Edgar Filing: Advanced Emissions Solutions, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Document

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, 2016



¨	TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE 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.)



9135 South Ridgeline Boulevard, Suite 200, 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. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. (Check one): 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, 2016
Common stock, par value $0.001 per share		22,002,235

INDEX



		PAGE
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and September 30, 2015	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and September 30, 2015	3
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	51
Item 4.	Controls and Procedures	52
PART II. - OTHER INFORMATION

Item 1.	Legal Proceedings	53
Item 1a.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
	Signatures	55

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, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	7,603		$	9,265
Receivables, net	12,008			8,361
Receivables, related parties, net	1,376			1,918
Restricted cash	4,019			728
Costs in excess of billings on uncompleted contracts	1,050			2,137
Prepaid expenses and other assets	1,548			2,306
Total current assets	27,604			24,715
Restricted cash, long-term	4,750			10,980
Property and equipment, net of accumulated depreciation of $2,577 and $4,557, respectively	1,062			2,040
Investment securities, restricted, long-term	—			336
Cost method investment	2,776			2,776
Equity method investments	3,091			17,232
Other assets	1,260			2,696
Total Assets	$	40,543		$	60,775
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,337		$	6,174
Accrued payroll and related liabilities	2,763			5,800
Current portion of notes payable, related parties	—			1,837
Billings in excess of costs on uncompleted contracts	4,726			9,708
Short-term borrowings, net of discount and deferred loan costs, related party	—			12,676
Legal settlements and accruals	12,448			6,502
Other current liabilities	6,703			7,395
Total current liabilities	28,977			50,092
Long-term portion of notes payable, related party	—			13,512
Legal settlements and accruals, long-term	9,305			13,797
Other long-term liabilities	2,552			8,352
Total Liabilities	40,834			85,753
Commitments and contingencies (Note 8)
Stockholders’ deficit:
Preferred stock: par value of $.001 and no par value per share, respectively, 50,000,000 shares authorized, none outstanding	—			—
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 22,271,525 and 21,943,872 shares issued, and 22,001,585 and 21,809,164 shares outstanding at September 30, 2016 and December 31, 2015, respectively	22			22
Additional paid-in capital	118,868			116,029
Accumulated deficit	(119,181		)	(141,029		)
Total stockholders’ deficit	(291		)	(24,978		)
Total Liabilities and Stockholders’ Deficit	$	40,543		$	60,775

See Notes to the Condensed Consolidated Financial Statements.

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 and percentages)	2016			2015			2016			2015
Revenues:
Equipment sales	$	14,869		$	12,088		$	44,788		$	47,439
Chemicals	670			132			1,717			749
Consulting services and other	171			665			492			1,349
Total revenues	15,710			12,885			46,997			49,537
Operating expenses:
Equipment sales cost of revenue, exclusive of depreciation and amortization	12,704			9,914			35,175			38,662
Chemicals cost of revenue, exclusive of depreciation and amortization	469			105			865			383
Consulting services cost of revenue, exclusive of depreciation and amortization	86			591			299			1,282
Payroll and benefits	2,809			4,445			10,567			19,102
Rent and occupancy	508			596			1,534			1,828
Legal and professional fees	1,615			3,424			6,581			11,545
General and administrative	818			1,249			2,920			4,635
Research and development, net	(524		)	2,022			(667		)	5,133
Depreciation and amortization	138			528			593			1,632
Total operating expenses	18,623			22,874			57,867			84,202
Operating loss	(2,913		)	(9,989		)	(10,870		)	(34,665		)
Other income (expense):
Earnings (loss) from equity method investments	10,735			(41		)	30,066			5,133
Royalties, related party	2,064			3,273			3,922			7,767
Interest income	149			2			267			20
Interest expense	(969		)	(1,778		)	(4,496		)	(5,347		)
Gain on sale of equity method investment	—			—			2,078			—
Gain on settlement of note payable and licensed technology	—			—			869			—
Other	1,129			(77		)	746			10
Total other income	13,108			1,379			33,452			7,583
Income (loss) before income tax expense	10,195			(8,610		)	22,582			(27,082		)
Income tax expense	583			44			734			151
Net income (loss)	$	9,612		$	(8,654	)	$	21,848		$	(27,233	)
Earnings (loss) per common share (Note 1):
Basic	$	0.44		$	(0.40	)	$	0.99		$	(1.24	)
Diluted	$	0.43		$	(0.40	)	$	0.97		$	(1.24	)
Weighted-average number of common shares outstanding:
Basic	21,740			21,687			21,926			21,757
Diluted	22,098			21,687			22,209			21,757

See Notes to the Condensed Consolidated Financial Statements.

Advanced Emissions Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended September 30,
(in thousands)	2016			2015
Cash flows from operating activities
Net income (loss)	$	21,848		$	(27,233	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	593			1,632
Amortization of debt issuance costs	1,152			75
Impairment of property, equipment, inventory and intangibles	517			2,515
Interest costs added to principal balance of notes payable	—			946
Share-based compensation expense	2,238			6,096
Earnings from equity method investments	(30,066		)	(5,133		)
Gain on sale of equity method investment	(2,078		)	—
Gain on settlement of note payable, licensed technology, and sales-type lease	(1,910		)	—
Other non-cash items, net	61			770
Changes in operating assets and liabilities, net of effects of acquired businesses:
Receivables	(3,677		)	7,579
Related party receivables	541			(752		)
Prepaid expenses and other assets	831			(1,134		)
Costs incurred on uncompleted contracts	28,575			4,719
Restricted cash	3,488			1,690
Other long-term assets	961			144
Accounts payable	(3,837		)	1,414
Accrued payroll and related liabilities	(2,245		)	1,161
Other current liabilities	(2,094		)	1,624
Billings on uncompleted contracts	(32,469		)	(7,256		)
Advance deposit, related party	(1,306		)	(2,586		)
Other long-term liabilities	(1,661		)	98
Legal settlements and accruals	1,454			(2,528		)
Distributions from equity method investees, return on investment	6,850			2,519
Net cash used in operating activities	(12,234		)	(13,640		)



	Nine Months Ended September 30,
(in thousands)	2016			2015
Cash flows from investing activities
Maturity of investment securities, restricted	336			—
Increase in restricted cash	(550		)	(2,100		)
Acquisition of property and equipment, net	(147		)	(437		)
Advance on note receivable	—			(500		)
Acquisition of business	—			(2,124		)
Purchase of and contributions to equity method investees	(223		)	(1,083		)
Proceeds from sale of equity method investment	1,773			—
Distributions from equity method investees in excess of cumulative earnings	24,650			4,730
Net cash provided by (used in) investing activities	25,839			(1,514		)
Cash flows from financing activities
Repayments on short-term borrowings, related party	(13,250		)	—
Repayments on notes payable, related party	(1,246		)	(1,166		)
Short-term borrowing loan costs	(579		)	—
Repurchase of shares to satisfy tax withholdings	(192		)	(276		)
Net cash used in financing activities	(15,267		)	(1,442		)
Decrease in Cash and Cash Equivalents	(1,662		)	(16,596		)
Cash and Cash Equivalents, beginning of period	9,265			25,181
Cash and Cash Equivalents, end of period	$	7,603		$	8,585
Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,899		$	5,335
Cash paid for income taxes	$	46		$	186
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		$	—

See Notes to the Condensed Consolidated Financial Statements.

