolidated financial statements in April 2016.
Cash flow from investing activities
Distributions from equity method investees
Distributions received from our equity method investees reported as return in excess of investment basis within investing cash flows increased by $8.7 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 . This increase was due to an increase in distributions received from Tinuum Group, all of which were reported under investing cash flows for the nine months ended September 30, 2017 , compared to only $3.4 million of the total $28.1 million of distributions in the nine months ended September 30, 2016 being reported within operating cash flows.
Purchases of and contributions to equity method investees
On July 27, 2017, we purchased a 50% membership interest in GWN Manager from Tinuum Group for an upfront payment of $0.1 million.
Proceeds from sale of equity method investment
In March 2016, we sold our investment in RCM6. Proceeds from the sale included $1.8 million in cash and the assumption by the buyer of all unpaid amounts outstanding under the original note payable.
Cash flow from financing activities
Borrowings and repayments on Line of Credit
During March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million, which was funded by borrowing availability under the Line of Credit. We subsequently repaid this amount to the Lender as of March 31, 2017.
Short-term borrowings
On June 30, 2016, we, the required lenders under the Credit Agreement and the Administrative Agent agreed to terminate the Credit Agreement, and on June 30, 2016, we paid the payoff amount of $9.9 million. Additionally, during the nine months ended September 30, 2016 , we repaid $0.6 million in debt issuance costs related to the Second Amendment of the Credit Agreement. Additionally, during the nine months ended September 30, 2016 , we used $1.2 million of cash for repayments of principal on the RCM6 and the DSI Business Owner notes payable, as described in Note 3 of the Condensed Consolidated Financial Statements.
Equity award activity
During the nine months ended September 30, 2017 and 2016 , we used $0.5 million and $0.2 million , respectively, for the repurchase of shares to satisfy tax withholdings upon the vesting of equity based awards.

Cash dividends paid
During the nine months ended September 30, 2017, we made payments of $10.5 million related to dividends declared on our common stock.
Repurchase of common stock
As described in Note 6 of the Condensed Consolidated Financial Statements, on May 5, 2017 , the Board authorized the commencement of the Tender Offer. We acquired  1,370,891  shares of our common stock at a price of  $9.40  per share, for a total cost of approximately  $13.0 million , including fees and other expenses related to the Tender Offer.

42



Contractual Obligations
During the nine months ended September 30, 2017 , there were no material changes to our contractual obligations outside of the ordinary course of business from those reported as of December 31, 2016 , except for a reduction in the estimated obligations due under the Royalty Award, as described in Note 5 of the Condensed Consolidated Financial Statements, and the quarterly dividend program that commenced during the June 2017 quarter.
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2017 , we did not engage in any off-balance sheet arrangements except those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2016 10-K, which included operating leases, LC's and future 453A interest obligations.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates have not changed from those reported in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2016 10-K.
Recently Issued Accounting Standards
Refer to Note 1 of the Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report for new accounting guidance issued during the  nine months ended September 30, 2017 and subsequent thereto through the date of this Quarterly Report.
Forward-Looking Statements Found in this Report
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve risks and uncertainties. In particular, such forward-looking statements are found in this Part I, Item 2 above. Words or phrases such as "anticipates," "believes," "expects," "intends," "plans," "estimates," "predicts," the negative expressions of such words, or similar expressions are used in this Quarterly Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding:
(a)
the scope and impact of mercury and other regulations or pollution control requirements, including the impact of the final MATS, and how it may affect demand for ACI and DSI systems, as well as chemical products;
(b)
one of our major customer's purchase of chemicals in the future;
(c)
the continuity of dividend;
(d)
DOL investigation of our Plan;
(e)
the expected lack of liability in connection with the Tinuum Group Party Guarantees;
(f)
expected demand for our consulting services.
Our expectations are based on certain assumptions, including without limitation, that:
(a)
coal will continue to be a major source of fuel for electrical generation in the United States;
(b)
the IRS will allow the production and sale of RC to qualify for Section 45 tax credits;
(c)
we will continue as a key supplier of equipment, chemicals and services to the coal-fired power generation industry as it seeks to implement reduction of mercury emissions;
(d)
current environmental laws and regulations requiring reduction of mercury from coal-fired boiler flue gases will not be materially weakened or repealed by courts or legislation in the future;
(e)
we will be able to meet any performance guarantees we make and continue to meet our other obligations under contracts;
(f)
we will be able to obtain adequate capital and personnel resources to meet our operating needs and to fund anticipated growth and our indemnity obligations;
(g)
we will be able to establish and retain key business relationships with other companies;
(h)
orders we anticipate receiving will be received;
(i)
governmental audits of our costs incurred under DOE contracts will not result in material adjustments to amounts we have previously received under those contracts;
(j)
we will be able to formulate new chemicals and blends that will be useful to, and accepted by, the coal-fired boiler power generation business;
(k)
we will be able to effectively compete against others;
(l)
we will be able to meet any technical requirements of projects we undertake;
(m)
Tinuum Group will be able to sell or lease the remaining RC facilities, including RC facilities that may be returned to Tinuum Group, to third party investors; and
(n)
we will be able to utilize our portion of the Section 45 tax credits generated by production and sale of RC from retained facilities.


