Document
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-K
______________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37822
 
 
Advanced Emissions Solutions, Inc.
(Name of registrant as specified in its charter)
 
 
Delaware
 
27-5472457
(State of incorporation)
 
(IRS Employer
Identification No.)
640 Plaza Drive, Suite 270, Highlands Ranch CO, 80129
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code): (720) 598-3500
Securities registered under Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
NASDAQ Global Market
Securities registered under Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    ¨  Yes    x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    ¨  Yes    x  No

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $106.1 million based on the last reported bid price of the Common Stock on the OTC Pink® Marketplace - Limited Information Tier on June 30, 2016.  The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of March 8, 2017 was 22,022,683.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 

 
 
 
Documents Incorporated By Reference
None


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ADVANCED EMISSIONS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I
Item 1. Business
General
ADA-ES, Inc. (“ADA”), a Colorado corporation, was incorporated in 1997. Pursuant to an Agreement and Plan of Merger ("Reorganization"), effective July 1, 2013, Advanced Emissions Solutions, Inc. (“ADES”), a Delaware company incorporated in 2011, replaced ADA as the publicly-held corporation and ADA became a wholly-owned subsidiary of ADES. Each outstanding share of ADA’s common stock automatically converted into one share of common stock of ADES and the shareholders of ADA became stockholders of ADES on a one-for-one basis, holding the same number of shares in and the same ownership percentage of ADES after the reorganization as they held in and of ADA prior to the reorganization. ADES’s common stock became listed on the NASDAQ Capital Market under the symbol, "ADES," ADA’s previous symbol, and ADA’s stock ceased trading on the NASDAQ Capital Market on July 1, 2013. From March 30, 2015 through July 6, 2016, ADES's common stock was traded on the OTC Pink® Marketplace - Limited Information Tier under the trading symbol "ADES." Effective, July 7, 2016 ADES's common stock began trading on the NASDAQ Global Market under the symbol, ADES. This Annual Report on Form 10-K is referred to as the "Form 10-K" or the "Report."

Except as otherwise noted in this Report, ADES and its subsidiaries have continued to conduct business in substantially the same manner as conducted prior to the reorganization.

As this filing pertains to the year ended December 31, 2016, the terms the "Company," "we," "us" and "our" means ADA and its consolidated subsidiaries for the periods through and including the period ended June 30, 2013 and ADES and its consolidated subsidiaries for the dates or periods after July 1, 2013.

We are also an equity investor in Tinuum Group, LLC ("Tinuum Group"), formerly known as Clean Coal Solutions, LLC, and Tinuum Services, LLC ("Tinuum Services"), formerly known as Clean Coal Solutions Services, LLC. As of December 31, 2016 and 2015, we held equity interests of 42.50% and 50.00% in Tinuum Group and Tinuum Services, respectively, and each of their operations significantly impacted our financial position and results of operations for the years ended December 31, 2016, 2015 and 2014. These equity interests are accounted for under the equity method of accounting. On March 3, 2016, we sold our 24.95% equity interest in RCM6, LLC ("RCM6"), which had been accounted for under the equity method of accounting from inception until its disposition.

Business Purpose and Strategy
ADES is the holding entity for a family of companies that provide emissions solutions to customers in the coal-fired power generation and industrial boiler processes. Through our subsidiaries and joint ventures, we are a leader in emissions control ("EC") technologies and associated equipment, chemicals and services. Our proprietary environmental technologies enable our customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and pending EC regulations.
Our major activities include:
•
Development and sale of technology to reduce emissions and improve operations of coal-fired boilers used for power generation and industrial processes;
•
Development and sale of equipment, specialty chemicals, consulting services and other products designed to reduce emissions of mercury, acid gases, metals and other pollutants, and the providing of technology services in support of our customers' emissions compliance strategies;
•
Through Tinuum Group, an unconsolidated entity, reduction of mercury and nitrogen oxide ("NOX") emissions at select coal-fired power generators through the burning of Refined Coal ("RC") produced by RC facilities placed in service by Tinuum Group. We benefit from Tinuum Group's production and sale of RC, which generates tax credits, as well as the revenue from selling or leasing RC facilities to tax equity investors. See the separately filed financial statements of Tinuum Group included in Item 15 of this Report; and
•
Research and development of technologies and other solutions to advance cleaner energy and to help our customers meet existing and future regulatory and business challenges, including technologies designed to address regulated environmental impacts related to power generation or industrial processes.

3

Markets for Our Products and Services
We provide environmental control equipment, chemicals and technologies to our primary market that consists of approximately 680 coal-fired electrical generation units located in the United States.

The share of coal-fired power generation as a percentage of U.S. electricity generation is expected to continue to decrease over the coming years due to low projected natural gas prices, increasingly stringent environmental regulations and increased deployment of renewable power generating assets. However, we believe that coal-fired power generation will remain a significant component of the U.S. power generation mix for many years given coal's abundance, affordability, reliability and availability as a domestic fuel source. In its Annual Energy Outlook for 2017, the Energy Information Administration ("EIA") projects that coal will provide 22% of electricity generation in 2040 if the Clean Power Plan ("CPP") of the U.S. Environmental Protection Agency ("EPA"), addressing limiting greenhouse gas emissions, is implemented. If the CPP is not implemented, the EIA projects that coal will provide 31% of power generated. The primary drivers for many of our products and services are environmental laws and regulations impacting the electric power generation industry and other coal users. These regulations include the Mercury and Air Toxics Standards ("MATS"), a federal regulation that requires all of the existing fleet and all new coal-fired plants to control mercury emissions, acid gases, and particulate matter, as well as various state regulations and permitting requirements for coal-fired power plants. In addition to the federal MATS rule, certain states have their own mercury rules that are similar to, or more stringent than MATS, and many plants around the country have agreed to consent decrees, which require pollution controls that, in some cases, are more restrictive than the existing regulations. We continue to believe the MATS rule as well as certain state regulations create a large market for RC and EC products. Additionally, the proposed, pending, and future rules relating to carbon dioxide (CO2) or other greenhouse gas emissions, effluent discharge, coal combustion residuals and other pollutants are driving, and we expect will continue to drive, future markets for which we may develop products and solutions.

In general, coal is a low cost, stable and reliable source of domestic energy that, unlike many other forms of energy, can be easily stored in large quantities. We believe coal is critical to ensuring the U.S. has a secure and stable source of energy. With current environmental regulations, we believe it is unlikely that any new coal plants will be financed or constructed, which suggests that the average plant age in 2040 will be 64 years old. With the continued retirement of the less efficient and generally smaller coal plants switching of fuel sources from coal to other fuels such as natural gas, and the influx of intermittent generation such as solar and wind, we believe coal-fired generation will be seen as a complement to the other fuel sources in providing electricity to users and supporting the electric grid. This belief is reflected in the CPP, published in October 2015 by the EPA. Continued pressure from renewable energy sources and natural gas combined with uncertainty regarding regulations on CO2 emissions will likely push coal-fired generators to increase their focus on maintaining regulatory compliance in the most efficient and cost effective manner, while also responding to intermittent generating sources. As coal plants age and they are dispatched with more variability rather than at base-load levels for which they were designed, we expect that increased support will be required to assure reliable operation and continued compliance with environmental regulations. We expect that plants and owners will require additional support as their aging workforce retires and on-site expertise is no longer as available, and as utilities allocate resources elsewhere in their power generation fleets.

While the future is uncertain, we expect this uncertainty will continue to drive a shift in utilities' purchasing desires towards variable cost products and integrated solutions with low capital expenditure requirements and away from large capital equipment and other fixed cost solutions that are less likely to have costs recovered given the uncertain operating life of many coal plants. We also expect to see a continued trend towards outsourcing various aspects of plant operations to third-party vendors and away from having integrated plant staff.

We believe it is likely that many U.S. coal mines, coal-fired power generators, coal-centric large equipment providers and other coal-related businesses will have difficulty in adapting to industry changes expected in the coming years. However, we see opportunities for companies that can offer their customers creative and cost effective solutions that help the U.S. coal-related businesses meet regulatory compliance, improve efficiency, lower costs and maintain reliability.

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As of December 31, 2016, our products, services and RC technology licenses available to coal-fired electrical generators requiring solutions to assist with compliance with emissions standards included:

•
Equipment:
◦
Low capital expenditure mercury control technologies and systems such as Activated Carbon Injection ("ACI") systems, that effectively reduce mercury emissions over a broad range of plant configurations and coal types; and
◦
Dry Sorbent Injection systems ("DSI") that reduce emissions of Sulfur Dioxide ("SO2") and other acid gases such as Sulfur Trioxide ("SO3") and Hydrogen Chloride ("HC1"); and
◦
Our patented ADAirTM Mixer in-duct technology that alters flue gas flow to improve mixing and optimize particle dispersion to reduce sorbent consumption for ACI and DSI systems.

•
RC technology licenses:
◦
Our patented CyCleanTM technology, a pre-combustion coal treatment process that provides electric power generators the ability to enhance combustion and reduce emissions of NOX and mercury from coals burned in cyclone boilers; and
◦
Our patented M-45TM and patent pending M-45-PCTM technologies, which are proprietary pre-combustion coal treatment technologies used to control emission from circulating fluidized bed boilers and pulverized coal boilers, respectively.

•
Chemicals:
◦
Our patented M-ProveTM technology, which is also incorporated in our RC technologies, that provides a cost effective alternative to other halogen-based, oxidation chemicals used to enhance removal of mercury emissions. M-ProveTM technology mitigates coal treatment corrosion risks to minimize maintenance and repair costs to enhance system reliability and risks associated with bromine discharge from plant wastewater; and
◦
Our RESPond® liquid chemical additive that is a highly effective ash resistivity modifier for power plants operating cold-side electrostatic precipitators. Unlike SO3 solutions, the incumbent chemical being used to modify ash resistivity, the RESPond® additive does not interfere with or reduce the effectiveness of activated carbon injected into the flue gas for purposes of reducing mercury emissions.

•
Consulting services and other:
◦
We provide general consulting services as requested by our customers related to emissions control.
Additionally, as of December 31, 2011, Tinuum Group, an unconsolidated entity in which we own a 42.5% equity interest, built and placed into service a total of 28 RC facilities designed to produce RC for sale to coal-fired power plants. Coal-fired power plants use RC as one of a portfolio of tools to help comply with MATS and other environmental regulations. These RC facilities produce RC that qualifies for tax credits under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"), including meeting the "placed in service" requirements (hereafter referred to as "placed in service"). The law that provides for Section 45 tax credits substantially expires in December 2019 for two of Tinuum Group's RC facilities placed in service in 2009 and in the fourth quarter of 2021 for 26 RC facilities built and placed in service in 2011. Once an RC facility is in operation, Tinuum Group may enter into contracts with tax equity investors to lease or sell the RC facility, which we refer to as an "invested" RC facility. Such investors subsequently operate the RC facility to produce and sell RC to a utility. RC facilities that are producing and selling RC, but have not been leased or sold, are referred to as "retained" RC facilities, whereby the RC is produced and sold by Tinuum Group and where the related tax benefits may be realized by the owners of Tinuum Group. As of December 31, 2016, Tinuum Group had 13 invested RC facilities producing RC at utility sites and no retained RC facilities. The remaining 15 RC facilities, although placed in service, were either installed but not operating, awaiting site selection or in various other stages of contract negotiation or permanent installation. Of these remaining 15 RC facilities, eight have been installed and are ready to operate pending final commitments for the purchase or lease of such facilities by tax equity investors. The remaining facilities are awaiting site selection or in various other stages of contract negotiation, permanent installation or commissioning.

Although we intend to utilize our share of the Section 45 tax credits which have been or may be generated by producing RC at retained RC facilities, it is also financially advantageous to lease or sell RC retained facilities to tax equity investors. The tax equity investor for a particular RC facility pays the operating expenses of the RC facility and also pays Tinuum Group for either the purchase or lease of the RC facility, and in return, takes over production and sale of RC including the related tax benefit. We benefit from equity income and distributions accruing through our investment in Tinuum Group. Tax equity investors may benefit from their investment in RC facilities through the realization of tax assets and credits from the production and sale of RC. As of December 31, 2016 and 2015, respectively, the Section 45 tax credits were $6.81 and $6.71 per ton of RC

5

produced and sold to a utility. The value of the Section 45 tax credits are adjusted annually based on inflation adjustment factors published in the Federal Register. As of December 31, 2016, we have received substantial tax credits and benefits from certain retained RC facilities that previously produced and sold RC for the benefit of Tinuum Group, but have not been able to fully utilize them. See Note 16 to our Consolidated Financial Statements included under Item 8 of this Report for additional information regarding our net operating losses ("NOL's"), tax credits and other deferred tax assets.
The 13 RC facilities producing RC as of December 31, 2016 are operated by our 50% owned entity, Tinuum Services, under operating and maintenance agreements with the owners or lessees of the RC facilities.
Legislation and Environmental Regulations
U.S. Federal Mercury and Air Toxic Standards (“MATS”) Affecting Electric Utility Steam Generating Units
On December 16, 2011, the U.S. EPA issued the final "MATS Rule," which took effect in April 2012. The EPA structured the MATS Rule as a MACT-based hazardous pollutant regulation applicable to coal and oil-fired Electric Utility Steam Generating Units (“EGU”), which generate electricity via steam turbines and have a capacity of 25 megawatts or greater, and provide for, among other provisions, control of mercury and particulate matter and control of acid gases such as HC1 and other Hazardous Air Pollutants ("HAPs"). According to our estimates, the standard sets a limit that we believe requires the capture of up to 80-90% of the mercury in the coal burned in electric power generation boilers as measured at the exhaust stack outlet for most plants. The MACT standards are also known as National Emission Standards for Hazardous Air Pollutants ("NESHAP"). Plants generally had four years to comply with the rule, and we estimate that, based on data reported to the EPA and conversations with plant operators, most plants were required to comply by April 2016. From May 2016 through October 2016, 679 EGU's had reported operations compared to 744 with operations during all of 2016, which included the pre-compliance period through April 2016. Although operating data indicated over 60 boilers ceased operations following the compliance date, not all of these boilers have been permanently shut down and some may return to operations at a future date.
State Mercury and Air Toxics Regulations Affecting EGUs
In addition to the federal MATS Rule, certain states have their own mercury rules that are similar to or more stringent than MATS, and power plants around the country are subject to consent decrees that require the control of acid gases and particulate matter, in addition to mercury emissions. Seventeen states have mercury-specific rules that affect more than 260 generating units.
U.S. Federal Industrial Boiler MACT
In January 2013, the U.S. EPA issued the final set of adjustments to the MACT-based air toxics standards for industrial boilers, including mercury, particulate matter, and acid gas emission limits. Existing boilers typically had until January 31, 2017 to comply with the rule. On December 1, 2014, the EPA announced the reconsideration of the IBMACT and proposed amendments to the version published January 31, 2013, representing technical corrections and clarifications. The proposed amendments do not affect the applicability of the final rule.
The EPA estimated that approximately 600 coal-fired boilers will be affected by the industrial boiler MACT ("IBMACT"), in industries such as pulp and paper. Our estimates, based on conversations with plant operators, suggest that most of the affected plants have or will either shut down or switch fuels to natural gas to comply with the regulation.
Effluent Limitation Guidelines
On September 30, 2015, the EPA set the first federal limits on the levels of toxic metals in wastewater that can be discharged from power plants. The final rule requires, among other things, zero discharge for fly ash transport water, and limits on mercury, arsenic, selenium, and nitrate from flue gas desulfurization ("FGD") wastewater (also known as "legacy wastewater"). Plants must comply with limits for legacy wastewater beginning as early as November 2018, with a possible extension to December 2023 with state approval. Although halogens are not directly regulated in the effluent guidelines, some halogens may impact the effectiveness of biological wastewater treatment systems that are often used for the removal of selenium. We expect that these regulations and restrictions on liquid effluents will generate a continuous market beginning in 2017 or 2018 for technologies and operating approaches to reduce liquid effluents. We are evaluating whether the potential market opportunity supports our development of new products to help plants comply with these rules, as well as how these rules may affect our current product offerings.