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"), a Delaware corporation with its principal office located in Highlands Ranch, Colorado, is principally engaged in providing environmental and emissions control equipment, technologies and specialty chemicals to the coal-burning electric power generation industry. Although the Company has historically operated at a net loss, 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") (f/k/a Clean Coal Solutions, LLC). Such technologies allow Tinuum Group to provide their customers with various solutions to enhance combustion and reduced emissions of nitrogen oxide ("NO_x") and mercury from coal burned to generate electrical power. The Company’s sales occur principally throughout the United States. See Note 12 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 U.S. generally accepted accounting principles ("U.S. GAAP") and with Article 10 of Regulation S-X. 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 are presented on a consolidated basis comprising ADES and its direct and indirect, wholly-owned subsidiaries: ADA-ES, Inc. ("ADA"), a Colorado corporation; BCSI, LLC ("BCSI"), a Delaware limited liability company; Advanced Clean Energy Solutions, LLC ("ACES"), a Delaware limited liability company; ADEquity, LLC ("ADEquity"), a Delaware limited liability company; ADA Environmental Solutions, LLC ("ADA LLC"), a Colorado limited liability company; ADA Intellectual Property, LLC ("ADA IP"), a Colorado limited liability company; ADA-RCM6, LLC ("ADA-RCM6"), a Colorado limited liability company; ADA Analytics, LLC, a Delaware limited liability company and ADA Analytics Israel Ltd. (collectively with ADA Analytics, LLC, "ADA Analytics"), an Israel limited liability company. ADA LLC and ADA IP had no operations for the three and nine months ended September 30, 2016, nor during the year ended December 31, 2015.

Included within the unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report are its investments, Tinuum Group and Tinuum Services, LLC ("Tinuum Services") (f/k/a Clean Coal Solutions Services, LLC), which are accounted for using the equity method of accounting. As discussed in Note 4, the Company sold its equity investment in RMC6, LLC ("RMC6") in March 2016, which was also accounted for using the equity method prior to the sale.

During 2015, the Company elected to cease the operations of ADA Analytics. The Company anticipates that ADA Analytics will be legally dissolved during 2017. In addition, the Company terminated its manufacturing operations, conducted under BCSI, effective as of the end of 2015. The Company anticipates that BCSI will eventually be legally dissolved upon the winding down of its remaining manufacturing operations, commitments and obligations. The Company will continue to serve the Dry Sorbent Injection ("DSI") market, which BCSI previously served, through ADA.

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 as of and for the three and nine months ended September 30, 2016 and 2015.

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, 2015. Significant accounting policies disclosed therein have not changed.

Liquidity

During the three months ended September 30, 2016, the Company's cash and cash equivalents reversed the negative trends of prior quarters and increased by $5.4 million, primarily due to a continued reduction in operating cost levels, coupled with (1) distributions from Tinuum Group; (2) royalty payments related to Tinuum Group’s use of our M-45^TM technologies; and (3) reimbursements received related to the close out of our last material Department of Energy ("DOE") research and development (“R&D”) contract. Performance in this period also reflects the elimination of debt service and principal payments on the

previously existing short term loan, discussed in Note 8 (the “Credit Agreement”), as it was fully paid as of June 30, 2016, which was notable among a number of significant drivers of the Company’s decreasing cash balances in prior quarters. The reduction in operating cost levels resulted in large part as a result of the Company completing the re-audit and restatement of prior financial statements (the "Restatement") and becoming current with its regulatory filings by June 30, 2016, as well as from the Company's continuing efforts to streamline its operations and reduce fixed and variable operating expenses.

As of September 30, 2016, the Company had negative working capital of $1.4 million. During the three and nine months ended September 30, 2016, the Company's working capital increased by $9.8 million and $24.0 million, respectively, primarily due to: (1) net income, which was driven in large part by the performance from our Refined Coal ("RC") segment during this period; (2) distributions and royalty payments from Tinuum Group and Tinuum Services due in part to a reduction in operated retained RC facilities; (3) proceeds received in the first quarter of 2016 from the sale of our interest in RCM6 and the elimination of the related note payable; and (4) Settlement in the first quarter of 2016 of our note payable with the sole owner of companies from which BCSI acquired its assets (the "DSI Business Owner"). Net income during these periods also reflects substantial reductions in operating expenses due to a number of strategic cost saving initiatives. As of September 30, 2016, the majority of the historical factors that have contributed to a deterioration of our working capital in prior quarters have been abated, and the Company does not foresee at this point circumstances that would likely result in a future, substantial deterioration of its working capital that would not otherwise be mitigated by improving operating performance.

The Company's ability to continue to generate sufficient cash flow required to meet ongoing operational needs and to meet obligations depends upon several factors, including executing on the Company's contracts and initiatives, receiving royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, and its ability to maintain and grow its share of the market for emissions control (“EC”) products, and, in particular, EC chemicals and services revenues. 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.

The Company is also currently working to either replace its existing revolving credit facility or renegotiate the terms of its existing revolving credit facility (“Line of Credit”) to enable the Company to have borrowing capacity to provide short-term liquidity for operating purposes. A key provision in negotiating terms of a credit facility is the ability to use facility to secure performance and other contractual settlement obligations, in lieu of pledging restricted cash. At September 30, 2016, the Company held $8.8 million in restricted cash that could potentially be released to unrestricted cash through the securing of an appropriately structured credit facility While such a facilityr would be desirable, if the Company is unable to obtain such a financing, the Company believes that its existing and forecasted liquidity from cash distributions and royalties as well as other expected operating results will be sufficient to fund its continuing operations.

Earnings (Loss) Per Share

The Company computes earnings (loss) per share in accordance with FASB ASC 260-10. Under this guidance, unvested restricted stock awards ("RSA's") that contain non-forfeitable rights to dividends or dividend equivalents are deemed to be participating securities and, therefore, are included in computing basic earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings (losses). The Company did not declare any cash dividends during the three and nine months ended September 30, 2016 or 2015.

Under the two-class method, net income (loss) for the period is allocated between common stockholders and the holders of the participating securities, in this case, the weighted-average number of unvested restricted stock awards outstanding during the period. The allocated, undistributed income (loss) for the period is then divided by the weighted-average number of common shares and participating securities outstanding during the period to arrive at basic earnings (loss) per common share or participating security for the period, respectively. Because the Company did not declare any dividends during the periods presented, and because the unvested RSA's possess substantially the same rights to undistributed earnings as common shares outstanding, there is no difference between the calculated basic earnings (loss) 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 (loss) per share attributable to participating securities on its Condensed Consolidated Statements of Operations.

Diluted earnings (loss) per share takes into consideration shares of common stock and unvested RSA's outstanding (computed under basic earnings (loss) per share) and potentially dilutive shares of common stock. Potentially dilutive shares consist of vested, in-the-money outstanding options, Stock Appreciation Rights ("SAR's") and contingent Performance Share Units ("PSU's") (collectively, "Potential dilutive shares"). When there is a loss from continuing operations, all potentially dilutive shares become anti-dilutive and are thus excluded from the calculation of diluted loss per share.

Each PSU represents a contingent right to receive shares of the Company’s common stock, which may range from zero to two times the number of PSU's granted on the award date, should the Company meet certain performance measures over the

requisite performance period. The number of potentially dilutive shares related to PSU's is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period was the end of the contingency period applicable to such PSU's.