43



The forward-looking statements included in this Quarterly Report involve risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including, but not limited to, timing of new and pending regulations and any legal challenges to or extensions of compliance dates of them; the US government’s failure to promulgate regulations or appropriate funds that benefit our business; changes in laws and regulations, accounting rules, prices, economic conditions and market demand; impact of competition; availability, cost of and demand for alternative energy sources and other technologies; technical, start up and operational difficulties; failure of the RC facilities to produce RC or such RC to qualify for Section 45 tax credits; termination of or amendments to the contracts for sale or lease of RC facilities; decreases in the production of RC; inability to commercialize our technologies on favorable terms; our inability to ramp up our operations to effectively address recent and expected growth in our business; loss of key personnel; potential claims from any terminated employees, customers or vendors; failure to satisfy performance guarantees; availability of materials and equipment for our businesses; intellectual property infringement claims from third parties; pending litigation; identification of additional material weaknesses or significant deficiencies; as well as other factors relating to our business, as described in our filings with the SEC, with particular emphasis on the risk factor disclosures contained in those filings. You are cautioned not to place undue reliance on the forward-looking statements made in this Report and to consult filings we have made and will make with the SEC for additional discussion concerning risks and uncertainties that may apply to our business and the ownership of our securities. The forward-looking statements contained in this Report are presented as of the date hereof, and we disclaim any duty to update such statements unless required by law to do so.


Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are most significantly exposed to interest rate risk related to our obligations to pay 453A interest to the IRS. Additionally, we are currently exposed to interest rate risk related to cash equivalents and restricted cash subject to variable interest rates. There have been no material changes from those reported in our 2016 Form 10-K.
Foreign Currency Risk
There have been no material changes from those reported in our 2016 Form 10-K.
Commodity Price Risk
There have been no material changes from those reported in our 2016 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a‑15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have evaluated, under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2017 .
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



44



PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation, claims and other proceedings related to the conduct of our business. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. None of these matters, either individually or in the aggregate, currently is material to us.
Item 1A. Risk Factors

Except as noted below, there are no material updates to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended  December 31, 2016 and those disclosed in our Form 10-Q filing for the quarterly period ended June 30, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On November 6, 2017 , the Company entered into a settlement agreement with a former third-party service provider to the Company in the amount of $3.5 million . The settlement amount is expected to be paid to the Company during the fourth quarter of 2017.

45



Item 6. Exhibits
 
 
Exhibit No.
 
Description
 
Form
 
File No.
 
Incorporated by Reference
Exhibit
 
Filing Date
10.1
 
 

 

 

 

31.1
 
 
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
101. INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Schema Document
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Calculation Linkbase Document
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Label Linkbase Document
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Presentation Linkbase Document
 
 
 
 
 
 
 
 
101.DEF
 
Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 

Notes:
*
– Filed herewith.




46



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Advanced Emissions Solutions, Inc.
 