6

Additional U.S. Legislation and Regulations
On August 3, 2015, the EPA finalized rules to reduced greenhouse gases ("GHGs") in the form of the CPP, which established guidelines for states to follow in developing plans to reduce GHG emissions. Under the CPP, states are required to prepare State Implementation Plans to meet state targets established based on emission reductions from affected sources. The CPP requires that the Best System of Emission Reduction ("BSER") be implemented and establishes three building blocks, which include heat rate improvements at affected coal-fired power plants, substituting coal-fired generation with less carbon-intensive EGUs such as natural gas combined cycle plants, and substituting renewable generation. The CPP has been challenged by multiple states in the U.S. Court of Appeals for the District of Columbia Circuit ("DC Circuit"). The CPP is currently stayed by the Supreme Court, and a panel of 10 judges on the DC Circuit are reviewing the CPP following a hearing in September 2016.
International Regulations
There are various international regulations related to mercury control. In Canada, the Canada-Wide Standard ("CWS") was initially implemented in 2010, with increasingly stringent limits through 2020 with varying mercury caps for each province. China and Germany both have limits for mercury emissions that are less stringent than U.S. limits, which are typically met using co-benefits from other installed air pollution control equipment designed to control other pollutants.

Based upon the existing and potential regulations, we believe the international market for mercury control products may expand in the coming years, and we are positioning our patent portfolio accordingly to be prepared if a market for our products appears.
Segment Information
As of December 31, 2016, our operations consisted of two reportable segments: (1) RC and (2) EC.

Financial information related to each of our reportable segments is set forth in Note 17 of the Consolidated Financial Statements included in Item 8 of this Report.

(1)
RC Segment
Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to reduced emissions of both NOX and mercury from coal treated with our proprietary chemicals and burned at coal fired power plants. Reducing emissions of both NOX and mercury from the combustion of coal is necessary to comply with regulatory standards. Our equity method investments related to the RC segment include Tinuum Group and Tinuum Services. Additionally, through March 3, 2016, we had an equity method investment referred to as RCM6, which impacted the results of the RC segment. As of December 31, 2016, we held equity interests of 42.5% and 50% in Tinuum Group and Tinuum Services, respectively.
Tinuum Group owns, leases or sells facilities used in the production of RC. The RC facilities are located at coal-fired generation stations owned by regulated utilities, cooperatives, government agencies and wholesale power generators (collectively, "Generators"). The RC produced by the RC facilities is used by the Generators as fuel in the coal-fired boilers to produce electricity. The production and sale of RC in these RC facilities qualifies for Section 45 tax credits during the term of such credits. The IRS has issued guidance regarding emissions reductions in the production of electricity by coal-fired power plants, including measurement and certification criteria necessary to qualify for the Section 45 tax credits.
The RC facilities that Tinuum Group has leased or sold to tax equity investors are referred to as invested facilities. For invested facilities, Tinuum Group collects lease income from the lessee, if leased, or sales proceeds from the buyer if sold. We benefit from these transactions through our equity method investment in Tinuum Group. RC facilities that are producing RC, but that Tinuum Group has not leased or sold, are referred to as retained RC facilities. The owners of Tinuum Group, including the Company, produce and sell RC to Generators, and may benefit to the extent Section 45 tax credits and other tax benefits are realized from the operation of retained RC facilities. The ability to produce RC, which generates Section 45 tax credits, expires 10 years after each RC facility is placed into service, but not later than December 31, 2021. RCM6, of which we owned a 24.95% equity interest and was sold in March 2016, owned a single RC facility managed by a wholly-owned subsidiary of Tinuum Group.
Tinuum Services operates and maintains RC facilities under operating and maintenance agreements with owners or lessees of RC facilities. Tinuum Group or the owners or lessees of the RC facilities pay Tinuum Services, subject to certain limitations,

7

the costs of operating and maintaining the RC facilities plus various fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives, which include the chemicals required for our CyCleanTM, M-45TM and M-45-PCTM technologies, necessary for the production of RC under chemical agency agreements. The term of each chemical agency agreement runs concurrently with the respective RC facility's lease. Tinuum Services is also the primary beneficiary of certain RC facilities that are variable interest entities ("VIEs") and therefore consolidates such RC facilities. All net income (loss) associated with these consolidated RC facilities is allocated to the noncontrolling equity owners and therefore does not impact our equity earnings (loss) from Tinuum Services.

Tinuum Group also pays us royalties from the licensing of our M-45TM and M-45-PCTM EC technologies ("M-45 License"). Royalties are earned based upon: (i) a percentage of the per-ton, pre-tax margin net of certain allocable operating expenses related to the lease or sale of an invested RC facility that produces and sells RC under the M-45 License, (ii) a percentage of the value of the Section 45 tax credits produced net of certain allocable operating expenses as a result of the production and sale of RC under the M-45 License at retained RC facilities and (iii) a percentage of the revenue, net of all direct expenses, received by Tinuum Group as a direct result of Tinuum Group's exercise of the M-45 License.


(2)
EC Segment

(a)
Systems & Equipment- Activated Carbon Injection, Dry Sorbent Injection System and Other Systems
We are an established market leader in the supply of ACI systems for the coal-fired electric industry. The injection of activated carbon into the coal combustion flue gas for the purpose of absorbing mercury molecules is the most established and accepted technology to specifically reduce mercury emissions. Our proprietary and highly engineered ACI systems facilitate a customer's ability to reliably and cost effectively meet regulatory emissions limits. Most coal-fired power plants had purchased and installed required mercury control equipment by mid-April 2016, and most coal-fired industrial boilers requiring ACI systems will have installed systems by January 2017 to meet compliance deadlines. We believe that a limited number of additional systems may be required to address fuel or operational changes after these dates.
DSI is used to control HC1 and can improve the effectiveness of ACI for some plants. Most power plants requiring DSI for MATS compliance had procured and installed systems by mid-April 2016. We believe that a limited number of additional systems may be required to address fuel or operational changes, or to meet other regulations in 2017 and 2018.
The ADAir™ Mixer was designed to improve the effectiveness of ACI and DSI systems. We believe sales of the ADAir™ Mixer may increase in 2017 and 2018 as plants gain experience with their ACI and DSI systems and seek options to optimize their systems to reduce operating costs.
(b)
Chemicals

(i)
Mercury Control Additives
Our patented M-Prove™ pre-combustion coal treatment technology involves the application of patented chemicals to coal. This technology substantially reduces mercury emissions and also can reduce the amount of activated carbon or other sorbents used to meet regulatory mercury emission limits. The power industry is beginning to experience corrosion and wastewater issues in their plants that they attribute to the use of bromine to enhance the capture of mercury. One of the advantages of the M-ProveTM additive is that it is effective at very low application rates, significantly reducing balance of plant risks associated with other coal additive technologies for mercury control. We believe that demand for M-ProveTM technology will increase in 2017 and 2018 as plants gain experience with their mercury control systems and begin to optimize their strategy to reduce operational impacts, especially as they relate to corrosion and wastewater. In October 2012, we were awarded the first of a family of patents designed to protect this technology in the U.S., and are pursuing similar patents in various other countries.
We license certain emissions control technologies, including the M-ProveTM additive, to Tinuum Group for the production of RC to reduce emissions of both mercury and NOX from coal-fired boilers. We licensed our patented CyCleanTM technology to Tinuum Group upon formation of the entity in 2006 for use with cyclone boilers for the life of the patents. In July 2012, we executed the M-45 license with Tinuum Group, which is effective for the duration that Section 45 tax credits are available. We believe these licenses will leverage Tinuum Group’s operating expertise and allow it the ability to provide and use either the CyCleanTM or M-45TM technology to produce RC. Later in 2012, we made a technological advancement in the M-45TM technology, which was incorporated in the M-45 License and allows it to be effective in “pulverized coal” (“PC”) boilers. In addition to the royalty payments we receive from Tinuum Group, the use of M-ProveTM technology in the production of RC provides valuable operating data and validates the effectiveness of the M-ProveTM technology in a range of coal-fired boilers. We expect this information will help in our sales process for the M-ProveTM technology.

8


(ii)
Flue Gas Chemicals and Services
We have deployed technologies for conditioning flue gas streams from coal-fired combustion sources. Our flue gas conditioning chemical allows existing air pollution control devices, such as electrostatic precipitators ("ESPs"), to operate more efficiently without the use of traditional SO3 additives, which have been shown to be detrimental to effective mercury control by partially negating the effectiveness of certain sorbents used to absorb mercury, including activated carbon. Such treatment of the flue gas stream allows for effective collection of fly ash particles that would otherwise escape into the atmosphere. The use of the proprietary chemical blends may help existing marginally sized ESPs continue to operate effectively when applied exclusively, or in combination with other chemicals such as hydrated lime, activated carbon products, or other high-resistivity materials. Our flue gas conditioning chemical is currently sold under the registered trademark RESPond®.
(c)
Consulting Services
We also offer consulting services to assist electric power generators, the electric utility industry and others in planning and implementing strategies to meet the new and increasing government emission standards requiring reductions in SO2, SO3, HC1, NOX, particulates, acid gases and mercury.
The following table shows the amount of total revenue by type:
 
 
Years Ended December 31,
(in thousands)
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
 
Equipment sales
 
$
46,949

 
$
60,099

 
$
12,044

Chemicals
 
3,025

 
888

 
391

Consulting services and other
 
648

 
1,752

 
4,488

Total revenues
 
$
50,622

 
$
62,739

 
$
16,923

Competition
We are an established leader in the mercury control market for coal-fired electric power generators. We believe we add significant value to our base offerings by having complementary products and services. Our expertise and experience in conducting full-scale emissions control demonstrations reflect our understanding of the application of the control technologies that customers find valuable. Our ability to provide users with performance guarantees on our equipment, along with comprehensive testing services and overall compliance strategies, enhances our competitive position in this market. In the EC equipment market, we believe Norit Americas, Inc., a division of Cabot Corporation, United Conveyor Corporation, Nol-Tec Systems, Inc. and Clyde Bergemann, Inc. are our principal ACI market competitors and that Nol-Tec Systems, Inc., United Conveyor Corporation and Clyde Bergemann, Inc. are our principal DSI market competitors. Competition for ACI and DSI systems is based primarily on price, quality, performance, terms of performance guarantees and the ability to meet the requested delivery and installation schedule. In the EC chemicals market, our mercury control chemicals primarily compete against the use of brominated activated carbon, as well as the use of bromine applied to the coal prior to combustion. Our primary competitors for our coal additives are Nalco and ME2C. As it relates to brominated activated carbon providers, our competitors include ADA Carbon Solutions, Norit Americas, and Calgon Carbon. Because of a number of market and technology dynamics, there is not a definitive connection between the sale of mercury control systems and the ultimate supply of mercury control chemicals. Thus when we are successful with a contract for the ACI equipment, it does not guarantee that we will also sell that customer M-ProveTM coal additives, and when a customer buys a competitors’ ACI system it does not mean that that customer is not a viable candidate for our chemicals.
In the RC market, we believe Chem-Mod, LLC and licensees of the Chem-Mod technology are our principal competitors. Competition within the RC market is based primarily on price, the number of tons of coal burned at the coal-fired power plant where the RC facilities are operating and the tax compliance facts associated with each RC facility. Additionally, competition for tax equity investors extends into other investment opportunities, including opportunities related to potential tax incentive transactions available to potential investors.

9

Patents
As of December 31, 2016, we held 35 U.S. patents that were issued or allowed, 16 additional U.S. Provisionals or applications that were pending, and 10 international patent applications that were either pending or filed relating to different aspects of our technology. Our existing patents generally have terms of 15 to 20 years, measured from the application date, the earliest of which was in 1997. We consider many of our patents or pending patents to be critical to the ongoing conduct of our business.
Our Vendors and Supply of Materials
We purchase our materials, including equipment, fabricated modules and steel, from a variety of vendors for engineered ACI and DSI systems, components and other equipment we provide. Such equipment is available from numerous sources; however, based on the system requested by the customer, we may determine that some sources are not suitable. We typically subcontract the major portion of the work associated with installation of such equipment to a variety of vendors, who are usually located near the work site.
We purchase our proprietary chemicals through negotiated blending contracts that include confidentiality agreements with chemical suppliers. These arrangements attempt to assure continuous supply of our proprietary chemical blends. The chemicals used in our proprietary chemical products are readily available, and there are several chemical suppliers that can provide us with our requirements. Supply agreements are generally renewed on an annual basis.
Seasonality of Activities
The sale of our chemical products and RC facility operation levels depend on the operations of the electric power generators to which the applicable chemicals are provided and the location of the RC facilities, respectively. Electric power generators routinely schedule maintenance outages in the spring and/or fall depending upon the operation of the boilers. During the period in which an outage may occur, which may range from one week to over a month, no chemicals are used or RC produced and sold, and our revenues can be correspondingly reduced. Additionally, power generation is weather dependent, with electricity and steam production varying in response to heating and cooling needs.
Dependence on Major Customers
We depend on our customer relationships with owners and operators of coal-fired power generation facilities as well as general market demand for coal-fueled power generation. Our internal sales staff and external sales representative network market our technology through trade shows, mailings and direct contact with potential customers.
Through our investment in Tinuum Group, we depend on our relationships with owners and operators of coal-fired power generation facilities, including various electric utilities and tax equity investors. Tinuum Group is the exclusive licensee for purposes of producing RC using the CyCleanTM and M-45 License technologies. Tinuum Group depends on tax equity investors, with significant concentration within affiliates of Goldman Sachs ("GS"). These investors could renegotiate or terminate their leases, or the utilities where the RC facilities are installed could materially reduce their use of RC. See Risk Factors -- Customers may cancel or delay projects and our backlog may not be indicative of our future revenues.
Additional information related to major customers is disclosed in Note 18 of the Consolidated Financial Statements included in Item 8 of this Report.
Research and Development Activities
In 2016, we focused on assisting our customers in successfully implementing their MATS strategies and conducted limited research and development activities. Certain research and development related to CO2 capture was funded, in part, under contracts and/or cost reimbursement arrangements with the U.S. Department of Energy ("DOE") and other third parties. Our research and development expense, net of DOE and industry cost-share partners' reimbursements, for the years ended December 31, 2016, 2015 and 2014 was $(0.6) million, $5.4 million and $1.5 million, respectively. Excluding cost-share reimbursements, we incurred research and development expenses of $0.2 million, $6.7 million and $3.6 million on our own behalf for research and development activities related to further development of our technologies for the years ended December 31, 2016, 2015 and 2014, respectively. We engage in these activities in order to continue to develop technologies to bring to the broader EC market and to expand our own offerings into other areas. However, we expect future research and development activities will not be significant as the Company aligns the business with its current strategic objectives.