The following table sets forth the calculations of basic and diluted earnings (loss) per share:



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except per share amounts)	2016		2015			2016		2015
Net income (loss)	$	9,612	$	(8,654	)	$	21,848	$	(27,233	)
Less: Undistributed income (loss) allocated to participating securities	133		(87		)	229		(274		)
Income (loss) attributable to common stockholders	$	9,479	$	(8,567	)	$	21,619	$	(26,959	)

Basic weighted-average common shares outstanding	21,740		21,687			21,926		21,757
Add: dilutive effect of equity instruments	358		—			283		—
Diluted weighted average shares outstanding	22,098		21,687			22,209		21,757
Earnings (loss) per share - basic	$	0.44	$	(0.40	)	$	0.99	$	(1.24	)
Earnings (loss) per share - diluted	$	0.43	$	(0.40	)	$	0.97	$	(1.24	)

The table below shows the number of shares that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive to the calculation:



	Three Months Ended September 30,		Nine Months Ended September 30,
(share data in thousands)	2016	2015	2016	2015
Stock options	—	6	—	14
Restricted stock awards	—	165	—	171
Performance share units	—	169	—	186
Stock appreciation rights	—	—	—	—
Total shares excluded from diluted shares outstanding	—	340	—	371

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Actual results could differ from these estimates.

Reclassifications

Certain balances have been reclassified from the prior year to conform to the current year presentation.

New Accounting Guidance

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation-Improvements to Employee Share-Based Payment Accounting (Topic 718), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company adopted this standard effective as of January 1, 2016. There was no material impact to the Company’s financial statements or disclosures from the adoption of this standard.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which (1) clarifies the principle for determining whether a good or service is "separately identifiable" from other promises in the contract and, therefore, should be accounted for separately; (2) clarifies that entities are not required to identify promised goods or services that are immaterial in the context of the contract; and (3) allows entities to elect to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service. The new standard also provides guidance with respect to the classification of licensed intellectual property as either "functional" or "symbolic," which determines when revenues from licensed intellectual property are recognized. This ASU is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.

In May 2016, the FASB issued ASU No. 2016-11, "Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting ("EITF")," which rescinds SEC paragraphs pursuant to SEC staff announcements. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer. This ASU is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. This ASU is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and

Cash Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This ASU is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017 on a retrospective basis, however, early adoption is permitted. The Company adopted this standard effective as of January 1, 2016. There was no material impact to the Company’s financial statements or disclosures from the adoption of this standard.

Other than as disclosed above or in the 2015 Form 10-K, there are no other new accounting standards that would have a material effect on the Company’s financial statements and disclosures that have been issued but not yet adopted by the Company as of September 30, 2016, and through the filing date of this report.

Note 2 - Restructuring

The Company recorded restructuring charges during the three and nine months ended September 30, 2016 and 2015 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.

A summary of the net pretax charges, incurred by segment, excluding facility charges shown below, for each period 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

Three Months Ended September 30, 2015
Restructuring charges	109	$	—	$	2,617		$	116		$	2,733
Changes in estimates		—		—			—			—
Total pretax charge, net of reversals		$	—	$	2,617		$	116		$	2,733

Nine Months Ended September 30, 2015
Restructuring charges	154	$	—	$	4,417		$	4,358		$	8,775
Changes in estimates		—		(10		)	(2		)	(12		)
Total pretax charge, net of reversals		$	—	$	4,407		$	4,356		$	8,763

The following table summarizes the Company's change in restructuring accruals for the nine months ended September 30, 2016:



(in thousands)	Employee Severance			Facility Closures
Remaining accrual as of December 31, 2015	$	2,581		$	777
Expense provision (1)	2,058			—
Cash payments and other (1)	(3,149		)	(320		)
Change in estimates	(276		)	(210		)
Remaining accrual as of September 30, 2016	$	1,214		$	247

(1) Included within the Expense provision and Cash payments and other line items in the above table is equity based compensation of $0.4 million for the nine months ended September 30, 2016, resulting from the accelerated vesting of modified equity-based compensation awards for certain terminated employees.

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 3 - Acquisition

2015 Acquisition

In November 2014, the Company entered into an agreement with InSyst Ltd. and ClearView Monitoring Solutions Ltd. (collectively "ClearView"), both Israel based companies specializing in data analytics, to allow the Company the exclusive option to purchase certain assets of ClearView. The Company paid $0.2 million related to this option, which was included

within the Prepaid expenses and other assets line item within the Condensed Consolidated Balance Sheet as of December 31, 2014. In January 2015, the Company notified ClearView that it had elected to exercise its exclusive option to purchase certain assets of ClearView.

In March 2015, the Company acquired certain assets of ClearView for total cash payments of $2.4 million, which is inclusive of VAT tax of $0.4 million. The acquisition was accounted for under the acquisition method of accounting, which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. Operating results related to the acquired assets were consolidated into the Company’s results of operations beginning March 6, 2015.

A summary of the 2015 purchase consideration and allocation of the purchase consideration is as follows:



(in thousands)
Purchase consideration:
Cash paid	$	2,360
Fair value of liabilities assumed:
Accrued liabilities	10
Contingent consideration	451
Total fair value of liabilities assumed	461

Total purchase consideration	$	2,821

Allocation of purchase consideration
Receivables	$	360
Property and equipment and other	82
Intangibles - in process research and development	2,379
Total	$	2,821

The transaction called for a series of contingent payments based upon the achievement of sales and sales targets. These contingent payments are classified as purchase consideration. As part of the purchase price, the Company recorded a $0.5 million liability for the contingent consideration based upon the net present value of the Company's estimate of the future payments.

During August 2015, as part of a broader strategic restructuring of the Company's business to simplify its operating structure in a manner that creates increased customer focus, better supports sales and product delivery and also aligns the Company’s cost structure as the emissions control market shifts towards compliance solutions for the Federal Mercury and Air Toxics Standards ("MATS"), the Company’s management approved an action to wind down operations of ADA Analytics. As a result of these actions, the Company fully impaired the carrying value of the assets and reversed the liability for the contingent consideration, thereby recognizing net impairment expense in the amount of $1.9 million during the third quarter of 2015.

Note 4 - Equity Method Investments

Tinuum Group, LLC

The Company's ownership interest in Tinuum Group was 42.5% as of September 30, 2016 and December 31, 2015. Tinuum Group supplies technology equipment and technical services to cyclone-fired, pulverized coal and other boiler users, but Tinuum Group's primary purpose is to put into operation facilities that produce RC that 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 the VIE’s economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined the partners of Tinuum Group with voting rights had identical voting interests, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact the VIE’s economic performance was shared.

The following tables summarize the results of operations of Tinuum Group for the three and nine months ended September 30, 2016 and 2015, respectively:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2016			2015			2016			2015
Gross profit	$	22,645		$	25,035		$	70,325		$	80,869
Operating, selling, general and administrative expenses	4,996			5,369			15,464			17,872
Income from operations	17,649			19,666			54,861			62,997
Other expenses	(3,583		)	(1,464		)	(7,618		)	(1,794		)
Class B preferred return	(905		)	(1,463		)	(3,101		)	(4,825		)
Loss attributable to noncontrolling interest	8,881			3,698			14,788			6,811
Net income available to Class A members	$	22,042		$	20,437		$	58,930		$	63,189
ADES equity earnings	$	9,775		$	—		$	28,050		$	4,730

The difference between the Company's proportionate share of Tinuum Group's net income and the Company's earnings from its Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations relates to the Company receiving distributions in excess of the carrying value of the investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed below.