(Registrant)
 
 
 
 
 
 
November 6, 2017
By:
/s/ L. Heath Sampson
 
 
L. Heath Sampson
 
 
President, Chief Executive Officer and Treasurer
 
 
(Principal Executive and Financial Officer)
 
 
 
 
 
 
November 6, 2017
By:
/s/ Greg P. Marken
 
 
Greg P. Marken
 
 
Chief Accounting Officer and Secretary
 
 
(Principal Accounting Officer)

 
 


47


ELEVENTH AMENDMENT OF
2013 LOAN AND SECURITY AGREEMENT

THIS ELEVENTH AMENDMENT OF 2013 LOAN AND SECURITY AGREEMENT (“ Eleventh Amendment ”) is made as of the 30th day of September, 2017 (the “ Effective Date ”) by and among ADA-ES, INC., a Colorado corporation (“ Borrower ”), ADVANCED EMISSIONS SOLUTIONS, INC., a Delaware corporation (“ ADES ”), and COBIZ BANK, a Colorado corporation, d/b/a COLORADO BUSINESS BANK (“ Lender ”).
RECITALS
A.    Borrower, ADES and Lender are parties to that certain 2013 Loan and Security Agreement dated as of September 19, 2013 (as amended, supplemented, modified and restated from time to time, the “ Loan Agreement ”).
B.    In accordance with the provisions of the Loan Agreement, Lender has agreed to amend, for the benefit of Borrower, certain terms and conditions contained in the Loan Agreement, as specifically provided herein.
C.    ADES wishes to provide its consent to the amendments set forth herein.
D.    Other than as defined in this Eleventh Amendment, all capitalized terms used in this agreement without definition shall have the meanings given to such terms in the Loan Agreement.
NOW THEREFORE, in consideration of the promises and covenants made by Borrower and contained in this Eleventh Amendment and the consent given by ADES herein, Lender agrees to the amendments set forth below as of the Effective Date:
1. Amendments to Definitions . The following definitions are amended and restated in their entirety, to read as follows:
EBITDA ” means for any Measurement Period, with respect to Borrower and its Subsidiaries on a consolidated basis, in accordance with GAAP, net income for such period (i) plus , without duplication and to the extent deducted in calculating net income, the sum of (a) interest expense, (b) the sum of federal, state, local and foreign taxes paid in cash, (c) depreciation and amortization expense, (d) subject to Lender’s approval, which shall not be unreasonably withheld, any extraordinary, unusual or non-recurring items, and, (e) any other non-cash items; (ii) minus , without duplication and to the extent added in calculating net income, the sum of (a) any extraordinary, unusual or non-recurring items, including without limitation all income from the sale of activated carbon injection and dry sorbent injection equipment systems, and (b) any non-cash items.
Maximum Secured Line ” means Ten Million Dollars ($10,000,000).
Secured Line Termination Date ” means September 30, 2018, or such earlier date as may occur pursuant to Section 8.2 hereof.





2.      Amendment of Exhibits . Exhibit C and Exhibit F to the Loan Agreement are each amended and restated to read, respectively, in their entirety, as attached hereto.

3.      Letter of Credit Facility . Section 2.11(a) is amended and restated to read as follows:
(a)    Subject to the terms and conditions of this Agreement and the other Loan Documents, the Secured Line may be utilized, upon request of Borrower, in addition to the Advances, for the issuance of Letters of Credit by Lender provided, however, that in no event shall:

(i)      the aggregate amount of the Letters of Credit exceed at any time the sum of Eight Million Dollars ($8,000,000);
(ii)      the aggregate amount of the Letters of Credit, plus the aggregate principal amount of all Advances then outstanding, exceed at any time the Borrowing Base;
(iii)      the expiration date of any Letter of Credit extend beyond the Maturity Date;
(iv)      Lender be obligated to issue any Letter of Credit at any time while there then exists and is continuing any Default or Event of Default; nor
(v)      any Letter of Credit be issued in a currency other than United States Dollars nor at a tenor other than sight.

4.      Promise to Pay Fees . Section 3.2 is amended and restated in its entirety to read as follows:
(a)      Borrower shall pay Lender, on or before execution hereof, a loan origination fee of Twenty-Five Thousand Dollars ($25,000); and
(b)      Borrower shall pay Lender an annual unused commitment fee equal to .75% of the averaged unused portion of the Maximum Secured Line payable monthly in arrears commencing on November 1, 2017 (the “ Non-Use Fee ”). For the purpose of calculating the Non-Use Fee, the Letters of Credit issued hereunder shall be deemed to be a use of the Maximum Secured Line.
5.      Litigation . Section 5.6 is amended and restated in its entirety to read as follows:

Other than the arbitration award issued on April 8, 2011 in favor of Norit Americas, Inc. and Norit International, N.V., and the related subsequent confidential settlement agreement dated August 29, 2011 and indemnity settlement agreement dated November 28, 2011, the material terms of which have

2



been disclosed to Lender (“ Settlement Agreements ”), there are no actions, suits, proceedings, or investigations pending or, to the knowledge of Borrower or ADES, threatened against Borrower which, if adversely determined, would, in any case or in the aggregate, have a Material Adverse Effect.
6.      Financial Covenants . Section 6.12, entitled “Minimum Balance Covenant,” is hereby deleted.