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Refined Coal Data
The following table provides summary information related to the Company's investment in Tinuum Group and the related RC facilities as of December 31, 2016 and tons of RC produced and sold for the year ended December 31, 2016:
 
 
 
 
 
 
Operating
 
 
# of RC Facilities
 
Not Operating
 
Invested
 
Retained
RC Facilities
 
28

 
15

 
13

 
—

RC tons produced and sold (000's)
 
 
 
 
 
41,628

 
890

Additional information related to RC facilities is included in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Item 7") of this Report.
Backlog
Backlog represents the dollar amount of revenues we expect to recognize in the future from fixed-price contracts, primarily for ACI and DSI systems as well as certain fixed-price consulting service contracts that have been executed, but work has not commenced, and those that are currently in progress. A project is included within backlog when a contract is executed. Backlog amounts include anticipated revenues associated with the original contract amounts, executed change orders, and any claims that may be outstanding with customers. It does not include contracts that are in the bidding stage or have not been awarded. As a result, we believe the backlog figures are firm, subject to customer modifications, alterations or cancellation provisions contained in the various contracts.
Backlog may not be indicative of future operating results. Estimates of profitability could increase or decrease based on changes in direct materials, labor and subcontractor costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs, and any claims with customers. Backlog is not a measure defined by accounting principles generally accepted in the United States ("U.S. GAAP") and is not a measure of profitability. Our method for calculating backlog may not be comparable to methodologies used by other companies.
(in thousands)
 
 
Backlog as of December 31, 2015
 
$
92,642

New contracts
 
7,864

Change order and claims to existing contracts, net
 
(3,970
)
Revenues recognized
 
(47,068
)
Backlog as of December 31, 2016
 
$
49,468

Operating Locations
During the year ended December 31, 2016, we had domestic operations located in Colorado. During 2015, we had domestic and international operations, in which the domestic operations were located in Colorado and Pennsylvania. The Pennsylvania location, used as a manufacturing facility, was closed at the end of 2015, with certain wind-down activities remaining through early 2016. The international operations were not material to our total revenues or long-lived assets and were closed at the end of 2015. Tinuum Group and the related operating entity, Tinuum Services, have operations within 12 states across the United States.
Employees
As of December 31, 2016 we employed 25 full-time and part-time personnel, including four ADES executives; all employees were employed at our offices in Colorado.

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Available Information
Our periodic and current reports are filed with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are available free of charge within 24 hours after they are filed with, or furnished to, the SEC at the Company’s website at www.advancedemissionssolutions.com. The filings are also available through the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800- SEC-0330. Alternatively, these reports can be accessed at the SEC’s website at www.sec.gov. The information contained on our web site shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act.
Copies of Corporate Governance Documents
The following Company corporate governance documents are available free of charge at our website at www.advancedemissionssolutions.com and such information is available in print to any stockholder who requests it by contacting the Secretary of the Company at 640 Plaza Drive, Suite 270, Highlands Ranch CO, 80129.
•
Certificate of Incorporation
•
Bylaws
•
Code of Ethics and Business Conduct
•
Insider Trading Policy
•
Whistleblower Protection Policy
•
Board of Directors Responsibilities
•
Audit Committee Charter
•
Compensation Committee Charter
•
Nominating and Governance Committee Charter
Forward-Looking Statements Found in this Report
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. In particular such forward-looking statements are found in this Part I and under the heading in Part II, Item 7 below. Words or phrases such as "anticipates," "believes," "expects," "intends," "plans," "estimates," "predicts," the negative expressions of such words, or similar expressions are used in this Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding:

(a)
the scope and impact of mercury and other regulations or pollution control requirements, including the impact of the final MATS;
(b)
the production and sale of RC by the RC facilities will qualify for Section 45 tax credits;
(c)
expected growth or contraction in and potential size of our target markets;
(d)
expected supply and demand for our products and services;
(e)
increasing competition in the emission control market;
(f)
our ability to satisfy warranty and performance guarantee provisions;
(g)
expected dissolution and winding down of certain of our wholly-owned subsidiaries;
(h)
future level of research and development activities;
(i)
the effectiveness of our technologies and the benefits they provide;
(j)
Tinuum Group’s ability to profitably sell and/or lease additional RC facilities and/or RC facilities that may be returned to Tinuum Group, or recognize the tax benefits from production and sale of RC on retained RC facilities;
(k)
probability of any loss occurring with respect to certain guarantees made by Tinuum Group ("Party Guarantees");
(l)
the timing of awards of, and work and related testing under, our contracts and agreements and their value;
(m)
the timing and amounts of or changes in future revenues, royalties earned, backlog, funding for our business and projects, margins, expenses, earnings, tax rate, cash flow, royalty payment obligations, working capital, liquidity and other financial and accounting measures;
(n)
the outcome of current and pending legal proceedings;
(o)
awards of patents designed to protect our proprietary technologies both in the U.S. and other countries;
(p)
the materiality of any future adjustments to previously recorded reimbursements as a result of the DOE audits and the amount of contributions from the DOE and others towards planned project construction and demonstrations; and
(q)
whether any legal challenges or EPA actions will have a material impact on the implementation of the MATS or other regulations and on our ongoing business.

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Our expectations are based on certain assumptions, including without limitation, that:

(a)
coal will continue to be a major source of fuel for electrical generation in the United States;
(b)
the IRS will allow the production and sale of RC to qualify for Section 45 tax credits;
(c)
we will continue as a key supplier of equipment, chemicals and services to the coal-fired power generation industry as it seeks to implement reduction of mercury emissions;
(d)
current environmental laws and regulations requiring reduction of mercury from coal-fired boiler flue gases will not be materially weakened or repealed by courts or legislation in the future;
(e)
we will be able to meet any performance guarantees we make and continue to meet our other obligations under contracts;
(f)
we will be able to obtain adequate capital and personnel resources to meet our operating needs and to fund anticipated growth and our indemnity obligations;
(g)
we will be able to establish and retain key business relationships with other companies;
(h)
orders we anticipate receiving will be received;
(i)
governmental audits of our costs incurred under DOE contracts will not result in material adjustments to amounts we have previously received under those contracts;
(j)
we will be able to formulate new chemicals and blends that will be useful to, and accepted by, the coal-fired boiler power generation business;
(k)
we will be able to effectively compete against others;
(l)
we will be able to meet any technical requirements of projects we undertake;
(m)
Tinuum Group will be able to sell or lease the remaining RC facilities, including RC facilities that may be returned to Tinuum Group, to third party investors; and
(n)
we will be able to utilize our portion of the Section 45 tax credits generated by production and sale of RC from retained facilities.

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

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Item 1A. Risk Factors
Risks relating to our business
The following risks relate to our business as of the date this Report is filed with the SEC, or any alternative date specified. This list of risks is not intended to be exhaustive, but reflects what we believe are the material risks inherent in our business and the ownership of our securities as of the specified dates. A statement to the effect that the occurrence of a specified event may have a negative impact on our business, results of operations, profitability, financial condition, or the like, is intended to reflect the fact that such an event would be likely to have a negative impact on your investment in the Company, but should not imply the likelihood of the occurrence of such specified event. The order in which the following risk factors are presented is not intended as an indication of the relative seriousness of any given risk.
Demand for our products and services depends significantly on environmental laws and regulations; uncertainty as to the future of such laws and regulations, as well as changes to such laws and regulations, or granting of extensions of compliance deadlines has had, and will likely continue to have, a material effect on our business.
A significant market driver for our existing products and services, and those planned in the future, are present and expected environmental laws and regulations, particularly those addressing the reduction of mercury and other emissions from coal-fired power plants. If such laws and regulations are delayed, or are not enacted or are repealed or amended to be less strict, or include prolonged phase-in periods, or not enforced, our business would be adversely affected by declining demand for such products and services. For example:

•
The implementation of environmental regulations regarding certain pollution control and permitting requirements has been delayed from time to time due to various lawsuits. The uncertainty created by litigation and reconsiderations of rule-making by the EPA has negatively impacted our business, results of operations and financial condition and will likely continue to do so.

•
To the extent federal, state, and local legislation mandating that electric power generating companies serving a state or region purchase a minimum amount of power from renewable energy sources such as wind, hydroelectric, solar and geothermal, and such amount lessens demand for electricity from coal-fired plants, the demand for our products and services would likely decrease.

Federal, state, and international laws or regulations addressing emissions from coal-fired facilities, climate change or other actions to limit emissions, including public opposition to new coal power plants, has caused and could continue to cause electricity generators to transition from coal to other fuel and power sources, such as natural gas, nuclear, wind, hydroelectric and solar. The potential financial impact on us of future laws or regulations or public pressure will depend upon the degree to which electricity generators diminish their reliance on coal as a fuel source. That, in turn, will depend on a number of factors, including the specific requirements imposed by any such laws or regulations, the periods over which those laws or regulations are or will be phased in, the amount of public opposition, and the state and cost of commercial development of related technologies and processes. In addition, Public Utility Commissions ("PUC's") may not allow utilities to charge consumers for, and pass on the cost of, emission control technologies without federal or state mandate. In view of the significant uncertainty surrounding each of these factors, we cannot reasonably predict the impact that any such laws or regulations or public opposition may have on our results of operations, financial condition or cash flows.
The ability of Tinuum Group to generate revenues from the sale or lease of RC facilities to tax equity investors is not assured, and the inability to sell, lease or operate RC facilities to produce and sell RC and generate Section 45 tax credits could adversely affect our future growth and profitability.
Except for RC facilities that Tinuum Group may retain and operate permanently for its own benefit, Tinuum Group is attempting to sell or lease the remaining RC facilities to investors. The inability of Tinuum Group to successfully lease or sell additional RC facilities to third party tax equity investors who will receive the benefit of the Section 45 tax credits that are expected to be generated from those RC facilities, as well as RC facilities that may be returned to Tinuum Group over time, would likely have an adverse effect on our future growth and profitability.

Furthermore, if in the future electric power generators decide to limit coal-fired generation for economic reasons and/or do not burn and use RC and instead switch to another power or fuel source, Tinuum Group would likely be unable to fully produce the RC and the associated Section 45 tax credits potentially available from RC facilities over the anticipated term of the Section 45 tax credit program. In addition, pursuant to Tinuum Group’s operating agreement, if Tinuum Group is unable to generate enough revenue for cash distributions through the sale or lease of RC facilities over the next five years to return the

14

unrecovered investment balance to its Class B Member, GSFS Investments I Corp. ("GSFS"), an affiliate of GS, then GSFS may require Tinuum Group to redeem its interest in Tinuum Group for any deficit of such amount not distributed to GSFS. As of December 31, 2016, the unrecovered investment balance inclusive of the 15% annual return was $18.3 million, as shown in the Tinuum Group Consolidated Financial Statements, which are included in Item 15 Exhibits and Financial Statement Schedules ("Item 15") of this Report.
Market uncertainty created by the lack of guidance and rulings issued by courts and the IRS related to Section 45 tax credits could inhibit Tinuum Group's ability to lease or sell additional RC facilities or require a restructuring of, or result in the termination of, existing arrangements.
The availability of Section 45 tax credits, related to the production and sale of RC, to taxpayers investing in RC facilities depends upon a number of factors, including the risk assumed by the taxpayer in the RC facility investment transaction. The law addressing when a taxpayer may and may not be considered the producer and seller of RC and avail itself of Section 45 tax credits is not fully developed and is subject to rulings by courts, interpretations by the IRS and other official pronouncements on tax credit regulations. If rulings, guidance or other pronouncements of courts or the IRS are not definitive or interpreted as allowing the IRS to restrict availability, increase the difficulty, or prohibit or limit the ability of taxpayers to be considered to be the producer and seller of RC and take advantage of Section 45 tax credits, several aspects of our current and future RC business could be adversely impacted. For example, current investors in RC facilities may decide to terminate their existing agreements, or potential investors may reduce the price they are willing to pay or change the structure of the investment to account for perceived risks associated with being considered the producer and seller of RC and the availability of the associated Section 45 tax credits.
Technical or operational problems with long-term operation of our RC facilities could result in additional costs and delays that adversely affect our financial condition.
Our initial RC facilities were operated using CyClean™ technology at cyclone boilers. Tinuum Group began operating RC facilities using the M-45TM technology at circulating fluidized bed ("CFB") boilers in 2012 and pulverized coal ("PC") boilers in 2013. Given the different technology we use at different types of boilers, the likelihood for technical or operational problems may be increased. Any such problems could result in decreased production of RC at such facilities and/or delays in, or postponement or cancellation of, expected potential future installations and operations at electric power generators and would likely have a material adverse effect on our business, financial condition and results of operations.
Present reliance upon one investor for a substantial portion of our earnings from Tinuum Group and any renegotiation by or loss of this investor or any failure to continue to produce and sell RC at the investor’s RC facilities would have a material adverse effect on our business.
As of December 31, 2016, 10 of Tinuum Group’s 28 RC facilities are leased to entities affiliated to GS. Significant components of our total cash flows come from Tinuum Group's distributions relating to payments received under these leases. These leases have an initial fixed period and then automatically renew, unless terminated at the option of the lessee, for successive one-year terms through 2019 or 2021. If these GS related entities renegotiated or terminated their leases, or if the utilities where the RC facilities are installed materially reduce their use of RC, these events would have a material adverse effect on our business, results of operations or financial condition. Certain GS related entities amended their leases during 2016, with some of the amended leases including less favorable terms to Tinuum Group.
Reduction of coal consumption by U.S. electric power generators could result in less demand for our products and services. If utilities significantly reduce the number of coal fired power plants or the amount of coal burned, without a corresponding increase in the services required at the remaining plants, this could reduce our revenues and materially and adversely affect our business, financial condition, and results of operations.
The amount of coal consumed for U.S. electric power generation is affected by, among other things, (1) the location, availability, quality and price of alternative energy sources for power generation, such as natural gas, fuel oil, nuclear, hydroelectric, wind, biomass and solar power; and (2) technological developments, including those related to competing alternative energy sources.
Natural gas-fueled generation has been displacing and may continue to displace coal-fueled generation, particularly from older, less efficient coal-powered generators. We expect that many of the new power plants needed to meet increasing demand for electricity generation will be fueled by natural gas because the price of natural gas has remained at relatively low levels after a period of sharp decline. Gas-fired plants are cheaper to construct, and permits to construct these plants are easier to obtain, as natural gas is seen as having a lower environmental impact than coal-fueled generators, and ongoing costs associated with