As shown in the tables below, the Company’s carrying value in Tinuum Group had been reduced to zero throughout 2015, as cumulative cash distributions received from Tinuum Group had 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 income. For quarterly periods during which the ending balance of the Company's investment in Tinuum Group is zero, the Company only recognizes equity income 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 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 earnings (losses) for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding quarter. During the three and nine months ended September 30, 2016, the Company's cumulative amount of distributions received from Tinuum Group exceeded the Company's cumulative pro-rata share of Tinuum Group's income. As such, the Company recognized equity earnings from Tinuum Group for the three and nine months ended September 30, 2016 of $9.8 million and $28.1 million, respectively. As of September 30, 2016, the Company's carrying value in Tinuum Group has been reduced to zero, as cumulative cash distributions received from Tinuum Group have exceeded the Company's pro-rata share of cumulative earnings in Tinuum Group. If Tinuum Group subsequently reports net income, the Company will not record its pro-rata share of such net income until the cumulative share of pro-rata income equals or exceeds the amount of its cumulative income recognized due to the receipt of cash distributions. Until such time, the Company will only report income from Tinuum Group to the extent of cash distributions received during the period.

Thus, the amount of equity income or loss reported on the Company's income statement 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 equity owners as shown on Tinuum Group’s income statement. 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.

The following table presents the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, on a quarterly basis, for the three and nine months ended September 30, 2016 (in thousands):



Description	Date(s)	Investment balance			ADES equity earnings (loss)			Cash distributions		Memorandum Account: Cash distributions and equity loss in (excess) of investment balance
Beginning balance	12/31/15	$	—		$	—		$	—	$	(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			—		—
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		)



Description	Date(s)	Investment balance			ADES equity earnings (loss)			Cash distributions		Memorandum Account: Cash distributions and equity loss in (excess) of investment balance
Beginning balance	12/31/2014	$	—		$	—		$	—	$	(29,877	)
ADES proportionate share of income from Tinuum Group (1)	First Quarter	9,827			9,827			—		—
Recovery of cumulative distributions and equity losses in excess of investment balance	First Quarter	(9,827		)	(9,827		)	—		9,827
Cash distributions from Tinuum Group	First Quarter	(100		)	—			100		—
Adjustment for current year cash distributions in excess of investment balance	First Quarter	100			100			—		(100		)
Total investment balance, equity earnings (loss) and cash distributions	3/31/2015	—			100			100		(20,150		)
ADES proportionate share of income from Tinuum Group (1)	Second Quarter	7,825			7,825			—		—
Recovery of cumulative distributions and equity losses in excess of investment balance	Second Quarter	(7,825		)	(7,825		)	—		7,825
Cash distributions from Tinuum Group	Second Quarter	(4,630		)	—			4,630		—
Adjustment for current year cash distributions in excess of investment balance	Second Quarter	4,630			4,630			—		(4,630		)
Total investment balance, equity earnings (loss) and cash distributions	6/30/2015	—			4,630			4,630		(16,955		)
ADES proportionate share of income from Tinuum Group (1)	Third Quarter	8,127			8,127			—		—
Recovery of cumulative distributions and equity losses in excess of investment balance	Third Quarter	(8,127		)	(8,127		)	—		8,127
Cash distributions from Tinuum Group	Third Quarter	—			—			—		—
Adjustment for current year cash distributions in excess of investment balance	Third Quarter	—			—			—		—
Total investment balance, equity earnings (loss) and cash distributions	9/30/2015	—			—			—		(8,828		)

(1) The amounts of the Company's 42.5% proportionate share of net income 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 the elimination of Tinuum Group earnings attributable to RCM6, of which the Company owned 24.95% during the periods presented through March 6, 2016. As noted below, the Company sold its interest in RCM6 on March 3, 2016.

Tinuum Services, LLC

On January 20, 2010, the Company, together with NexGen Refined Coal, Inc. ("NexGen"), formed Tinuum Services, a Colorado limited liability company, for the purpose of operating the RC facilities leased or sold to third parties. The Company has determined that Tinuum Services is not a VIE and has evaluated the consolidation analysis under the Voting Interest Model. The Company has a 50% voting and economic interest in Tinuum Services, which is equivalent to the voting and economic interest of NexGen. Therefore, as the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for the investment under the equity method of accounting. The Company’s investment in Tinuum Services as of September 30, 2016 and December 31, 2015 was $3.1 million and $4.0 million, respectively.

The following table summarizes the results of operations of Tinuum Services:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2016			2015			2016			2015
Gross loss	$	(15,848	)	$	(11,616	)	$	(42,946	)	$	(31,511	)
Operating, selling, general and administrative expenses	34,278			41,322			101,687			120,269
Loss from operations	(50,126		)	(52,938		)	(144,633		)	(151,780		)
Other income (expense)	27			(7		)	(13		)	(86		)
Loss attributable to noncontrolling interest	52,019			55,661			149,792			158,926
Net income	$	1,920		$	2,716		$	5,146		$	7,060
ADES equity earnings	$	960		$	1,358		$	2,573		$	3,530

Included within the Consolidated Statements of Operations of Tinuum Services for the three and nine months ended September 30, 2016 and 2015, 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 income of Tinuum Services as they are losses attributable to a noncontrolling interest.

RCM6, LLC

On February 10, 2014, the Company purchased a 24.95% membership interest in RCM6, which owned a single RC facility that produced RC that qualified for Section 45 tax credits, from Tinuum Group through a combination of an up-front payment and note payable to Tinuum Group. Due to the payment terms of the note purchase agreement, the note payable was periodically negatively amortizing. The balance of the note payable as of December 31, 2015 was $14.2 million. In addition to the up-front and subsequent note payments, the Company was also subject to quarterly capital calls and variable payments based upon differences in originally forecasted RC production as of the purchase date and actual quarterly production. The following table presents the capital calls and variable payments made by the Company related to its investment in RCM6 during the three and nine months ended September 30, 2016 and 2015, respectively:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2016		2015		2016		2015
Capital calls and variable payments	$	—	$	850	$	223	$	1,080

RCM6 was determined to be a VIE, however, during the periods presented, the Company did not have the power to direct the activities that most significantly impacted the VIE's economic performance and therefore accounted for the investment under the equity method of accounting.

As of December 31, 2015, the Company’s ownership in RCM6 was 24.95%. The carrying value of the Company’s investment in RCM6 as of December 31, 2015 was $13.3 million. 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 the outstanding note payable made by the Company in connection with its purchase of RCM6 membership interests from Tinuum Group in February 2014. 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 Gain on sale of equity method investment 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 will still receive its pro-rata share of income and cash distributions through its ownership in Tinuum Group based on the RCM6 RC facility 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. The following table summarizes the results of operations of RCM6 for the period from January 1 to March 3, 2016, and the three and nine months ended September 30, 2015:



	Three Months Ended September 30,					January 1-March 3,			Nine Months Ended September 30,
(in thousands)	2016		2015			2016			2015
Gross loss	$	—	$	(2,896	)	$	(555	)	$	(4,876	)
Operating, selling, general and administrative expenses	—		590			360			1,567
Loss from operations	—		(3,486		)	(915		)	(6,443		)
Other expenses	—		(220		)	(52		)	(382		)
Net loss	$	—	$	(3,706	)	$	(967	)	$	(6,825	)
ADES equity losses	$	—	$	(1,399	)	$	(557	)	$	(3,127	)

The following table details the components of the Company's respective equity method investments included within the Earnings (loss) 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)	2016		2015			2016			2015
Earnings from Tinuum Group	$	9,775	$	—		$	28,050		$	4,730
Earnings from Tinuum Services	960		1,358			2,573			3,530
Loss from RCM6	—		(1,399		)	(557		)	(3,127		)
Earnings (loss) from equity method investments	$	10,735	$	(41	)	$	30,066		$	5,133

The following table details the components of the cash distributions from the Company's respective equity method investments included within the Condensed Consolidated Statements of Cash Flows. Distributions from equity method investees are reported on the Condensed Consolidated Statements of Cash Flows as "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 in excess of cumulative earnings" within Investing cash flows.