7.      No Default . Borrower and ADES hereby certify to Lender that, after giving effect to the amendments and waivers provided herein, Borrower is in full compliance with the provisions of the Loan Agreement, and that no Event of Default will occur as a result of the effects of this Eleventh Amendment.

8.      Release of Claims . Borrower and ADES hereby release and forever discharge Lender, its affiliates, directors, officers, agents, employees, and attorneys (“ Lender Parties ”) of and from any and all liability, suits, damages, claims, counterclaims, demands, reckonings and causes of action, setoffs and defenses, whether known or unknown, whether arising in law or equity, which any of Borrower or ADES have, now have or may have in the future against Lender Parties by reason of any acts, omissions, causes or things arising out of or in any way related to this Eleventh Amendment or the Loan Agreement existing or accrued as of the date of this Eleventh Amendment. This release shall survive the termination of this Eleventh Amendment. Borrower acknowledges that the foregoing release is a material inducement to Lender’s decision to extend to Borrower the financial accommodations hereunder and has been relied upon by Lender in its agreement to enter into this Eleventh Amendment.
9.      Costs . Borrower will pay Lender’s attorneys’ fees for preparation of this Eleventh Amendment and all reasonable costs and expenses of Lender in connection therewith.
10.      Miscellaneous .
(a)
The paragraph headings used herein are intended for reference purposes only and shall not be considered in the interpretation of the terms and conditions hereof.
(b)
The terms and conditions of this Eleventh Amendment shall be binding upon and shall inure to the benefit of the parties hereto, their successors and permitted assigns.
(c)
This Eleventh Amendment may be executed in any number of counterparts, and by Lender, ADES and Borrower on separate counterparts, each of which, when so executed and delivered, shall be an original, but all of which shall together constitute one and the same agreement.
(d)
Except as expressly modified by this Eleventh Amendment, the Loan Agreement shall remain in full force and effect and shall be enforceable in accordance with its terms.

3



(e)
This Eleventh Amendment and the Loan Agreement constitute the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, understandings, and agreements between such parties with respect to such subject matter.
(f)
This Eleventh Amendment, and the transactions evidenced hereby, shall be governed by, and construed under, the internal laws of the State of Colorado, without regard to principles of conflicts of law, as the same may from time to time be in effect, including, without limitation, the Uniform Commercial Code as in effect in the State of Colorado.
(Signatures on following page)




4



IN WITNESS WHEREOF, the parties hereto have executed and delivered this Eleventh Amendment as of the date first above set forth.


 
 
ADA-ES, INC.,
 
 
a Colorado corporation
 
 
 
 
 
 
 
By:
/s/ L. Heath Sampson
 
Name:
L. Heath Sampson
 
Title:
President
 
 
 

 
 
ADVANCED EMISSIONS SOLUTIONS, INC.,
 
 
a Delaware corporation
 
 
 
 
 
 
 
By:
/s/ L. Heath Sampson
 
Name:
L. Heath Sampson
 
Title:
CEO
 
 
 



 
440469

Signature Page to Eleventh Amendment of 2013 Loan and Security Agreement



IN WITNESS WHEREOF, the parties hereto have executed and delivered this Eleventh Amendment as of the date first above set forth.


 
 
COBIZ BANK,
 
 
a Colorado corporation,
 
 
d/b/a COLORADO BUSINESS BANK
 
 
 

 
By:
/s/ Paul D. Stanford
 
 
Paul D. Stanford, Senior Vice President
 
 
 
 
 
 

400469




Signature Page to Eleventh Amendment of 2013 Loan and Security Agreement



EXHIBIT C
BORROWING BASE CERTIFICATE
(Revised 9/30/2017)

As of the period ending               , 20     


This Certificate is made and dated as of                  , 20      and is submitted by ADA-ES, INC., a Colorado corporation, in accordance with the 2013 Loan and Security Agreement by and among ADA-ES, INC., ADVANCED EMISSIONS SOLUTIONS, INC., and COBIZ Bank, a Colorado corporation, d/b/a Colorado Business Bank (as amended, modified, supplemented and restated from time to time, the “Loan Agreement” ). Capitalized terms used but not defined herein shall have the respective meanings therefor set forth in the Loan Agreement.