15

meeting environmental compliance are lower. Possible advances in technologies and incentives, such as tax credits, to enhance the economics of renewable energy sources could make those sources more competitive with coal. Several large U.S.-based banks have publicly indicated they will no longer finance new coal-fired power plants in the U.S., and at least five large coal companies have filed bankruptcy in recent years. Any reduction in the amount of coal consumed by domestic electric power generators could reduce the demand for our current products and services, thereby reducing our revenues and materially and adversely affecting our business and results of operations.
Additionally, long-term changes in environmental regulation that threaten or preclude the use of coal or other fossil fuels as a primary fuel source for electricity production, and result in the reduction or closure of a significant number of coal-fired power plants, may adversely affect our business, financial condition and results of operations.
Changes in taxation rules or financial accounting standards could adversely affect our results of operations or financial condition.
Changes in taxation rules and accounting pronouncements (and changes in interpretations of accounting pronouncements) have occurred and may occur in the future. A change in existing taxation rules, particularly those related to Section 45 tax credits or the ability of taxpayers to benefit from tax credits or net operating loss carryforwards, could have an adverse effect on our reported or future results of operations or financial condition and could also impact our businesses that produce and sell RC and generate Section 45 tax credits.
Additionally, changes in future tax rates may occur in the future. A change to existing tax rates could negatively impact tax capacity of current or potential tax equity investors. Additionally, a change to existing tax rates may cause a change related to our current estimate of the amount of deferred tax assets that we may be able to utilize in future periods.
Our dependence on third parties for manufacturing key components of our systems may cause delays in deliveries, increased warranty claims and increased costs to us.
Between 2012 and 2015, we owned and controlled a manufacturing and assembly facility for our DSI systems. At the end of 2015, manufacturing and assembly operations at that facility were shut down. Like most of our competitors, we currently rely heavily upon third parties for the manufacture, assembly and some of the testing of key components for both our ACI and DSI systems. Delays or difficulties in the manufacturing, assembly, or delivery of key components of our ACI and DSI systems could harm our business and financial condition.
There are limited sources of acceptable supply for some key ACI and DSI system components. Business disruptions, financial difficulties of suppliers or raw material shortages could increase the costs of our equipment systems sold or reduce the availability of these components. If we are unable to obtain a sufficient supply of required components that meet customer specifications in a timely manner, we could experience significant delays in delivery or increased warranty claims, associated with delivery and product performance. Disruptions of these types could result in the loss of orders or customers or liability for liquidated damages, which could materially and adversely affect our business, financial condition and results of operations.
If the quality and effectiveness of our technologies, products and services do not meet our customers’ expectations, then our sales, results of operations and ultimately our reputation could be negatively impacted.
If flaws in the design, production, assembly, delivery, installation, performance or providing of our technologies, products or services (caused by us or our suppliers) were to occur, we could experience substantial liquidated damages, repair, replacement or service costs and potential damage to our reputation. We have provided warranties and performance guarantees for certain ACI and DSI systems we have sold. Under those contractual arrangements, we are responsible for repair or replacement costs and certain operating costs, within the limits provided by the contracts, if the agreed specifications are not met. Continued improvement in manufacturing capability assessment and quality control, technological development, supply-chain management, product testing, installation, delivery and other costs are critical factors in our future growth and meeting our customers’ expectations. Our efforts to monitor, develop, modify and implement appropriate technologies, designs and processes for the manufacture, production, installation and testing of our products may not be sufficient to avoid failures and meet performance criteria that may result in dissatisfied customers, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition.

16

Our businesses that are joint ventures are managed under operating agreements where we do not have sole control of the decision making process, and we cannot mandate decisions or ensure outcomes.
We oversee our joint ventures under the terms of their operating agreements by participating in the following activities: (1) representation on the respective governing boards of directors, (2) regular oversight of financial and operational performance and controls and establishing audit and reporting requirements, (3) hiring of management personnel, (4) technical support of RC facilities, and (5) other regular and routine involvement with our joint venture partners. Notwithstanding this regular participation and oversight, our joint venture partners also participate in the management of these businesses and they may have business or economic interests that divert their attention from the joint venture, or they may prefer to operate the business, make decisions or invest resources in a manner that is contrary to our preferences. Since material business decisions must be made jointly with our joint venture partners, we cannot mandate decisions or ensure outcomes.
Failure to protect our intellectual property or infringement of our intellectual property by a third party could have an adverse impact on our financial condition.
We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Such means of protecting our proprietary rights may not be adequate because they provide only limited protection. We also enter into confidentiality and non-disclosure agreements with our employees, consultants, many of our customers and many of our vendors, and generally control access to and distribution of our proprietary information. Notwithstanding these measures, a third party could copy or otherwise obtain and use our proprietary information without authorization. We cannot assure you that the steps taken by us will prevent misappropriation of our technology and intellectual property, which could result in injury to our business and financial condition. In addition, such actions by third parties would divert the attention of our management from the operation of our business.
We may be subject to intellectual property infringement claims from third parties that are costly to defend and that may limit our ability to use the disputed technologies.
Companies in the business of developing technology face the risk of being subject to intellectual property infringement claims that are costly to defend. As a company involved in developing and commercializing new technologies, we may be subject to intellectual property infringement claims from third parties, the defense of which would likely be costly in terms of monetary expenses and management demands. If our technologies infringe the intellectual property rights of others, we may be prevented from continuing sales of existing products or services and from pursuing research, development or commercialization of new or complimentary products or services. Further, we may be required to obtain licenses to third party intellectual property, or be forced to develop or obtain alternative technologies. Our failure to obtain a license to a technology that we may require, or to develop or obtain alternative technologies, could significantly and negatively affect our business.
Agreements to indemnify third party licensees of our technologies against intellectual property infringement claims concerning our licensed technology and our products could be significant to us.
We have agreed to indemnify licensees of our technologies (including Tinuum Group and Arch Coal, Inc.) and purchasers of our products and we may enter into additional agreements with others under which we agree to indemnify and hold the third party harmless from and against losses it may incur as a result of the infringement of third party rights caused by the use of our technologies and products. Infringement claims, which are expensive and time-consuming to defend, could have a material adverse effect on our business, operating results and financial condition, even if we are successful in defending ourselves (and indemnified parties) against them.
Our future success depends in part on our ongoing identification and development of intellectual property and our ability to invest in and deploy new products, services and technologies into the marketplace efficiently and cost effectively.
The process of identifying customer needs and developing and enhancing products, services and solutions for our business segments is complex, costly and uncertain. Any failure by us to identify and anticipate changing needs, emerging trends and new regulations could significantly harm our future market share and results of operations. Historically, our approach to technology development, implementation and commercialization of products has focused on quickly taking technology to full-scale testing and enhancing it under actual power plant operating conditions. We continue to review and adjust methods to deploy products, services and technologies to our customers. We may focus our resources on technologies, services or products that are not widely accepted or commercially viable, or on operational processes that are not profitable, even after significant up-front investment of our resources, such as occurred with the shut-down of ADA Analytics, LLC, ADA Analytics Israel Ltd. (collectively, "ADA Analytics") and BCSI, LLC. Our results are subject to risks related to our investments in new technologies,

17

but if we are unable to develop and scale up new technologies, products, and services to meet the needs of our customers, our financial results would be adversely affected.
The effects of providing warranties and performance guarantees for our equipment and chemical sales or Tinuum Group providing payment and performance guarantees of its RC facilities are largely unknown and could adversely affect our financial condition.
Providing warranties on equipment and chemicals that generally do not extend beyond 12 months from the installation date and delivery date, respectively, have been and will likely continue to be an integral part of successful sales of our products and services. Providing certain performance guarantees during a discrete performance testing period that generally do not extend beyond six months from the initial test date have been and will likely continue to be an integral part of successful sales of our products and services. Guarantees with respect to our ACI and DSI systems typically require the equipment to meet stated injection rates of a specified or approved absorbent or alkali material. In some cases, guarantees might require that emissions of certain pollutants (such as mercury) be reduced by a specified amount if certain operating parameters of the generating facility, including the nature of the coal burned, are met. Such guarantees sometimes require us to spend amounts up to the value of the sales contract to “make right” the performance of the ACI or DSI system, or subject us to liquidated damages if the guaranteed level of performance is not achieved. In 2014, 2015 and 2016 under certain contracts, we provided customers with more stringent performance guarantees and higher cost related remedies. Although we believe compliance with these more stringent guarantees is probable, these stronger guarantees and customer remedies place us at greater risk and may also require us to delay revenue recognition on such contracts. In addition to performance guarantees on ACI and DSI systems we sell, Tinuum Group indemnifies certain utilities and lessees of RC facilities for particular risks associated with the operations of those facilities. We have provided limited, joint and several guarantees of Tinuum Group’s obligations under those leases. Any substantial payments made under such guarantees could have a material adverse effect on our financial condition, results of operations and cash flows.
Material adjustments pursuant to DOE audits of our past performance could have a detrimental impact on our business.
Certain of our completed and current contracts awarded by the DOE and related industry participants remain subject to government audits. Our historical experience with these audits has not resulted in significant adverse adjustments to reimbursement amounts previously received; however audits for the years 2010 and later have not been finalized. If the results of future audits require us to repay material amounts, our results of operations and business would likely suffer material adverse impacts.
Information technology vulnerabilities and cyberattacks on our networks could have a material adverse impact on our business.
We rely upon information technology ("IT") to manage and conduct business, both internally and with our customers, suppliers and other third parties. Internet transactions involve the transmission and storage of data including, in certain instances, customer and supplier business information. Therefore, maintaining the security of computers and other electronic devices, computer networks and data storage resources is a critical issue for us and our customers and suppliers because security breaches could result in reduced or lost ability to carry on our business and loss of and/or unauthorized access to confidential information. We have limited personnel and other resources to address information technology reliability and security of our computer networks and to respond to known security incidents to minimize potential adverse impact. Experienced hackers, cybercriminals and perpetrators of threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our information and networks or otherwise exploit any security vulnerabilities of our information and networks. Techniques used to obtain unauthorized access to or sabotage systems change frequently and often are not recognized until long after being launched against a target, and we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our IT systems and security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could materially adversely impact our business and results of operations and expose us to customer, supplier and other third party liabilities.
We have made and may make future acquisitions or form partnerships and joint ventures that may involve numerous risks that could impact our financial condition, results of operations and cash flows.
Our strategy may include expanding our scope of products and services organically or through selective acquisitions, investments or creating partnerships and joint ventures. We have acquired, and may selectively acquire, other businesses,

18

product or service lines, assets or technologies that are complementary to our business. We may be unable to find or consummate future acquisitions at acceptable prices and terms, or we may be unable to integrate existing or future acquisitions effectively and efficiently and may need to divest those acquisitions as we did with our acquired operations in ADA Analytics and BCSI, LLC. We continually evaluate potential acquisition opportunities in the ordinary course of business. Acquisitions involve numerous risks, including among others:
•
integration difficulties, including challenges and costs associated with implementing systems and processes to comply with requirements of being part of a publicly-traded company;
•
diverting management’s attention from normal daily operations of the business;
•
entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
•
unanticipated costs and exposure to undisclosed or unforeseen liabilities or operating challenges;
•
potential loss of key employees and customers of the acquired businesses, product or service lines, assets or technologies;
•
our ability to properly establish and maintain effective internal controls over an acquired company; and
•
increasing demands on our operational and IT systems.
Although we have conducted what we believe to be a prudent level of investigation regarding the operating and financial condition of acquisitions we have made, an unavoidable level of risk remains regarding their actual operating results and financial condition. Until we assume operating control of these acquisitions, we may not be able to ascertain their actual value, costs or exposures to liabilities. This is particularly true with respect to acquisitions outside the U.S.
In addition, acquisitions of businesses may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. Our loan agreements contain certain covenants that limit, or that may have the effect of limiting, among other things acquisitions, capital expenditures, the sale of assets and the incurrence of additional indebtedness.
Customers may cancel or delay projects and our backlog may not be indicative of our future revenues.
Customers may cancel or delay projects for reasons beyond our control. Our equipment and chemical orders normally contain cancellation provisions that permit us to recover our costs incurred through termination. If a customer cancels an order, we have to recognize our costs and revenues immediately, and may not achieve the full amount of our backlog. If projects are delayed, the timing to recognize our revenues, particularly when using the completed contract method of accounting, will be adversely impacted and projects may remain in our backlog for extended periods of time. Revenue recognition may occur over extended periods of time and is subject to unanticipated delays and quarterly fluctuations, which may also impact quarterly backlog. As a result, our backlog may not be indicative of our future revenues.

We may be unable to renew our bank line of credit agreement upon maturity.

Our bank line of credit ("Line of Credit") agreement matures on September 30, 2017 and it is primarily used to support current and future letters of credit that are not supported by cash collateral. If we are unable to extend the Line of Credit, we may have to utilize existing cash resources to support letters of credit.

Inability to prepare and timely file periodic reports under the Exchange Act limits our access to the public markets to raise debt or equity capital and could result in increased transaction costs.

We are required to comply with Section 13 of the Exchange Act. For the period beginning December 31, 2013 through September 30, 2015, we did not file current Annual Reports on Form 10-K or Quarterly Reports on Form10-Q. Because we did not remain current in our reporting requirements under the Exchange Act, we have been, and continue to be, limited in our ability to access the public markets to raise debt or equity capital. Our limited ability to access the public markets could prevent us from implementing business strategies that we may otherwise believe are beneficial to our business. Until one year after the date, April 19, 2016, we maintain compliance with the filing requirements of the Exchange Act, we will be ineligible to use shorter and less costly filings, such as Form S­-3 under the Securities Act, to register our securities for sale. We may use Form S-1 under the Securities Act to register a sale of our stock to raise capital, but doing so would likely increase transaction costs and adversely affect our ability to raise capital in a timely manner.

19

Risks relating to our common stock
Our stock price may continue to be volatile.
The market price of our common stock fluctuates significantly. The market price of our common stock may continue to be affected by numerous factors, including:

•
actual or anticipated fluctuations in our operating results and financial condition;
•
changes in laws or regulations and court rulings and trends in our industry;
•
Tinuum Group’s ability to lease or sell RC facilities;
•
announcements of sales awards;
•
changes in supply and demand of components and materials;
•
adoption of new tax regulations or accounting standards affecting our industry;
•
changes in financial estimates by securities analysts;
•
perceptions of the value of corporate transactions; and
•
the degree of trading liquidity in our common stock and general market conditions.
From December 31, 2013 to December 31, 2016, the closing price of our common stock ranged from $3.27 to $27.90 per share (retroactively restated to reflect the two-for-one stock split of our common stock, which was effected in the form of a common stock dividend distributed on March 14, 2014). Significant declines in the price of our common stock could impede our ability to obtain additional capital and attract and retain qualified employees, and could reduce the liquidity of our common stock.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of similarly staged companies. These broad market fluctuations may adversely affect the market price of our common stock.
Our certificate of incorporation and bylaws contain provisions that may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions that:

•
limit the business at special meetings to the purpose stated in the notice of the meeting;
•
authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that our Board of Directors (the "Board") can create and issue without prior stockholder approval;
•
establish advance notice requirements for submitting nominations for election to the Board and for proposing matters that can be acted upon by stockholders at a meeting; and
•
require the affirmative vote of the "disinterested" holders of a majority of our common stock to approve certain business combinations involving an "interested stockholder" or its affiliates, unless either minimum price criteria or procedural requirements are met, or the transaction is approved by a majority of our "continuing directors" (known as "fair price provisions").
These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock, or could limit the ability of our stockholders to approve transactions that they may deem to be in their best interest.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Office and Warehouse Leases
As of December 31, 2016, we leased office, warehouse and laboratory space in Highlands Ranch, Colorado for a total of approximately 52,869 square feet under three leases. Original lease terms ranged from four to seven years. Certain of these leases have options permitting renewals for additional periods.

20

Our lease of approximately 37,102 square feet of office space in Highlands Ranch, Colorado was entered into in 2012 with an initial term ending in February 2019. In December 2016, we terminated the lease effective February 2017 and paid a termination fee of $0.3 million. In December 2016, the Company entered into a new office lease for approximately 8,208 square feet of office space in Highlands Ranch, Colorado. This lease is effective February 2017 and runs through May 2020.
Our lease of approximately 7,559 square feet of warehouse space in Highlands Ranch, Colorado was entered into in 2012 and expires in February 2019 with the option to renew for two additional five-year periods.