	Nine Months Ended September 30,
(in thousands)	2016		2015
Distributions from equity method investees, return on investment
Tinuum Group	$	3,400	$	—
Tinuum Services	3,450		2,519
	$	6,850	$	2,519
Distributions from equity method investees in excess of investment basis
Tinuum Group	$	24,650	$	4,730
	$	24,650	$	4,730

Note 5 - Investments

The Company had investment securities related to certificates of deposit in the amount of $0.3 million as of December 31, 2015. No unrealized gains or losses were recorded as of December 31, 2015 related to these investment securities. The Company did not have any investment securities related to certificates of deposit as of September 30, 2016.

In November 2014, the Company acquired an 8% ownership interest in the common stock of Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage, for $2.8 million in cash. The Company evaluated the investment and determined that it should account for the investment under the cost method. This 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 September 30, 2016 and December 31, 2015, no indicators of impairment were identified with respect to the cost method investment in Highview. When there are no indicators of impairment present, the Company estimates the fair value for the investment only if it is practical to do so. As of September 30, 2016, the Company estimated that the fair value of the cost method investment based upon an equity raise completed by Highview during the second quarter of 2016 at a price of £4.60 per share. As £4.60 per share exceeds the Company's cost per share of £4.25, there was no impairment as of September 30, 2016. As of December 31, 2015, the Company estimated that the fair value of the cost method investment approximated the November 2014 purchase price due to the proximity of the purchase date to December 31, 2015.

Note 6 - Borrowings

The following table summarizes the Company's borrowings and notes payable, all of which were with related parties:



	As of
(in thousands)	September 30, 2016		December 31, 2015
Short-term borrowings
Credit Agreement, net of discount and deferred loan costs	$	—	$	12,676
Total short-term borrowings	$	—	$	12,676
Current portion of notes payable
RCM6 note payable, net of discount	$	—	$	1,207
DSI Business Owner note payable	—		630
Total current portion of short-term borrowings and notes payable	—		1,837
Long-term portion of notes payable
RCM6 note payable, net of discount	—		13,023
DSI Business Owner note payable	—		489
Total long-term portion of notes payable	—		13,512
Total notes payable	$	—	$	15,349

Credit Agreement

On October 22, 2015, the Company entered into a credit agreement for a $15.0 million short-term loan (the "Credit Agreement") with Franklin Mutual Quest Fund and MFP Investors LLC (the "Lenders"), and Wilmington Trust, National Association, as the administrative agent and collateral agent (the "Administrative Agent" ),which was subsequently amended in 2016 as discussed below. Under the original terms and conditions, the Credit Agreement was scheduled to mature on April 22, 2016, subject to a three-month extension at the Company's option to the extent certain conditions were met. The Credit Agreement's annual interest rate was equal to 10.5% and was subject to various prepayment and other premiums if certain events, including a change in control, occurred. The Company received net proceeds of $13.5 million and recorded an initial debt discount and debt issuance costs totaling $1.5 million. The debt discounts and debt issuance costs were amortized to interest expense using the effective interest method over the life of the Credit Agreement. As of December 31, 2015, the unamortized debt discount and issuance costs were $0.6 million. The net proceeds were used to fund working capital needs and for general operating purposes of the Company and its subsidiaries.

On February 8, 2016, the Company entered into the first amendment to the Credit Agreement that extended the Company's filing date deadline related to its 2015 SEC filings to March 30, 2016. On March 30, 2016, the Company entered into the second amendment to the Credit Agreement ("Second Amendment"). The Second Amendment extended the maturity date to July 8, 2016, extended the Company's filing date deadline related to its 2015 SEC filings to April 20, 2016, increased the stated

interest rate from 10.5% to 15.0%, increased the minimum cash balance requirement from $3.0 million to $3.5 million and adjusted the amortization payment schedule. The Company incurred $0.6 million in fees related to the Second Amendment.

On June 30, 2016, the Company, the required Lenders under the Credit Agreement and the Administrative Agent agreed to terminate the Credit Agreement (the "Payoff Letter") prior to the maturity date of July 8, 2016, effective upon the Company’s prepayment of the total principal balance of the loans 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 (the "Payoff Amount"). The Payoff Amount was paid on June 30, 2016 (the "Payoff Date") and equaled $9.9 million. The Payoff Letter included a waiver by the Lenders for a portion of the prepayment premium of 4% reflected in the Credit Agreement.

All obligations of the Company under the Credit Agreement were unconditionally guaranteed by each of the Company’s wholly-owned domestic subsidiaries (other than ADA Analytics, LLC) and were secured by perfected security interests in substantially all of the assets of the Company and the guarantors, subject to certain agreed upon exceptions.

The Lenders were beneficial owners of Common Stock in the Company. The Credit Agreement was approved by the Company's Board of Directors and by the Audit Committee as a related party transaction.

Tinuum Group - RCM6 Note Payable

The Company acquired membership interests 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%. Due to the difference between the stated rate and the effective rate, the RCM6 Note Payable was carried at a discount of $7.6 million as of December 31, 2015. As discussed in Note 4, 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

As of December 31, 2014, the Company terminated the consulting portion of the agreements with the DSI Business Owner, as described in Note 9 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014. However, according to the terms of the remaining agreements, the Company was required to make all remaining payments structured as a note payable through the third quarter of 2017. In February 2016, the Company entered into an agreement with the DSI Business Owner and settled the remaining amounts owed as of the date of the agreement of approximately $1.1 million for $0.3 million, which was paid during the first quarter of 2016. The difference between the remaining amounts owed and the settlement amount has been included within the Gain on settlement of note payable and licensed technology line item in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016.

Note 7 - Fair Value Measurements

Fair value of financial instruments

The carrying amounts of financial instruments, including cash and cash equivalents, 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, 2016				As of December 31, 2015
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Instruments:
Investment securities:
Cost method investment (1)	$	2,776	$	2,964	$	2,776	$	2,776
Investment securities, restricted, long-term	$	—	$	—	$	336	$	336
Notes Payable:
Short-term borrowings, net of discount and deferred loan costs, related party	$	—	$	—	$	12,676	$	12,676
Current portion of notes payable, related party (2)	$	—	$	—	$	1,837	$	1,457
Long-term portion of notes payable, related party (2)	$	—	$	—	$	13,512	$	13,273
Highview technology license payable	$	218	$	218	$	519	$	519
Highview technology license payable, long-term	$	—	$	—	$	1,038	$	1,038
Stock appreciation rights, liability-classified equity award (3)	$	—	$	—	$	742	$	742

(1) Fair value is based on the investee's recently completed equity raise at £4.60 per share. Refer to Note 5 for further discussion of this investment. The fair value has been calculated using the historical rate as of the acquisition date.