The undersigned hereby certifies to Lender that the undersigned is familiar with the following financial information, which has been taken from Borrower’s books and records, which are complete and accurate, and the following calculations on the Borrowing Base and the remaining amount under the Borrowing Base are true and correct.

BORROWING BASE
(All numbers must be taken from the most recent 10-K or 10-Q filed by ADES with the Securities and Exchange Commission.)

A. Total fixed payments due to Borrower by CCS n/k/a Tinuum Group, LLC on the AECI Leases
 
B. Balance in A discounted to present value using a discount factor of ten percent (10%)*
 
C. Eighty percent (80%) of B
 
D. Total Available Collateral: C or $10,000,000, whichever is less
 
E.    Current Secured Line Balance of $____________ plus the aggregate amount of outstanding Letters of Credit of $________________)
 
F. Excess / (Deficit) Borrowing Base (D minus E)
 
*Spreadsheet used to calculate present value attached.

 
 
ADA-ES, INC.,
 
 
a Colorado corporation
 
 
 
 
 
 
 
By:
 
 
Name:
 
 
Title:
 
 
 
 


Exhibit C



EXHIBIT F
FORM OF COMPLIANCE CERTIFICATE
(Revised 9/30/2017)

ADA-ES, INC., a Colorado corporation (“ Borrower ”), and ADVANCED EMISSIONS SOLUTIONS, INC., a Delaware corporation (“ ADES ”), hereby certify to COBIZ BANK, a Colorado corporation, d/b/a COLORADO BUSINESS BANK (“ Lender ”) pursuant to the 2013 Loan and Security Agreement by and among Borrower, ADES and Lender (as amended, modified, supplemented and restated from time to time, the “ Loan Agreement ”), that:

A. General.

1. Capitalized terms not defined herein shall have the meanings set forth in the Loan Agreement.

2. Borrower has materially complied with the terms, covenants and conditions to be performed or observed by Borrower contained in the Loan Agreement and the Loan Documents.

3. Neither on the date hereof nor, if applicable, after giving effect to any Advance made under the Loan Agreement on the date hereof, does there exist an Event of Default.

B.
Financial Covenants . (All numbers must be taken from the most recent 10 K or 10-Q filed by ADES with the Securities and Exchange Commission.)


1. Minimum EBITDA Covenant:
A. Consolidated net income for the Measurement Period of ADES and its Subsidiaries
 
without duplication and to the extent deducted in calculating Net Income in A:
 
B. interest expense
 
C. the sum of federal, state, local and foreign taxes paid in cash
 
D. depreciation and amortization expense
 
E. any extraordinary, unusual or non-recurring items
 
F. any other non-cash items
 
G. Total of A+B+C+D+E+F
 
   without duplication and to the extent deducted in calculating Net Income in A:
 
H. any extraordinary, unusual or non-recurring items, including without limitation all income from the sale of activated carbon injection and dry sorbent injection equipment systems
 
I. any other non-cash items
 
J. Total of H+I
 
K. G less J
 
L. Is K greater than or equal to $24,000,000
yes/no

Exhibit F, Page 1




IN WITNESS WHEREOF, Borrower and ADES have executed and delivered this Compliance Certificate on              , 20___.

ADA-ES, INC., a Colorado corporation
ADVANCED EMISSIONS SOLUTIONS, INC., a Delaware corporation
 
 
 
 
By:
 
By:
 
Its:
 
Its:
 


Exhibit F, Page 2


Exhibit 31.1
Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Amended
I, L. Heath Sampson , certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Advanced Emissions Solutions, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2017

 
/s/ L. Heath Sampson
 
L. Heath Sampson
 
President, Chief Executive Officer and Treasurer
 
(Principal Executive and Financial Officer)
 





Exhibit 32.1
Certification
Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Advanced Emissions Solutions, Inc. (the “Company”) for the quarterly period ended September 30, 2017 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), L. Heath Sampson, as the Principal Executive and Financial Officer of the Company, hereby certifies, pursuant to and solely for the purpose of 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge and belief, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ L. Heath Sampson
 
L. Heath Sampson
 
President, Chief Executive Officer and Treasurer
 
(Principal Executive and Financial Officer)
 
 
 
November 6, 2017