See Note 14 to our 2016 Consolidated Financial Statements included in Item 8 of this Report for information with respect to our lease commitments as of December 31, 2016.

Item 3. Legal Proceedings

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 was filed in May 2014 in the federal court in Denver, Colorado alleging that ADES and other 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. In May 2016, the parties reached an agreement in principle to settle this litigation, and on June 30, 2016, the parties entered into a Stipulation and Agreement of Settlement to resolve the action in its entirety. On February 10, 2017, we received an order and final judgment that the lawsuit was settled, and the entire case has been dismissed with prejudice.

The settlement agreement for this case contains no admission of liability, and all of the defendants in this litigation have expressly denied, and continue to deny, all allegations of wrongdoing or improper conduct. The Company’s insurance carriers funded the full settlement in November 2016. However, until an order and final judgment of the lawsuit having been settled was received, the funded settlement did not relieve the Company's recorded liability.

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

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 against certain of the Company’s current and former officers and directors, along with the Company as a "nominal defendant." In May 2016, the parties reached an agreement in principle to settle this stockholder derivative action, and on September 30, 2016, the parties entered into a Stipulation and Agreement of Settlement to resolve the action in its entirety. The Stockholder Derivative Settlement was approved and the case was closed on January 4, 2017.

The settlement agreement for this case contained no admission of liability, and all of the defendants in this stockholder derivative action have expressly denied, and continue to deny, all allegations of wrongdoing or improper conduct. The Company’s insurance carriers funded the full settlement in January 2017.

SEC Inquiry

On April 7, 2014, the SEC Staff informed the Company that it had initiated the SEC Inquiry to determine if violations of the federal securities laws had occurred, 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. This penalty will not be funded by the Company’s insurance carriers. The SEC must approve the SEC Staff recommendation and any final settlement or relief.

Item 4. Mine Safety Disclosures
Not applicable.

21



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock
As of December 31, 2016, our common stock was quoted on the NASDAQ Global Market under the symbol "ADES." The table below sets forth the price range of our common stock for each quarter of 2016 and 2015: 
 
 
2016
 
2015
 
 
High
 
Low
 
High
 
Low
1st Quarter
 
$
8.18

 
$
3.27

 
$
21.86

 
$
9.40

2nd Quarter
 
$
8.19

 
$
6.20

 
$
17.00

 
$
12.20

3rd Quarter
 
$
8.60

 
$
6.40

 
$
13.00

 
$
6.30

4th Quarter
 
$
9.89

 
$
7.53

 
$
7.14

 
$
3.70

For the period from January 1 through February 2, 2015, our common stock traded on the NASDAQ Capital Market under the symbol ADES. For the period beginning February 3, 2015 through July 6, 2016, our common stock traded on the OTC Pink® Marketplace - Limited Information Tier ("OTC") under the symbol ADES as a result of NASDAQ suspending trading on February 2, 2015 due to our non-compliance with filing requirement under the Exchange Act.

For the period noted above for which our stock traded on the OTC market, the OTC quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions. Such quotes were not necessarily representative of actual transactions or the value of our common stock.

The trading volume for our common stock is relatively limited. There is no assurance that an active trading market will provide adequate liquidity for our existing stockholders or for persons who may acquire our common stock in the future.
Performance Graph
The following performance graph illustrates a five-year comparison of cumulative total return of our common stock, the Russell 3000 Index and a select industry peer group ("Peer Group") for the period beginning on December 31, 2011 and ending on December 31, 2016. The graph assumes an investment of $100 on December 31, 2011 and assumes the reinvestment of all dividends.

The performance graph is not intended to be indicative of future performance. The performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of the Company’s filings under the Securities Act or the Exchange Act.



22

Five Year Cumulative Total Shareholder Return Comparison
Advanced Emissions Solutions Return Relative to the Russell 3000 Index and Select Industry Peer Group

ades-201612_chartx20723.jpg
The select industry Peer group includes the following: American Vanguard Corp., Calgon Carbon Corporation, CECO Environmental Corp., Clean Energy Fuels Corp., EnerNOC, Inc., FutureFuel Corp., Fuel-Tech, Inc., Hawkins Inc., Headwaters Incorporated, KMG Chemicals Inc., Lydall Inc., Flotek Industries, Inc., Rentech, Inc. and TerraVia Holdings, Inc.
Holders
The number of holders of record of our common stock as of March 8, 2017 was approximately 1,006. The approximate number of beneficial stockholders is estimated at 2,260.
Dividends
We have not paid cash dividends since inception. In addition, the Energy Capital Partners I, LP and its affiliated funds ("ECP") Settlement Agreement signed in November 2011 restricts our ability to pay dividends without concurrently increasing our letters of credit in an amount equal to 50% of the fair market value of the dividend. However, the maximum total letter of credit related to dividends or earnings, as described in Note 14 of the Consolidated Financial Statements included in Item 8 of this Report, is $7.5 million. Should we pay dividends, the payment of such dividends will be dependent upon earnings, financial condition and other factors considered relevant by the Board and will be subject to limitations imposed under Delaware law.

23

Securities Authorized for Issuance under Equity Compensation Plans
We have equity plans under which options and shares of our common stock are authorized for grant or issuance as compensation to eligible employees, consultants, and members of the Board. Our stockholders have approved these plans. See Note 13 Stock-Based Compensation included in Item 8 of this Report for further information about the material terms of our equity compensation plans. The following table is a summary of the shares of our common stock authorized for issuance under the equity compensation plans as of December 31, 2016:
Plan Category
 
Number of securities issued
 
Weighted-Average Exercise Price of Outstanding Options
 
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
 
1,508,758

 
$
11.61

 
891,242

Equity compensation plans not approved by security holders
 
—

 
$
—

 
—

Total
 
1,508,758

 
 
 
891,242

Purchases of Equity Securities by the Company and Affiliated Purchasers
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the three months ended December 31, 2016.


24

Item 6. Selected Financial Data
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

The following selected financial data are derived from the audited Consolidated Financial Statements for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 and should be read in conjunction with Item 1A, Item 7 and our Consolidated Financial Statements and the related notes included in Item 8 of this Report. 
 
 
Years Ended December 31,
(in thousands)
 
2016
 
2015
 
2014
 
2013
 
2012
Statement of operations data:
 
(4) (5) (6) 
 
(3) (5) 
 
(3) (5) 
 
(3) 
 
(3) 
Revenues
 
$
50,622

 
$
62,739

 
$
16,923

 
$
13,286

 
$
16,316

Earnings from equity method investments
 
45,584

 
8,921

 
42,712

 
15,502

 
813

Royalties, related party
 
6,125

 
10,642

 
6,410

 
2,505

 
1,446

Income tax (benefit) expense
 
(60,938
)
 
20

 
296

 
463

 
14

Net income (loss)
 
97,678

 
(30,141
)
 
1,387

 
(15,987
)
 
(13,129
)
Net income (loss), per common share, basic (1) (2)
 
4.40

 
(1.37
)
 
0.06

 
(0.78
)
 
(0.65
)
Net income (loss), per common share, diluted
 
4.34

 
(1.37
)
 
0.06

 
(0.78
)
 
(0.65
)
 
 
As of December 31,
(in thousands)
 
2016
 
2015
 
2014
 
2013
 
2012
Balance sheet data:
 
(4) (5) (6) 
 
(3) (5) 
 
(3) (5) 
 
(3) 
 
(3) 
Total assets
 
$
107,296

 
$
60,775

 
$
93,699

 
$
73,524

 
$
28,885

Total debt
 
—

 
28,025

 
15,910

 
—

 
—

Stockholders’ equity (deficit)
 
76,165

 
(24,978
)
 
(697
)
 
(6,167
)
 
(21,456
)
(1) For the years ended December 31, 2013 and 2012, the number of common shares and per common share amounts have been retroactively restated to reflect the two-for-one stock split of our common stock, which was effected in the form of a common stock dividend distributed on March 14, 2014.
(2) For the years ended December 31, 2015, 2013 and 2012, the computation of diluted net loss per common share was the same as basic net loss per common share as the inclusion of outstanding options or unvested equity instruments for those years would have been anti-dilutive .
(3) On August 31, 2012, we acquired and consolidated the assets of two related private companies engaged in the DSI business. The fabrication facility related to this acquisition was shut down during the fourth quarter of 2015 as described in Note 2 of the Consolidated Financial Statements included in Item 8 of this Report.
(4) As described in Item 7 of this Report and Note 14 of our Consolidated Financial Statements included in Item 8 of the 2014 10-K, during 2011, we entered into settlement agreements with various third parties related to litigation regarding one of our equity method investments (the "Royalty Award"), whereby we paid a lump-sum payment totaling $33 million in the third quarter of 2011. In addition, we agreed to pay an additional $7.5 million over a three-year period with payments commencing in the second quarter of 2012, payable in three equal installments. We also relinquished our investment in the equity method entity and were also required to pay additional damages in the form of future royalty payments related to certain future revenues generated from the equity method investment through the second quarter of 2018.
(5) As described in Note 7 of the Consolidated Financial Statements included in Item 8 of this Report, on February 10, 2014, we purchased a 24.95% membership interest in RCM6, which owns a single RC facility that produces and sells RC that qualifies for Section 45 tax credits, from Tinuum Group through an up-front payment of $2.4 million and an initial note payable to Tinuum Group of $13.3 million. During the year ended December 31, 2016, the Company recognized equity method losses related to RCM6 of $0.6 million. On March 3, 2016, the Company sold its 24.95% membership interest in RCM6 for a cash payment of $1.8 million and assumption of the outstanding note payable made by the Company in connection with its purchase of RCM6 membership interests from Tinuum Group in February 2014.
(6) As described in Note 16 of the Consolidated Financial Statements included in Item 8 of this Report, during the fourth quarter of 2016, the Company released $61.4 million of the valuation allowance related to the deferred tax assets, which resulted in an income tax benefit during 2016 of $60.9 million.

The Notes to the Consolidated Financial Statements included in Item 8 of this Report contain additional information about charges resulting from other operating expenses and other income (expense) which affects the comparability of information presented.


25


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
This Form 10-K for the year ended December 31, 2016 is filed by Advanced Emissions Solutions, Inc. together with its consolidated subsidiaries (collectively, "ADES," the "Company," "we," "us," or "our" unless the context indicates otherwise).
We are a leader in emissions reductions technologies and associated specialty chemicals, primarily serving the coal-fueled power plant industry. Our proprietary environmental technologies and specialty chemicals enable power and coal-fired plants to enhance existing air pollution control equipment, minimize mercury, CO2 and other emissions, maximize capacity, and improve operating efficiencies, to meet the challenges of existing and pending emission control regulations. See further discussion of our business included in Item 1 of this Report. Discussion regarding segment information is included within the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and Note 17 of the Consolidated Financial Statements included in Item 8 of this Report.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated Statement of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.

Revenues and costs of revenue

Equipment sales
Equipment sales represent the sale of activated carbon injection ("ACI") systems to control mercury, dry sorbent injection ("DSI") systems to control SO2, SO3, and HCl and electrostatic precipitator ("ESP") liquid flue gas conditioning systems. Revenue from extended equipment contracts is recorded using the completed contract method of accounting.

We also enter into other non-extended equipment contracts for which we recognizes revenue on a time and material basis as services to build equipment systems are performed or as equipment is delivered.

Chemicals
We sell proprietary chemical blends to coal-fired utilities that allow the respective utilities to comply with the regulatory emissions standards.

Consulting services and other
We provide consulting services to assist electric power generators and others in planning and implementing strategies to meet the new and increasingly stringent government emission standards requiring reductions in SO2, NOx, particulates, acid gases and mercury. This includes demonstrations of our commercial products.

Other Operating Expenses

Payroll and benefits
Payroll and benefits costs include personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expenses.

Rent and occupancy
Rent and occupancy costs include rent, insurance, and other occupancy-related expenses.

Legal and professional fees
Legal and professional costs include external legal, audit and consulting expenses.

General and administrative
General and administrative costs include director fees and expenses, bad debt expense and other general costs of conducting business.


26

Research and development, net
Research and development expense consists of research relating to various projects including the CO2 capture and control market. Historically, we have entered into reimbursement contracts with the DOE related to certain of our research and development contracts. These contracts have been best-effort-basis contracts and we have included industry cost-share partners to offset the costs incurred that are anticipated to be in excess of funded amounts from the DOE. During 2016, we continued to receive DOE reimbursements related to prior years' executed contracts. We recognize amounts funded by the DOE and industry partners under research-and-development-cost-sharing arrangements as an offset to our aggregate research and development expenses within the Research and development, net line in the Consolidated Statements of Operations included in Item 8 of this Report.

Depreciation and amortization
Depreciation and amortization expense consists of depreciation expense related to property and equipment and the amortization of long lived intangibles.

Other Income (Expense), net

Earnings from equity method investments
Earnings from equity method investments relates to our share of earnings (losses) related to our equity method investments.
Our equity method earnings in Tinuum Group are positively impacted when Tinuum Group obtains an investor in an RC facility and receives lease payments from the lessee, or purchase payments from the sale, of the RC facility. If Tinuum Group operates a retained RC facility, the Company's equity method earnings will be negatively impacted as operating retained RC facilities generate operating losses. However, we benefit on an after-tax basis if we are able to utilize net operating losses and tax credits associated with the production and sale of RC from operation of retained RC facilities by Tinuum Group. These benefits, if utilized in future periods, will reduced the tax expense reported within the Income tax (benefit) expense line item in the Consolidated Statements of Operations included in Item 8 of this Report. In addition, our equity method earnings in Tinuum Group are negatively impacted due to an annual preferred return to which one of Tinuum Group's equity owners, GSFS, is entitled. Therefore, Tinuum Group's equity earnings available to its common members are equal to Tinuum Group's net income less the preferred return due to GSFS.
Through March 3, 2016, we owned a 24.95% equity interest in RCM6, which owns a single RC facility that is managed by Tinuum Group. The economics to us were consistent with an invested facility discussed above except that we were subject to funding our share of RCM6's operating costs during 2014 and 2015 and through March 3, 2016. Our purchase of RCM6 resulted in us recording a basis difference related to fixed assets and identifiable intangible assets, which resulted in a difference between our proportionate share of RCM6's net losses and our recorded equity losses related to additional depreciation and amortization expense recorded by us related to the basis difference.

Tinuum Services operates and maintains RC facilities under operating and maintenance agreements. Tinuum Group or the lessee/owner of the RC facilities pays Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus certain fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives necessary for the production of refined coal under chemical agency agreements. Tinuum Services is also the primary beneficiary of certain RC facilities that are variable interest entities ("VIE's) and therefore consolidates them. All net income (loss) associated with these consolidated VIE's is allocated to the noncontrolling equity holders of Tinuum Services and therefore does not impact our equity earnings (loss) from Tinuum Services.

Royalties, related party
We generate royalties under a licensing arrangement with Tinuum Group for our M-45TM and M-45-PCTM emission control technologies to Tinuum Group ("M-45 License"). Royalties are earned based upon (i) a percentage of the per-ton, pre-tax margin net of certain allocable operating expenses related to the lease or sale of an invested RC facility that produces and sells RC under the M-45 License, (ii) a percentage of the value of the Section 45 tax credits generated related to retained RC facilities, net of certain allocable operating expenses as a result of the production and sale of RC under the M-45 License, and (iii) a percentage of the revenue, net of all direct expenses, received by Tinuum Group as a direct result of Tinuum Group's exercise of the M-45 License.

Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items, including with respect to 2016 an adjustment to a litigation loss accrual and change in estimate related to royalty indemnity expense.


27

We record interest expense due to our share of Tinuum Group's equity method earnings for RC facility leases that are treated as installment sales for tax purposes. IRS Section 453A requires taxpayers using the installment method to pay an interest charge on the portion of the tax liability that was deferred under the installment method. We refer to this as "453A interest."

28

Results of Operations
For comparison purposes, the following tables set forth our results of operations for the periods presented in the Consolidated Financial Statements included in Item 8 of this Report. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years.

Year ended December 31, 2016 Compared to Year ended December 31, 2015

Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended December 31, 2016 and 2015 is as follows:
 
 
Years Ended December 31,
 
Change
(Amounts in thousands except percentages)
 
2016
 
2015
 
($)
 
(%)
Revenues:
 
 
 
 
 
 
 
 
Equipment sales
 
$
46,949

 
$
60,099

 
$
(13,150
)
 
(22
)%
Chemicals
 
3,025

 
888

 
2,137

 
241
 %
Consulting services and other
 
648

 
1,752

 
(1,104
)
 
(63
)%
Total revenues
 
50,622

 
62,739

 
(12,117
)
 
(19
)%
Operating expenses:
 
 
 
 
 
 
 
 
Equipment sales cost of revenue, exclusive of depreciation and amortization
 
37,741

 
45,433

 
(7,692
)
 
(17
)%
Chemicals cost of revenue, exclusive of depreciation and amortization
 
1,700

 
601

 
1,099

 
183
 %
Consulting services and other cost of revenue, exclusive of depreciation and amortization
 
376

 
1,518

 
(1,142
)
 
(75
)%

Equipment sales and Equipment sales cost of revenue
During the years ended December 31, 2016 and 2015, we entered into five and four long-term (6 months or longer) fixed price contracts to supply ACI systems with aggregate contract values including change orders of $2.9 million and $5.5 million, respectively. The total value per contract may change due to the relative sizes of ACI systems and the contracts related thereto. During the years ended December 31, 2016 and 2015, we completed 17 and 32 ACI systems, recognizing revenues of $26.9 million and $51.7 million and cost of revenue of $20.5 million and $38.4 million, respectively. We recognized $0.5 million and $0.1 million in loss provisions related to ACI systems contracts during the years ended December 31, 2016 and 2015, respectively.

During the years ended December 31, 2016 and 2015, we entered into zero and one long term (6 months or longer) fixed price contracts to supply DSI systems and other material handling equipment with contract values including associated change orders of $1.5 million and $2.4 million, respectively. Total value per contract may change due to the relative sizes of DSI systems and the contracts related thereto. During the years ended December 31, 2016 and 2015, we completed 11 and seven DSI systems and zero and two other material handling equipment systems, recognizing revenues of $15.8 million and $7.2 million and cost of revenue of $14.8 million and $5.9 million, respectively. Due to potential cost overruns related to certain DSI projects, we expect that the future relationship between revenues and costs may be dissimilar from prior results. During the year ended December 31, 2016, we recognized a reduction of $0.1 million in previously recognized loss provisions included in cost of revenue. During the year ended December 31, 2015, we recorded $0.2 million in loss provisions included in cost of revenue related to DSI system contracts.

Additionally, in 2016, we executed sales-type lease agreements related to ACI and DSI systems and recognized revenue of $3.4 million and cost of revenue of $1.2 million during the year ended December 31, 2016.

The remaining changes were due to other equipment sales.

As a result of using the completed contract method for revenue recognition on long-term equipment contracts, our revenue and cost of revenue information may not be comparable to the information of our competitors who do not use the completed contract method. For example, due to the long-term revenue recognition period on certain contracts, we may recognize less revenue and related cost of revenue during a particular period, but record significant deferred revenue and deferred project costs. This impacts our outstanding backlog as is discussed in more detail in Item 1 of this Report.


29

Demand for ACI and DSI system contracts during 2015 and 2016 has been driven by coal-fired power plant utilities that need to comply with MATS and MACT standards by 2016. Revenues related to ACI and DSI system contracts fluctuate due to changes in the number of contracts entered into as well as the long duration of completing certain contracts, which involve long-lead time requirements for manufacturing, installation and testing of the equipment. As the deadline for these standards has now passed, we have experienced and expect to continue to experience a significant decline in the number of long-term fixed price contracts entered into going forward as the coal-fired power plant and other utilities markets have materially completed purchases of these systems to assist in the achievement of initial compliance with regulatory standards.

Chemicals and Chemical cost of revenue
During the years ended December 31, 2016 and 2015, revenues increased year over year primarily due to an overall increase in pounds of our chemicals sold, most significantly driven by higher sales of our M-ProveTM chemicals during the second half of 2016. The increase in revenue is due to our increased focus on selling these products to coal-fired power plants to be in compliance with applicable regulations. We believe revenues will continue to increase in 2017 due to the full year financial impact of existing customers and a continued expansion of our customer base. However, we believe that it is likely that gross margins on sales of chemicals for 2017 will be lower than in 2016 based on the nature of certain chemical sale contracts, which may include longer field testing time frames, which can result in decreased margins, as we attempt to not only expand our customer base but also the volume size and duration of chemical sales contracts.

Consulting services and other and Consulting services cost of revenue
We also provide consulting services related to emissions regulations. During the years ended December 31, 2016 and 2015, revenues decreased year over year due to a decrease in the number of consulting service engagements performed. The decrease in the number of consulting services engagements was due in part to us no longer performing consulting services related to a certain customer within the legacy Emissions Control - Manufacturing segment.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in Note 18 to the Consolidated Financial Statements included in Item 8 of this Report.

Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2016 and 2015 is as follows:
 
 
Years Ended December 31,
 
Change
(in thousands, except percentages)
 
2016
 
2015
 
($)
 
(%)
Operating expenses:
 
 
 
 
 
 
 
 
Payroll and benefits
 
$
12,390

 
$
23,589

 
$
(11,199
)
 
(47
)%
Rent and occupancy
 
2,168

 
3,309

 
(1,141
)
 
(34
)%
Legal and professional fees
 
8,293

 
16,604

 
(8,311
)
 
(50
)%
General and administrative
 
3,721

 
6,104

 
(2,383
)
 
(39
)%
Research and development, net
 
(648
)
 
5,362

 
(6,010
)
 
(112
)%
Depreciation and amortization
 
979

 
2,019

 
(1,040
)
 
(52
)%
 
 
$
26,903

 
$
56,987

 
$
(30,084
)
 
(53
)%

Payroll and benefits
Payroll and benefits expenses decreased in 2016 compared to 2015 primarily due to a decrease in restructuring expenses in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives. During the year ended December 31, 2016 and December 31, 2015, we recorded net restructuring charges of $1.6 million and $10.4 million, respectively, including the modification and acceleration of equity awards of $0.4 million and $3.4 million, respectively. Additionally, we had a decrease in headcount of approximately 70% during the year ended 2016 compared to the same period in 2015 in connection with employees impacted by management's alignment of the business with strategic objectives. We expect a continued decrease in Payroll and benefits going forward as we realize the full year benefit of actions taken during 2016 to continue to align personnel with our strategic objectives.

Rent and occupancy
Rent and occupancy expenses decreased in 2016 compared to 2015 primarily due to the shutdown of our BCSI, LLC ("BCSI") office and fabrication facilities in the fourth quarter of 2015. During the first quarter of 2016, we entered into an agreement to terminate various lease agreements covering approximately 207 thousand square feet of manufacturing, warehouse and office space in Pennsylvania. As consideration for terminating the leases, we agreed to pay the lessor a termination fee of $0.3 million

30

in April 2016 and the same amount in April 2017. During the first quarter of 2016, we recorded a gain of $0.2 million related to the difference between the amount accrued as of the cease-use date of December 31, 2015 and the settlement amount. In December 2016, we entered into an agreement to terminate approximately 37 thousand square feet of office space and relocate our corporate office in Colorado. For terminating the lease, we agreed to pay the lessor a termination fee of $0.3 million. The amount was paid in full in December 2016.

Legal and professional fees
Legal and professional fees expenses decreased during the year ended December 31, 2016 compared to the year ended December 31, 2015 as a result of a reduction in the professional resources deployed to address the Restatement of our consolidated financial statements, including the SEC Inquiry and related private litigation. Expenses related to the Restatement during the year ended December 31, 2016 and 2015 were $2.0 million and $9.5 million, respectively. In addition, legal and professional fees decreased as a result of a reduction in other consulting fees during the year ended December 31, 2016.

General and administrative
General and administrative expenses decreased in 2016 compared to 2015 due to a $0.5 million allowance recorded during 2015 against the entire principal balance of a note receivable. Additionally, during the year ended December 31, 2016, there was a decrease in expenses of $1.6 million due to the shutdown of our BCSI office and fabrication facilities in the fourth quarter of 2015. Other decreases during the year ended December 31, 2016 were due to decreases in general operating expenses, including travel and professional expenses. These decreases were partially offset by impairment charges recognized during the year ended December 31, 2016 on property and equipment and inventory of $0.5 million, as projected future cash flows from operations related to such property and equipment and inventory did not support the carrying value of these assets.

Research and development, net
Research and development expense decreased in 2016 compared to 2015 primarily due to a decrease in research and development activities, as we have concluded all material R&D activities except for continued product development necessary to our ongoing business. We also reduced R&D expense by $0.8 million during the year ended December 31, 2016 due to final billings made during this period to the DOE for one R&D contract which resulted in negative expense during 2016. Additional decreases in R&D expense were due to expenses incurred during 2015 related to our investment in ADA Analytics of $2.6 million, of which $1.9 million related to the impairment charge we recognized in the third quarter of 2015.

Depreciation and amortization
Depreciation and amortization expense decreased in 2016 compared to 2015 by approximately $0.8 million due to the shutdown of our BCSI office and fabrication facility in the fourth quarter of 2015 and by approximately $0.2 million due to the termination of the Highview technology license. See further discussion of the termination of the Highview technology license in Note 9 of the Consolidated Financial Statements included in Item 8 of this Report.

Other Income (Expense), net
A summary of the components of our other income (expenses), net for the years ended December 31, 2016 and 2015 is as follows:
 
 
Years Ended December 31,
 
Change
(Amounts in thousands, except percentages)
 
2016
 
2015
 
($)
 
(%)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings from equity method investments
 
$
45,584

 
$
8,921

 
$
36,663

 
411
 %
Royalties, related party
 
6,125

 
10,642

 
(4,517
)
 
(42
)%
Interest income
 
268

 
24

 
244

 
*

Interest expense
 
(5,066
)
 
(8,402
)
 
3,336

 
(40
)%
Litigation settlement and royalty indemnity expense, net
 
3,464

 
—

 
3,464

 
*

Other
 
2,463

 
494

 
1,969

 
399
 %
Total other income
 
$
52,838

 
$
11,679

 
$
41,159

 
352
 %
* Calculation not meaningful


31

Earnings in equity method investments
The following table presents the equity method earnings, by investee, for the years ended December 31, 2016 and 2015:
 
 
Year ended December 31,
Change
(in thousands)
 
2016
 
2015
 
($)
 
(%)
Earnings from Tinuum Group
 
$
41,650

 
$
8,651

 
$
32,999

 
381
 %
Earnings from Tinuum Services
 
4,491

 
4,838

 
(347
)
 
(7
)%
Loss from RCM6
 
(557
)
 
(4,568
)
 
4,011

 
(88
)%
Earnings from equity method investments
 
$
45,584

 
$
8,921

 
$
36,663

 
411
 %

Earnings from equity method investments, and changes related thereto, are impacted by our equity method investees: Tinuum Group, Tinuum Services and RCM6 (through the date of the sale of our interest in RCM6 on March 3, 2016). Earnings from equity method investments increased during the year ended December 31, 2016 compared to 2015 primarily as a result of an increase in cash distributions, as Tinuum Group did not invest significant capital expenditures related to the installation of RC facilities or incur significant costs to operate retained RC facilities during 2016 as they did during 2015. See discussion below regarding the accounting of earnings from Tinuum Group.

During the year ended December 31, 2016, we recognized $41.7 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $35.0 million for the year. During the year ended December 31, 2015, we recognized $8.7 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $35.3 million for the year. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations relates to us receiving cumulative 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 in more detail below.
As a result of cash flows from invested RC facilities, Tinuum Group distributions to us during the year ended December 31, 2016 were $41.7 million, which exceeded our pro-rata share of Tinuum Group's net income, resulting in us having cumulative cash distributions that exceeded our cumulative pro-rata share of Tinuum Group's net income as of December 31, 2016.
The following table for Tinuum Group presents our investment balance, equity earnings, cash distributions received and cash distributions in excess of the investment balance for the years ended December 31, 2016 and 2015 (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
Total investment balance, equity earnings (loss) and cash distributions
 
12/31/2014
 
$
—

 
$
—

 
$
—

 
$
(29,877
)
ADES proportionate share of net income from Tinuum Group (1)
 
2015 activity
 
35,265

 
35,265

 
—

 
—

Recovery of cash distributions in excess of investment balance (prior to cash distributions)
 
2015 activity
 
(29,877
)
 
(29,877
)
 
—

 
29,877

Cash distributions from Tinuum Group
 
2015 activity
 
(8,651
)
 
—

 
8,651

 
—

Adjustment for current year cash distributions in excess of investment balance
 
2015 activity
 
3,263

 
3,263

 
—

 
(3,263
)
Total investment balance, equity earnings (loss) and cash distributions
 
12/31/2015
 
—

 
8,651

 
8,651

 
(3,263
)
ADES proportionate share of net income from Tinuum Group (1)
 
2016 activity
 
35,019

 
35,019

 
—

 
—

Recovery of cash distributions in excess of investment balance (prior to cash distributions)
 
2016 activity
 
(3,263
)
 
(3,263
)
 
—

 
3,263

Cash distributions from Tinuum Group
 
2016 activity
 
(41,650
)
 
—

 
41,650

 
—

Adjustment for current year cash distributions in excess of investment balance
 
2016 activity
 
9,894

 
9,894

 
—

 
(9,894
)
Total investment balance, equity earnings and cash distributions
 
12/31/2016
 
$
—

 
$
41,650

 
$
41,650

 
$
(9,894
)

32

(1) The amounts of our 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 Class B preferred return and the elimination of Tinuum Group earnings attributable to RCM6, of which we owned 24.95%, for the period from January 1 to March 3, 2016 and for the years ended December 31, 2015 and 2014.
Tinuum Group's consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014 are included in Item 15 of this Report.
Equity earnings from our interest in Tinuum Services decreased by $0.3 million in 2016 as compared to 2015 primarily due to a decrease in the number of RC facilities being operated by Tinuum Services throughout the year. The weighted-average number of RC facilities for which Tinuum Services provided operating and maintenance services, based upon the number of months each facility was operated during the respective years, decreased year over year. As of December 31, 2016 and 2015, Tinuum Services provided operating and maintenance services to 13 and 14 RC facilities, respectively. Tinuum Services derives earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, depending upon the specific RC facility operating and maintenance agreement. The reduction in operating facilities during the year ended December 31, 2016 compared to the year ended December 31, 2015 was due to suspending operations on retained facilities to reduce operating expenses.
During February 2014, we purchased a membership interest in RCM6 and recognized equity method losses in all subsequent reporting periods resulting from the operation of the RC facility owned by RCM6; although, RCM6 produced and sold RC, which generated tax credits and tax benefits that were available to us. Equity losses from our interest in RCM6 decreased during the year ended December 31, 2016 compared to the year ended December 31, 2015 due to the sale of our 24.95% membership interest in RCM6 on March 3, 2016 for a cash payment of $1.8 million and assumption by the buyer of the outstanding note payable made by us in connection with our purchase of RCM6 membership interests from Tinuum Group in February 2014. As a result of the sale, we are no longer a member of RCM6 and are no longer subject to any quarterly capital calls and variable payments to RCM6.
We earned the following tax credits that may be available for future benefit related to the production of RC from the operation of retained RC facilities:
 
 
Years Ended December 31,
(in thousands)
 
2016
 
2015
Section 45 tax credits earned
 
$
2,956

 
$
38,998

The decrease in production and sale of RC, and the related tax credits earned during the year ended December 31, 2016 compared to December 31, 2015 was due to the suspension of retained RC facilities, as described above.
As discussed in Item 1 of this Report, Tinuum Group operates and leases or sells facilities used in the production and sale of RC to third party tax equity investors. All dispositions of such facilities are treated as sales for federal income tax purposes at Tinuum Group. The resulting gain from these sales is reported by Tinuum Group pursuant to the installment method under IRC Section 453. As of December 31, 2016, ADES’s allocable share of the gross deferred installment gain from Tinuum Group to be recognized in future years is approximately $204 million.
Due to the production and sale of RC from the operation of retained RC facilities, Tinuum Group has generated PTCs under IRC Section 45 and IRC Section 38. These Section 45 and Section 38 tax credits qualify as General Business Credits ("GBC"). These GBC's are allocated to the owners of Tinuum Group, including us, who may benefit to the extent that the GBC's are realized from the operation of retained RC facilities. As of December 31, 2016, we had approximately $99.9 million in GBC carryforwards and $31.7 million of federal net operating loss ("NOL's") carryforwards. Unused NOL's and GBC's may be carried forward 20 years from the tax year in which they are generated.  
 