(2) The fair value related to the DSI Business Owner note payable amounts as of December 31, 2015 was determined using the settlement agreement amount of $0.3 million, as described in Note 6.

(3) Based upon the approval of amendments to the 2007 Equity Incentive Plan by stockholders during the second quarter of 2016, SAR's that were previously reported as liability classified equity awards became option awards and were reclassified to equity awards as the settlement of the award was within the control of the Company.

Concentration of credit risk

The Company's certificates of deposits and virtually all of the Company's restricted and unrestricted cash accounts are at two financial institutions. 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 ($250 thousand) that would be returned to the Company.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The estimated fair values of investment securities are described below. Refer to Note 5 for additional information regarding the Company’s investment securities.

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The Company uses the hierarchy prescribed in the accounting guidance for fair value measurements based upon the available inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable either directly or indirectly, including, but not limited to, quoted prices in markets that are not active, quoted prices in active markets for similar assets or liabilities and observable inputs other than quoted prices such as interest rates or yield curves.

Level 3 Inputs - Unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.

Financial instruments carried and measured at fair value on a recurring basis are presented in the table below according to the fair value hierarchy described above. There were no financial instruments carried and measured at fair value on a recurring basis as of September 30, 2016.



	As of December 31, 2015
	Fair Value Measurement Using
(in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Assets:
Investment securities, restricted, long-term	$	—	$	336	$	—	$	336
Total assets at fair value	$	—	$	336	$	—	$	336
Liabilities:
Stock appreciation rights, liability-classified equity award	$	—	$	742	$	—	$	742
Total liabilities at fair value	$	—	$	742	$	—	$	742

The estimated fair value of investments securities consisting entirely of certificates of deposits was estimated to be equal to the deposit value of the investment due to the relative short term nature of the instrument.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

During December 2014 and March 2015, the Company loaned a total of $1.0 million to an independent technology development company exploring energy storage to provide financing to pursue emissions technology projects, bearing annual interest of 8%. Interest and principal were payable at maturity in March 2018. Subsequent to the second loan disbursement, the Company became aware that the independent technology development company exploring energy storage was not awarded contracts that would have utilized their emissions technology. The Company also became aware that without these contracts, the ability of the independent third party to repay these loans was doubtful. As a result, the Company has recorded an allowance against the entire principal balance of the notes receivable, reversed accrued interest and put the note on non-accrual status.

During the fourth quarter of 2015, the Company recorded impairments totaling approximately $0.3 million to reduce the carrying value of certain property and equipment that the Company intended to sell to its estimated sales value, less estimated costs to sell. The property and equipment were subsequently sold at auction. Proceeds from the sale of the impaired assets totaled approximately $0.6 million. No gain or loss was recognized on the sale of the property and equipment.

Also during the fourth quarter of 2015, the Company sold certain property and equipment having a net book value of approximately $0.1 million. Proceeds from the sale totaled approximately $0.3 million, which resulted in the recognition of a gain on the sale of approximately $0.2 million.

In June 2016, the Company sold certain inventory and property and equipment having a net book value of approximately $0.5 million. The Company recorded an impairment charge of approximately $0.5 million during the nine months ended September 30, 2016.

The fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.

Note 8 - Commitments and Contingencies

Legal Proceedings

The Company is involved in certain legal actions, described below. The outcomes of these legal actions are not within the Company’s complete control and may not be finalized for prolonged periods of time. In the described actions, the claimants seek monetary damages and other penalties. In accordance with U.S. GAAP, the Company records a liability in the Condensed Consolidated Financial Statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. In the described lawsuits, the Company has entered into settlement agreements, both of which are pending court approval, with the claimants setting forth the specific or maximum amount of monetary damages required to settle each action. In the described government investigation, the Company has reached agreement in principle with regard to the amount of monetary damages required to settle such action. Therefore, such amounts are probable and reasonably estimable. The Company cannot predict the timing of final resolution or the final outcome of any pending legal proceedings as described in the paragraphs below, nor can it provide any assurance that the ultimate resolution of any such matter will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

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.)

A class action lawsuit against ADES and certain of its current and former officers is pending in the federal court in Denver, Colorado ("U.S. District Court"). This lawsuit and a companion case were originally filed in May 2014. On February 19, 2015, the U.S. District Court consolidated these cases and appointed the United Foods and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund as lead plaintiff and approved its selection of the law firms. The consolidated case is now captioned United Food and Commercial Workers Union v. Advanced Emissions Solutions, Inc., No. 14-cv-01243-CMA-KMT (U.S. District Court, D. Colo.) (the “Denver Securities Litigation”).

The lead plaintiff filed "Lead Plaintiff’s Consolidated Class Action Complaint" on April 20, 2015 (the "Consolidated Complaint"). The Consolidated Complaint names as defendants the Company and certain current and former Company officers.

Plaintiffs allege that ADES and other defendants ("Defendants") misrepresented to the investing public the Company’s financial condition and its financial controls to artificially inflate and maintain the market price of ADES’s common stock. The Consolidated Complaint alleges two claims for relief for: 1) alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and 2) control person liability under Section 20(a) of the Exchange Act.

The Consolidated Complaint seeks unspecified monetary damages together with costs and attorneys’ fees incurred in prosecuting the class action, among other relief, and alleges a class period covering all purchasers or acquirers of the common stock of ADES or its predecessor-in-interest during the proposed class period from May 12, 2011 through January 29, 2015.

Defendants filed a motion to dismiss the Consolidated Complaint on June 19, 2015, contending the Consolidated Complaint: 1) fails to meet the strict pleading standards required for Section 10(b) claims; and 2) fails to establish the primary violation required for any claim of secondary (control person) liability. Plaintiffs filed a response in opposition to this motion on July 2, 2015 and Defendants filed their reply brief on July 16, 2015. On March 7, 2016, the parties filed a stipulated motion to stay the case while the parties mediated the matter. On March 8, 2016, the motion to stay was granted, and the Defendants’ motion to dismiss was denied without prejudice with the option to refile should mediation fail. The case was stayed until further order of the U.S. District Court.

Following the mediation, which occurred in May of 2016, the parties came to an agreement in principle to settle the Denver Securities Litigation, and on June 30, 2016, the parties entered into a Stipulation and Agreement of Settlement (the "Denver Settlement") to resolve the action in its entirety. Under the terms of the Denver Settlement, a payment of $4.0 million will be made in exchange for the release of claims against the defendants and other released parties by the lead plaintiff and all settlement class members, and for the dismissal of the action with prejudice. The Denver Settlement remains subject to the final approval of the U.S. District Court. Prior to any final U.S. District Court approval of the Denver Settlement, potential settlement class members (i.e., all persons and entities who purchased or otherwise acquired the Company's common stock during May 12, 2011 through January 29, 2015 ((both dates inclusive), with limited exclusions), will have an opportunity to exclude themselves from participating in the Denver Settlement or to raise objections with the U.S. District Court regarding the Denver Settlement or any part thereof. On June 30, 2016, the plaintiffs in the Denver Securities Litigation filed the Denver Settlement and related exhibits with the U.S. District Court and moved, among other things, for the U.S. District Court to preliminarily approve the Denver Settlement, to approve the contents and procedures for notice to potential settlement class members, to certify the Denver Securities Litigation as a class action for settlement purposes only, and to schedule a hearing for the U.S. District Court to consider final approval of the Denver Settlement (the “Motion for Preliminary Approval”). On October 13, 2016, the U.S. District Court issued an order granting the unopposed Motion for Preliminary Approval and set a hearing for the U.S. District Court to consider final approval of the Denver Settlement on February 10, 2017.

The Denver Settlement contains no admission of liability, and all of the Defendants in the Denver Securities Litigation have expressly denied, and continue to deny, all allegations of wrongdoing or improper conduct. If the Denver Settlement is approved by the U.S. District Court, the Company's insurance carriers will fund the $4.0 million Denver Settlement. In the event the Denver Settlement is not approved by the U.S. District Court or otherwise does not become effective for any reason, the Denver Settlement will become null and void, all things of value will be returned to the party providing them, and the case will move forward. Under those circumstances, all of the Defendants intend to continue to defend themselves vigorously against the allegations in the Second Amended Complaint.

As of September 30, 2016, the Company had a recorded liability of $4.0 million in connection with the Denver Settlement 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 Condensed Consolidated Balance Sheet. As of September 30, 2016, the Company also had a recorded receivable of $4.0 million in connection with the Denver Settlement as the Company's insurance carriers will fund the full settlement.

Stockholder derivative lawsuits: In Re Advanced Emissions Solutions, Inc. Shareholder Derivative Litigation, No. 2014CV-30709 (District Court, Douglas County, Colorado) (consolidated actions).

Consolidated stockholder derivative claims against certain of the Company’s current and former officers and directors, along with the Company as a "nominal defendant," are pending in the Colorado District Court for Douglas County, Colorado ("Douglas County District Court"), and are currently stayed.

In June and July 2014 stockholder derivative actions were filed in the Douglas County District Court and in the Colorado District Court for the City and County of Denver ("Denver District Court"). By agreement of the parties, the case in the Denver District Court was transferred to the Douglas County District Court and the cases were consolidated.

In separate complaints, the plaintiffs allege breach of fiduciary duties, waste of corporate assets, and unjust enrichment against the defendants for their alleged use of improper accounting techniques and for failing to maintain effective internal controls that, together, resulted in materially inaccurate financial statements from which incentive compensation was derived and paid. Plaintiffs demand, on behalf of the Company, unspecified monetary damages, "appropriate equitable relief," and the costs and disbursements of the action, including attorneys', accountants' and expert's fees, costs, expenses, and restitution, as well as certain corporate governance changes (collectively the "Derivative Claims").

On August 28, 2014, the Colorado state court approved a Stipulation and proposed Order Consolidating Actions, Appointing Co-Lead Plaintiffs and Co-Lead Counsel, and Staying Consolidated Action.

Following a mediation, which occurred in May of 2016, the parties came to an agreement in principle to settle the Stockholder Derivative Action, and on September 30, 2016, the parties entered into a Stipulation and Agreement of Settlement (the “Stockholder Derivative Settlement”) to resolve the action in its entirety. Under the terms of the Stockholder Derivative Settlement, the Company will incorporate specified governance changes, plaintiffs will be entitled to certain confirmatory discovery prior to the court’s preliminary approval of the settlement, and the Company will not oppose Plaintiffs’ request for up to $0.6 million in attorneys’ fees subject to court approval, in exchange for the release of claims against all defendants and for the dismissal of the action with prejudice. The required corporate governance changes under the Stockholder Derivative Settlement terms include revising the responsibilities of the Board, the Audit Committee, the Compensation Committee, and the Nominating and Governance Committee; ensuring expedited compliance with any new compensation clawback requirements; amending voting requirements for director elections; and implementing certain accounting reforms. The governance measures required by the settlement will remain in effect for at least four years following court approval of the Stockholder Derivative Settlement.

The Stockholder Derivative Settlement remains subject to the final approval of the Douglas County District Court. On October 14, 2016, the plaintiffs in the Stockholder Derivative Action filed the Stockholder Derivative Settlement and related exhibits with the Douglas County District Court and moved, among other things, for the Douglas County District Court to preliminarily approve the Stockholder Derivative Settlement, to approve the contents and procedures for notice to the Company's stockholders, and to schedule a hearing for the Douglas County District Court to consider final approval of the Stockholder Derivative Settlement (the “Motion for Preliminary Approval of Derivative Settlement”). On November 2, 2016, the Douglas County District Court issued an order granting the Motion for Preliminary Approval of Derivative Settlement and set a hearing for the Douglas County District Court to consider final approval of the Stockholder Derivative Settlement on January 13, 2017.

The Stockholder Derivative Settlement contains no admission of liability, and all of the defendants in the Stockholder Derivative Action have expressly denied, and continue to deny, all allegations of wrongdoing or improper conduct. If the Stockholder Derivative Settlement is approved by the Douglas County District Court, the Company's insurance carriers will fund payment of plaintiffs’ attorneys’ fees approved by the court. If the Stockholder Derivative Settlement is not approved by the Douglas County District Court, or otherwise does not become effective for any reason, the Stockholder Derivative Settlement will become null and void, and the case will move forward. Under those circumstances, the defendants intend to continue to defend themselves vigorously against the plaintiffs’ allegations.

As of September 30, 2016, the Company had a recorded liability of $0.6 million in connection with the Derivative Settlement 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 Condensed Consolidated Balance Sheet. As of September 30, 2016, the Company also had a recorded receivable in connection with the Derivative Settlement of $0.6 million, which was originally recorded as of June 30, 2016, as the Company's insurance carriers will fund the fee award amount.

SEC Inquiry

On April 7, 2014, the staff of the SEC’s Division of Enforcement ("SEC Staff") informed the Company that it had initiated an inquiry to determine if violations of the federal securities laws have occurred (the "SEC Inquiry"), and in September 2014 the SEC issued a formal order of investigation. The SEC Inquiry generally pertains to the restatement of the Company's financial statements and internal controls processes, as described in Note 2 to the Consolidated Financial Statements of the Company included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The Company cooperated with the SEC by providing information and documents to the SEC on an ongoing basis. In July 2016, the SEC Staff communicated to the Company that it would recommend to the SEC that it authorize a settlement with the Company on terms that include payment of a civil monetary penalty of $0.5 million. The SEC must approve the SEC Staff recommendation and any final settlement or relief.

As a result of the communication from the SEC Staff, the Company recorded a liability as of June 30, 2016 for the payment of monetary penalties in connection with the SEC Inquiry in the amount of $0.5 million as the losses in connection with this matter were both probable and reasonably estimable under U.S. GAAP. The recorded liability was based on an agreement in principle with SEC Staff subject to approval by the SEC. The liability was recorded in the Legal settlements and accruals 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 nine months ended September 30, 2016. While the Company anticipates that the proposed settlement will likely be approved by the SEC, it is possible that the ultimate settlement terms, including the penalty amount, could change.

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 equity method investment 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.

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. 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 letter of credit amounts as collateral for payments due to Norit, equal to 50% of the aggregate fair market value of such dividends. 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 must also increase its letter of credit amounts as collateral by $5.0 million for payments due to Norit. However, the maximum total letter of credit increase related to the combination of dividends or earnings is $7.5 million.

As of September 30, 2016, and December 31, 2015, the Company carried the components of the Royalty Award in Legal settlements and accruals in the Condensed Consolidated Balance Sheets of $7.4 million and $6.5 million, respectively, and in Legal settlements and accruals, long-term of $9.3 million and $13.8 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, 2016		December 31, 2015
Settlement and Royalty Indemnification	$	7,398	$	6,502
Legal settlements	5,050		—
Legal settlements and accruals	12,448		6,502
Settlement and Royalty Indemnification, long-term	9,305		13,797
Legal settlements and accruals, long-term	9,305		13,797
Total legal settlements and accruals	$	21,753	$	20,299

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 Goldman Sachs 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.

Line of Credit

In September 2013, ADA, as borrower, and ADES, as guarantor, entered into a 2013 Loan and Security Agreement with a bank (the "Lender") for an aggregate principal amount of $10 million (the "Line of Credit") that is secured by certain amounts due to the Company from certain Tinuum Group RC leases . During the third quarter of 2016, the Company entered into the Eighth Amendment and Ninth Waiver related to the Line of Credit. As amended, the Line of Credit is available until November 27, 2016.

Covenants in the Line of Credit include a borrowing base limitation that is based on a percentage of the net present value of ADA’s portion of payments due to Tinuum Group from the RC leases. The Line of Credit also contains other affirmative and negative covenants and customary indemnification obligations of ADA to the lender and provides for the issuance of letters of credit provided that the aggregate amount of the letters of credit plus all advances then outstanding does not exceed the calculated borrowing base. The Company guaranteed the obligations and agreements of ADA under the Line of Credit. Amounts outstanding under the Line of Credit bear interest payable monthly at a rate per annum equal to the higher of 5% or the "Prime Rate" (as defined in the Line of Credit) plus 1%. There were no outstanding balances under the Line of Credit at September 30, 2016 and December 31, 2015, respectively, nor were any amounts drawn during the three and nine months ended September 30, 2016.

As a result of certain historical covenant violations, the Company had no borrowing availability under this facility as of September 30, 2016 or December 31, 2015. The Company is currently in discussions with the Lender regarding a possible renewal that would include the ability to utilize the Line of Credit.

Letters of Credit

The Company has letters of credit ("LOC") with two financial institutions related to equipment projects, the Royalty Award and certain other agreements. The following tables summarize the letters of credit outstanding and collateral, by asset type, reported on the Condensed Consolidated Balance Sheets:



	As of September 30, 2016
(in thousands)	LOC Outstanding		Restricted Cash		Restricted cash, long-term		Investment securities, restricted, long-term
Contract performance - equipment systems	$	2,063	$	2,069	$	—	$	—
Royalty Award	6,700		1,950		4,750		—
Total LOC outstanding	$	8,763	$	4,019	$	4,750	$	—



	As of December 31, 2015
(in thousands)	LOC Outstanding		Restricted Cash		Restricted cash, long-term		Investment securities, restricted, long-term
Contract performance - equipment systems	$	5,556	$	728	$	4,830	$	—
Royalty Award	6,150		—		6,150		—
Other	328		—		—		336
Total LOC outstanding	$	12,034	$	728	$	10,980	$	336

Restricted balances may exceed the letters of credit outstanding due to interest income earned on the restricted assets.

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 level of mercury removal is not achieved, the Company may have a “make right” obligation within the contract limits. During the third quarter of 2015, the Company began working to modify and correct two performance guarantee issues related to EC systems that were installed during 2015. No revenue is recognized on these two contracts until the performance guarantees are resolved and contract obligations are substantially complete. During the second quarter of 2016, significant progress was made on one performance guarantee issue, but substantial completion had not yet been reached as of June 30, 2016. During the third quarter of 2016, the Company passed performance testing on both systems and revenues on both systems were recognized. As a result of the resolution of the performance guarantees, the Company incurred approximately $0.9 million on the ACI systems to pass the performance guarantees. Additional performance guarantee claims, if incurred, would be included within the Equipment sales cost of revenue line of the Condensed Consolidated Statements of Operations.

Note 9 - 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, 2016 and 2015 was as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2016			2015		2016		2015
Restricted stock award expense	$	633		$	415	$	1,615	$	2,354
Stock option expense	(21		)	46		118		616
PSU expense	83			157		399		2,590
SAR expense	—			19		106		536
Total stock-based compensation expense	$	695		$	637	$	2,238	$	6,096

The amount of unrecognized compensation cost as of September 30, 2016, and the expected weighted average period over which the cost will be recognized is as follows:



	As of September 30, 2016
(in thousands)	Unrecognized Compensation Cost		Expected Weighted Average Period of Recognition (in years)
Restricted stock award expense	$	1,401	0.71
Stock option expense	63		0.41
PSU expense	194		0.69
Total unrecognized stock-based compensation expense	$	1,658	0.70

Restricted Stock Awards

Restricted stock is typically granted with vesting terms of three or five 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, 2016 is presented below:



	Shares		Weighted Average Grant Date Fair Value
Non-vested at January 1, 2016	134,708		$	8.49
Granted	313,758		7.33
Vested	(161,562	)	12.40
Forfeited	(16,964	)	16.78
Non-vested at September 30, 2016	269,940		7.83

During the nine months ended September 30, 2016, the Company accelerated the terms of equity awards, including both RSA's and PSU's, granted to employees as part of a reduction in workforce. The Company recorded incremental expense of $0.2 million and $0.4 million for the three and nine months ended September 30, 2016, respectively, and zero and $3.1 million for the three and nine months ended September 30, 2015, respectively, in the Payroll and benefits line item in the Condensed Consolidated Statement of Operations.

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, 2016 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, 2016	106,250		$	15.22
Options granted (1)	268,198		$	13.19
Options exercised	—		$	—
Options expired / forfeited	(20,000	)	$	16.90
Options outstanding, September 30, 2016	354,448		$	13.59	$	—	3.68
Options exercisable as of September 30, 2016	147,780		$	12.92	$	—	3.62

(1)

Included in options granted are 243,750 awards granted that were initially granted on a contingent basis and became exercisable as a result of the automatic expiration of the same number of Stock Appreciation Rights, as a result of stockholder approval of Amendment No. 4 of the Company's Amended and Restated 2007 Equity Incentive Plan, as amended (the "2007 Plan"). See "Stock Appreciation Rights" section below for a discussion of the provisions of the exchange and incremental expense recognized.

Stock Appreciation Rights

SAR's generally vest over three years and have a contractual limit of five years from the date of grant to exercise. The fair value of SAR's 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 derived service period of the respective awards. The Company did not grant any SAR's during the nine months ended September 30, 2016.

In June 2016, the Company's stockholders approved Amendment No. 4 to the 2007 Plan, which triggered an automatic expiration of the Stock Appreciation Rights and an equal number of stock options being exercisable and no longer granted on a contingent basis. Upon approval, all existing SAR's expired under this provision. The Company recorded incremental expense of $0.1 million to stock-based compensation related to the change in fair value of the SAR's prior to the reclassification date. Upon reclassification, the impact to Additional paid-in capital was $0.9 million. The Company had no SAR's outstanding as of September 30, 2016.

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, 2016.

A summary of PSU activity for the nine months ended September 30, 2016 is presented below:



	Units		Weighted Average Grant Date Fair Value
Non-vested at January 1, 2016	169,334		$	26.38
Granted	—		—
Vested / Settled (1)	(119,818	)	(26.87		)
Forfeited / Canceled	—		—
Non-vested at September 30, 2016	49,516		$	25.20

(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.