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of the NOL's and tax credits generated prior to the change would be subject to an annual limitation imposed by IRC Section 382 for NOL's and IRC Section 383 for tax credits. The results of a recent analysis indicated that we had not experienced an ownership change as of December 31, 2016, as defined by IRC Section 382. Such analysis for the period from January 1, 2017 through the date of this filing has not been completed. Therefore, it is possible that we experienced an ownership change between January 1, 2017 and the date of this filing, thus subjecting our NOL and GBC carryforwards to limitation. Should a limitation exist, however, we would likely be in a position to substantially increase the limitation amount by virtue of our approximately $204 million deferred installment sale gain at Tinuum Group.

Specifically, IRC Section 382 provides that a corporation with a net unrealized built-in gain ("NUBIG") immediately before an ownership change may increase its limitation by the amount of recognized built-in gain ("RBIG") arising from the sale of a built-in gain asset during a recognition period, which is generally the five-year period immediately following an ownership

33

change. Built-in gain reported on the installment sale method that is attributable to assets sold by the corporation before or during the recognition period may increase the corporation’s limitation during and after the recognition period. Therefore, it is likely that any IRC Section 382 limitation imposed upon an ownership change may be increased by our share of RBIG from Tinuum Group’s installment sale gain attributable to RC facilities sold before or during the period in which the change in ownership occurred.

There are numerous assumptions that must be considered in calculating the RBIG related to Tinuum Group and the increase to our IRC Section 382 limitation. Assuming the following assumptions below, we may be able to increase the total limitation by approximately $204 million over the duration of the installment sale. As of December 31, 2016, after increasing the total hypothetical limitation, we would likely not have been able to utilize $10 million of tax credits.
 
•
The Tinuum Group RBIG is a result of the sale of RC facilities by Tinuum Group and its election to utilize the installment sale method for tax purposes;
•
Investors in RC facilities will not terminate existing contracts as completion of an installment sale transaction is necessary to realize RBIG;
•
We have no net unrealized built-in loss to offset the NUBIG from Tinuum Group;
•
Our RBIG is equal to the deferred gain allocated from Tinuum Group or, approximately $204 million;
•
We will have a NUBIG immediately before a hypothetical ownership change such that the Tinuum Group RBIG is available to increase the IRC Section 382 limitation;
•
We will continue our historic business operations for at least two years following a hypothetical ownership change; and
•
A second ownership change does not occur.

The annual limitation will be increased by the amount of RBIG that is included in taxable income each year.

Additional information related to equity method investments can be found in Note 7 to the Consolidated Financial Statements included in Item 8 of this Report.

Royalties, related party
During the years ended December 31, 2016 and 2015, there were 16.2 million tons and 22.0 million tons, respectively, of RC produced using M-45TM and M-45-PCTM technologies, which Tinuum Group licenses from us. The decrease was primarily due to a decrease in the number of RC facilities producing RC with our technologies, specifically the suspension of retained operations at facilities during the fourth quarter of 2015 and the first quarter of 2016 to reduce operating expenses and a decrease in the tons of refined coal produced. Additionally, as the royalties are earned on a percentage of the per-ton, pre-tax margin net of certain allocable operating expenses related to the lease or sale of an invested RC facility, which produces and sells RC using the M-45 License, the increase in operating expenses of Tinuum Group due to payments made to secure the location for an RC facility, while waiting to sell or lease the project to a tax equity investor, also decreased the royalty we earned. As a result of increases in the average number of invested facilities, we anticipate that 2017 royalties will increase from the level of 2016 royalties.

Interest expense
During the year ended December 31, 2016 interest expense decreased compared to the year ended December 31, 2015 due to a decrease in 453A interest and the elimination of the RCM6 note payable. These decreases were $2.1 million and $2.2 million, respectively, for the year ended December 31, 2016 compared to 2015. These decreases were offset by an increase in interest expense of $0.7 million related to the credit agreement for a $15.0 million short-term loan with a related party (the "Credit Agreement"), which was entered into during the fourth quarter of 2015 and was paid off as of June 30, 2016.

During the year ended December 31, 2016 compared to 2015, there was an increase in RC facilities in which Tinuum Group recognized installment sales for tax purposes from 12 to 13. IRC section 453A requires taxpayers using the installment method to pay an interest charge on the portion of the tax liability that was deferred under the installment method.

34

The following table shows the balance of the tax liability that has been deferred and the applicable interest rate to calculate section 453A interest:
 
 
As of December 31,
(in thousands)
 
2016
 
2015
Tax liability deferred on installment sales (1)
 
$
71,559

 
$
111,905

Interest rate
 
4.00
%
 
4.00
%

(1) Represents the approximate tax effected liability related to the deferred gain on installment sales (approximately $204 million as of December 31, 2016).

Revision of estimated litigation settlement and royalty indemnity expense, net
During the fourth quarter of 2016, management revised its estimate for future Royalty Award payments based on an updated forecast provided to the Company by a former equity method investment for which we are required to pay additional damages related to certain future revenues generated from the former equity method investment. This forecast included a material reduction in estimated future revenues generated at the specific activated carbon plant from which the royalties are generated. Based primarily on the updated forecast, management recorded a $4.0 million reduction to its Royalty Award accrual as of December 31, 2016.

During the year ended December 31, 2016, we recorded an expense for the estimated payment of monetary penalties in connection with the SEC Inquiry in the amount of $0.5 million. For additional details related to both of these matters, see Note 14 of the Consolidated Financial Statements included in Item 8 of this Report.

Other
Gain on sale of equity method investment
On March 3, 2016, we sold our 24.95% membership interest in RCM6 for a cash payment of $1.8 million and the assumption, by the buyer, of the note payable, which we entered into in connection with our purchase of RCM6 membership interests from Tinuum Group in February 2014. The outstanding balance on the note payable at the time of the sale was $13.2 million. With the sale of our membership interest in RCM6, we recognized a gain on the sale of $2.1 million, which is included within the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.

Gain on settlement of note payable
As of December 31, 2014, we terminated the consulting portion of our agreements with the DSI Business Owner. Originally, we were required to make all remaining payments, structured as a note payable, through the third quarter of 2017. In February 2016, we entered into an agreement with the DSI Business Owner to settle the remaining amounts owed of approximately $1.1 million for a one-time payment of $0.3 million. The one-time payment was made during the first quarter of 2016, and we recognized a gain of approximately $0.9 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.

Gain on settlement of licensed technology obligation
On June 15, 2016, we entered into an agreement with Highview to terminate a license agreement in exchange for a one-time payment by us of £0.2 million (approximately $0.2 million). According to the agreement, this payment will only be made upon the sale of our shares in Highview to satisfy the liability. As a result of terminating this license agreement, we eliminated the licensed technology asset, reduced the corresponding long-term liability to the amount of the one-time payment, and recognized a gain of approximately $0.2 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.

Impairment of cost method investment
As of December 31, 2016, we estimated the fair value of the cost method investment based upon an anticipated equity raise by Highview at a price of £2.00 per share, which was less than our cost per share of £4.25. As a result, we recorded an impairment charge of $1.8 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.

Gain on lease termination
On September 30, 2016, we and the lessee terminated a sale-type lease, and we recorded a lease termination fee of $3.6 million, which was in excess of the carrying value of the net investment in sales-type lease of $2.7 million. As a result of this lease termination, we recognized a gain of $0.9 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.

35

Income tax (benefit) expense
As of December 31, 2016 and 2015, we had a valuation allowance recorded of $75.9 million and $148.3 million, respectively, against our deferred tax assets. During 2016, we recorded an income tax benefit of $60.9 million compared to an income tax expense of zero for 2015. The income tax benefit for 2016 primarily reflects a $61.4 million reversal of the valuation allowance of our deferred tax assets.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. 
We assess the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
We have historically recorded a valuation allowance for all of our deferred tax assets primarily due to a historical three-year cumulative loss position. However, we concluded that, as of December 31, 2016, it is more likely than not we will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize $61.4 million of our net deferred tax assets and, therefore, reversed the valuation allowance by this amount. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evidence. The positive evidence considered by management in arriving at its conclusion to partially reverse the valuation allowance includes factors such as the emergence from the previous three-year cumulative loss position during the fourth quarter of 2016, achievement of four consecutive quarters of profitability and forecasts of continued future profitability under several potential scenarios derived from currently contracted business within the RC segment. We believe these factors support the partial utilization of deferred tax assets attributable to temporary differences that do not expire and NOLs and tax credits prior to their expiration between 2031 through 2036.
The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets.
Our conclusion that it more likely than not that $61.4 million of net deferred tax assets will be realized is based, among other considerations, on management’s estimate of future taxable income. Our estimate of future taxable income is based on internal projections which consider historical performance, multiple internal scenarios and assumptions, as well as external data that we believe is reasonable. If events are identified that affect our ability to utilize our deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation allowance are required. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in further releases to the deferred tax valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in Note 16 of the Consolidated Financial Statements included in Item 8 of this Report.

36


Year ended December 31, 2015 Compared to Year ended December 31, 2014

Total Revenue and Cost of Revenue
A summary of the components of revenues and costs of revenue for the years ended December 31, 2015 and 2014 is as follows:
 
 
Years Ended December 31,
 
Change
(in thousands except percentages)
 
2015
 
2014
 
($)
 
(%)
Revenues:
 
 
 
 
 
 
 
 
Equipment sales
 
$
60,099

 
$
12,044

 
$
48,055

 
399
 %
Chemicals
 
888

 
391

 
497

 
127
 %
Consulting services and other
 
1,752

 
4,488

 
(2,736
)
 
(61
)%
Total revenues
 
62,739

 
16,923

 
45,816

 
271
 %
Operating expenses:
 
 
 
 
 
 
 
 
Equipment sales cost of revenue, exclusive of depreciation and amortization
 
45,433

 
9,277

 
36,156

 
390
 %
Chemicals cost of revenue, exclusive of depreciation and amortization
 
601

 
140

 
461

 
329
 %
Consulting services and other cost of revenue, exclusive of depreciation and amortization
 
1,518

 
2,203

 
(685
)
 
(31
)%

Equipment sales and Equipment sales cost of revenue
During the years ended December 31, 2015 and 2014, we entered into four and 25 long-term (six months or longer) fixed price contracts to supply ACI systems with aggregate contract values including change orders of $5.5 million and $35.8 million, respectively. The total value per contract may change due to the relative sizes of ACI systems and the contracts related thereto. During the years ended December 31, 2015 and 2014, we completed 32 and 15 ACI systems, recognizing revenues of $51.7 million and $11.1 million and cost of revenue of $38.4 million and $8.1 million, respectively. We recognized $0.1 million and zero in loss provisions related to ACI systems contracts during the years ended December 31, 2015 and 2014, respectively.

During the years ended December 31, 2015 and 2014, we entered into one and 13 long-term (6 months or longer) fixed price contracts to supply DSI systems and other material handling equipment with contract values including associated change orders of $2.4 million and $10.9 million, respectively. Total value per contract may change due to the relative sizes of DSI systems and the contracts relate thereto. During the years ended December 31, 2015 and 2014, we completed seven and two DSI systems and two and five other material handling equipment systems, recognizing revenues of $7.2 million and $0.6 million and cost of revenue of $5.9 million and $0.8 million, respectively. Due to potential cost overruns related to certain DSI projects, we expect that the future relationship between revenues and costs may be dissimilar from prior results. We recognized $0.2 million and $0.3 million in loss provisions related to DSI systems contracts during the years ended December 31, 2015 and 2014, respectively.

The remaining changes were due to other equipment projects.

Demand for ACI and DSI system contracts during 2014 and 2015 was primarily driven by coal-fired power plant utilities that needed to comply with MATS and MACT standards by 2015 or 2016. Revenues related to ACI and DSI system contracts fluctuated due to changes in the number of contracts executed as well as the timing of revenue recognition on contracts, which is based on substantial completion of the contracts, due to long-lead time requirements for manufacturing, installation and testing of the equipment. Sales of ACI and DSI equipment continued to decrease in 2015 as many of the respective utilities had already reached the date at which they needed to comply with the MATS and MACT standards.

Chemicals and Chemicals cost of revenue
During the years ended December 31, 2015 and 2014, the most significant component of Chemicals revenues and Chemicals cost of revenue were chemical sales related to EC technologies. Revenues increased year over year due to an increase in average contract revenue. The increase in revenues was also due to our increased focus on selling these products to coal-fired power plants to be in compliance with applicable regulations.


37

Consulting services and other and Consulting services cost of revenue
We provided consulting services related to emissions regulations. Revenues decreased year over year due to a decrease in average contract revenue, driven by smaller scale consulting contracts with new customers in 2015 and our reduction in force of personnel providing consulting services.

Additional information related to revenue concentrations and contributions by class and reportable segment can be found in Note 18 to the Consolidated Financial Statements included in Item 8 of this Report.

Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2015 and 2014 is as follows:
 
 
Years Ended December 31,
 
Change
(in thousands, except percentages)
 
2015
 
2014
 
($)
 
(%)
Operating expenses:
 
 
 
 
 
 
 
 
Payroll and benefits
 
$
23,589

 
$
20,767

 
$
2,822

 
14
%
Rent and occupancy
 
3,309

 
2,468

 
841

 
34
%
Legal and professional fees
 
16,604

 
14,430

 
2,174

 
15
%
General and administrative
 
6,104

 
6,066

 
38

 
1
%
Research and development, net
 
5,362

 
1,521

 
3,841

 
253
%
Depreciation and amortization
 
2,019

 
1,865

 
154

 
8
%
Total operating expenses
 
$
56,987

 
$
47,117

 
$
9,870

 
21
%

Payroll and benefits
Payroll and benefits expenses increased in 2015 compared to 2014 due to an increase in restructuring expenses, including the modification and acceleration of equity awards during 2015 in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives. Restructuring expenses recorded during 2015 were $8.5 million compared to $3.5 million in 2014, of which $3.4 million was due to the accelerated vesting of modified equity-based compensation awards for certain terminated employees. Incentive compensation in 2015 compared to 2014 also increased by $0.6 million due to bonuses awarded during 2015. These increases were offset by a decrease in overall and executive headcount by approximately 30% related to the reduction in force and management's realignment of the business.

Rent and occupancy
Rent and occupancy expenses increased in 2015 compared to 2014 primarily due to $0.8 million in lease termination costs incurred in 2015 associated with the BCSI facility closure and an increase in insurance expense. These increases were partially offset by the termination of a lease relating to warehouse space in the third quarter of 2015 resulting in a $0.1 million reduction of expense.

Legal and professional fees
Legal and professional fees expenses increased by $2.2 million in 2015 compared to 2014 as a result of the significant professional resources deployed to address the Restatement, including the SEC Inquiry, which individually increased expenses by $3.3 million, resulting in total 2015 Restatement expenses of $9.5 million. Other increases related to legal fees of $0.8 million and consulting fees of approximately $2.7 million most significantly related to strategic advisory services and information technology services. These increases were offset by a $3.7 million decrease in professional fees for a residual payment agreement with a former consultant who was involved in the development and deployment of RC technologies, and expenses related to the termination of the consulting agreement with the former owner of the DSI equipment assets acquired by BCSI. The remaining decrease of $0.9 million was due to decreases in various other professional fees during 2015 compared to 2014.

General and administrative
General and administrative expenses increased in 2015 compared to 2014 primarily due to modest increases in general operating expenses.
 
Research and development, net
Research and development expenses increased in 2015 compared to 2014 mostly due to our investment in ADA Analytics. We recorded gross R&D expenses of $6.7 million and $3.6 million in 2015 and 2014, respectively, offset by reimbursements

38

received from the DOE and industry cost share partners of $1.4 million and $2.0 million, respectively. We incurred expenses related to our investment in ADA Analytics of $2.6 million, of which $1.9 million related to the impairment charge we recognized in the third quarter of 2015. Additionally, we incurred $1.2 million related to a liquefied natural gas project that we assisted in funding during 2015, which was subsequently terminated.

Depreciation and amortization
Depreciation and amortization expense increased in 2015 compared to 2014 due to amortization of the Highview technology license and asset additions.

Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31, 2015 and 2014 is as follows:
 
 
Years Ended December 31,
 
Change
(in thousands, except percentages)
 
2015
 
2014
 
($)
 
(%)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings from equity method investments
 
$
8,921

 
$
42,712

 
$
(33,791
)
 
(79
)%
Royalties, related party
 
10,642

 
6,410

 
4,232

 
66
 %
Interest income
 
24

 
74

 
(50
)
 
(68
)%
Interest expense
 
(8,402
)
 
(5,725
)
 
(2,677
)
 
47
 %
Other
 
494

 
26

 
468

 
1,800
 %
Total other income
 
$
11,679

 
$
43,497

 
$
(31,818
)
 
(73
)%

Earnings in equity method investments
The following table shows the equity method earnings, by investee, for the years ended December 31, 2015 and 2014:
 
 
Years Ended December 31,
 
Change
(in thousands)
 
2015
 
2014
 
($)
 
(%)
Earnings from Tinuum Group
 
$
8,651

 
$
43,584

 
$
(34,933
)
 
(80
)%
Earnings from Tinuum Services
 
4,838

 
3,625

 
1,213

 
33
 %
Loss from RCM6
 
(4,568
)
 
(4,497
)
 
(71
)
 
2
 %
Earnings from equity method investments
 
$
8,921

 
$
42,712

 
$
(33,791
)
 
(79
)%

Earnings from equity method investments decreased in 2015 compared to 2014 primarily due to decreases in cash distributions from Tinuum Group. The weighted-average number of invested RC facilities, based upon the number of months each facility was invested during the respective years, increased year over year. The number of invested RC facilities that were generating rental income as of December 31, 2015 and 2014, were 12 and 12, respectively. The weighted-average number of retained RC facilities, based upon the number of months each facility was retained during the respective years, increased year over year. However, the number of retained RC facilities that were producing and selling RC and generating Section 45 tax credits and other tax benefits as of December 31, 2015 and 2014, were two and five, respectively. During the fourth quarter of 2015, Tinuum Group suspended full-time operation of three retained RC facilities.

We recognized $8.7 million and $43.6 million of equity earnings from Tinuum Group for the years ended December 31, 2015 and 2014 compared to our proportionate share of Tinuum Group's net income of $35.3 million and $26.6 million, respectively. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on our Condensed Consolidated Statements of Operations relates to us receiving distributions in excess of the carrying value of the investment during prior periods, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur.

39


The following table for Tinuum Group shows our investment balance, equity earnings, cash distributions received and cash distributions in excess of the investment balance for the years ended December 31, 2015 and 2014 (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
 
12/31/2013
 
$
—

 
$
—

 
$
—

 
$
(12,906
)
ADES proportionate share of net income from Tinuum Group (1)
 
2014 activity
 
26,613

 
26,613

 
—

 
—

Recovery of cash distributions in excess of investment balance (prior to cash distributions)
 
2014 activity
 
(12,906
)
 
(12,906
)
 
—

 
12,906

Cash distributions from Tinuum Group
 
2014 activity
 
(43,584
)
 
—

 
43,584

 
—

Adjustment for current year cash distributions in excess of investment balance
 
2014 activity
 
29,877

 
29,877

 
—

 
(29,877
)
Total investment balance, equity earnings (loss) and cash distributions
 
12/31/2014
 
—

 
43,584

 
43,584

 
(29,877
)
ADES proportionate share of net income from Tinuum Group (1)
 
2015 activity
 
35,265

 
35,265

 
—

 
—

Recovery of cash distributions in excess of investment balance (prior to cash distributions)
 
2015 activity
 
(29,877
)
 
(29,877
)
 
—

 
29,877

Cash distributions from Tinuum Group
 
2015 activity
 
(8,651
)
 
—

 
8,651

 
—

Adjustment for current year cash distributions in excess of investment balance
 
2015 activity
 
3,263

 
3,263

 
—

 
(3,263
)
Total investment balance, equity earnings (loss) and cash distributions
 
12/31/2015
 
$
—

 
$
8,651

 
$
8,651

 
$
(3,263
)
(1) The amounts of our 42.5% proportionate share of net income as shown in the table above differ from the mathematical calculations of our 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's results of operations due to adjustments related to the Class B preferred return and the elimination of Tinuum Group's earnings attributable to RCM6, of which we owned 24.95% during the years ended December 31, 2015 and 2014.

Tinuum Group distributed $8.7 million in cash during 2015, which we recognized as equity method earnings, compared to distributions and earnings of $43.6 million during 2014. As of December 31, 2015, our cumulative distributions exceeded our proportionate share of Tinuum Group's cumulative earnings by approximately $3.3 million.

While Tinuum Group recognized $87.3 million in earnings allocable to Class A shareholders during 2015, of which our proportionate share totaled approximately $35.3 million, Tinuum Group's distributions were severely limited and restricted, primarily by capital expenditures, changes in working capital items and other requirements for cash to be retained within the business. As compared to distributions received in 2014, Tinuum Group's distributions in 2015 were also limited by a reduction in the number of closings of sales or leases of RC facilities to new tax equity investors, in which closings generally include upfront purchase price payments that have historically been immediately distributed to Tinuum Group's equity owners, including us. A substantial portion of the 2014 distributions received from Tinuum Group were due to such upfront purchase payments or lease payments that were received by Tinuum Group as a result of closings of sales or leases of RC facilities to new tax equity investors.

Equity earnings from our interest in Tinuum Services increased by $1.2 million in 2015 compared to 2014, primarily due to an increase in the number of RC facilities being operated by Tinuum Services during 2015. The weighted-average number of RC facilities for which Tinuum Services provided operating and maintenance services, based upon the number of months each facility was operated during the respective years, increased year over year. As of December 31, 2015 and 2014, Tinuum Services provided operating and maintenance services to 14 and 17 RC facilities, respectively. Tinuum Services derives earnings both from fixed-fee arrangements as well as fees that are tied to actual RC production, depending upon the specific RC facility operating and maintenance agreement.

During February 2014, we purchased a membership interest in RCM6 and recognized equity method losses during the years ended December 31, 2015 and 2014 resulting from the production and sale of RC from the RC facility owned by RCM6, which also generated tax credits and tax benefits available to us.


40

Although all of our deferred tax assets had a full valuation allowance recorded against them as of December 31, 2015 and 2014, we earned, through our ownership in Tinuum Group, the following Section 45 tax credits, which may be available for future benefit related to the operation of retained RC facilities:
 
 
Years Ended December 31,
(in thousands)
 
2015
 
2014
Section 45 tax credits earned
 
$
38,998

 
$
25,817


Royalties, related party
During the years ended December 31, 2015 and 2014, there were 22.0 million tons and 12.4 million tons of RC produced, respectively, using M-45TM and M-45-PCTM technologies, which Tinuum Group licenses from us, which resulted in a 66% increase in our income from royalties from the M-45 license. Certain of the RC facilities that were operating in 2015 were retained facilities that were producing RC for the benefit of Tinuum Group and its owners. Effective in the fourth quarter of 2015, some of these facilities were idled pending the sale or lease to tax equity investors.

Interest expense
Interest expense increased in 2015 compared to 2014 by $1.3 million primarily due to the increase in RC facilities in 2015 from 11 to 12 on which Tinuum Group recognized installment sales for tax purposes and an increase in the interest rate. IRC section 453A requires taxpayers using the installment method to pay an interest charge on the portion of the tax liability that was deferred under the installment method. The following table shows the balance of the tax liability that has been deferred and the applicable interest rate to calculate section 453A interest:
 
 
As of December 31,
(in thousands)
 
2015
 
2014
Tax liability deferred on installment sales (1)
 
$
111,905

 
$
120,129

Interest rate
 
4.00
%
 
3.00
%

(1) Represents the approximate tax effected liability related to the deferred gain on installment sales (approximately $336 million as of December 31, 2015).

Additionally, interest expense increased by $0.2 million and $1.2 million related to the note payable used to finance our purchase of RCM6 in February 2014 and the Credit Agreement entered into in the fourth quarter of 2015, respectively.

Income tax (benefit) expense
We did not recognize any federal income tax expense (benefit) during the years ended December 31, 2015 or 2014 as a result of recording full valuation allowances against all of our net deferred tax assets in all jurisdictions. However, we did recognize state income tax expense for the years ended December 31, 2015 and 2014 of zero and $0.3 million, respectively.

Business Segments
As of December 31, 2016, we have two reportable segments: (1) RC; and (2) EC.
The business segment measurements provided to and evaluated by our chief operating decision maker ("CODM") are computed in accordance with the principles listed below:
•
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.
•
Segment revenue includes equity method earnings and losses from our equity method investments. Segment revenue also includes royalty earnings from Tinuum Group and income related to sales-type leases.
•
Segment operating income (loss) includes the equity method earnings and losses from our equity method investments, royalty earnings from Tinuum Group (including depreciation and amortization expense) and gains related to sales of equity method investments. However, segment operating income (loss) excludes Payroll and benefits, Rent and occupancy, Legal and professional fees, and General and administrative ("Corporate general and administrative expenses") unless otherwise specifically included, as the Company does not allocate those amounts between segments.
•
All items not included in operating income, except as noted below, are excluded from the RC and EC segments.

The principal products and services of our segments are:

41


1.
RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NOX and mercury from the burning of RC. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services and, through March 3, 2016, RCM6. Segment revenues includes equity method earnings (losses) from our equity method investments and royalty earnings from Tinuum Group. These earnings are included within the Earnings from equity method investments and Royalties, related party line items in the Consolidated Statements of Operations included in Item 8 of this Report. Key drivers to RC segment performance are operating and retained produced and sold RC, royalty-bearing RC produced, lease and sale revenue, and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments.
2.
EC - Our EC segment includes revenues and related expenses from the sale of ACI and DSI equipment systems, chemical sales consulting services and chemical and other sales related to the reduction of emissions in the coal-fired electric generation process and the electric utility industry. The fabrication of ACI systems is largely dependent upon third-party manufacturers. We historically fabricated DSI systems through our subsidiary BCSI, however, we closed the fabrication facility during the fourth quarter of 2015 and future fabrication will occur through the use of third party manufacturers. These amounts are included within the respective revenue and cost of revenue line items in the Consolidated Statements of Operations included in Item 8 of this Report.

Management uses segment operating income (loss) to measure profitability and performance at the segment level. Management believes segment operating income (loss) provides investors with a useful measure of our operating performance and underlying trends of the businesses. Segment operating income (loss) may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our Consolidated Results of Operations.


42

The following table presents our operating segment results for the years ended December 31, 2016, 2015 and 2014:
 
 
Years Ended December 31,
 
Change
(in thousands)
 
2016
 
2015
 
2014
 
($)
 
($)
Revenues:
 
 
 
 
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
 
 
 
 
Earnings in equity method investments
 
$
45,584

 
$
8,921

 
$
42,712

 
$
36,663

 
$
(33,791
)
Consulting services
 
—

 
55

 
665

 
(55
)
 
(610
)
Royalties, related party
 
6,125

 
10,642

 
6,410

 
(4,517
)
 
4,232

 
 
51,709

 
19,618

 
49,787

 
32,091

 
(30,169
)
Emissions Control:
 
 
 
 
 
 
 
 
 
 
Equipment sales
 
46,949

 
60,099

 
12,044

 
(13,150
)
 
48,055

Chemicals
 
3,025

 
888

 
391

 
2,137

 
497

Consulting services
 
648

 
1,697

 
3,823

 
(1,049
)
 
(2,126
)
 
 
50,622

 
62,684

 
16,258

 
(12,062
)
 
46,426

Total segment reporting revenues
 
$
102,331

 
$
82,302

 
$
66,045

 
$
20,029

 
$
16,257

Adjustments to reconcile to reported revenues:
 
 
 
 
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
 
 
 
 
Earnings in equity method investments
 
$
(45,584
)
 
$
(8,921
)
 
$
(42,712
)
 
(36,663
)
 
33,791

Royalties, related party
 
(6,125
)
 
(10,642
)
 
(6,410
)
 
4,517

 
(4,232
)
 
 
(51,709
)
 
(19,563
)
 
(49,122
)
 
(32,146
)
 
29,559

 
 
 
 
 
 
 
 
 
 
 
Total reported revenues
 
50,622

 
62,739

 
16,923

 
(12,117
)
 
45,816

Segment reporting operating income (loss)
 
 
 
 
 
 
 
 
 
 
Refined Coal (1)
 
$
51,264

 
$
12,131

 
$
42,094

 
$
39,133

 
$
(29,963
)
Emissions Control (2)
 
7,334

 
(7,583
)
 
(13,348
)
 
14,917

 
5,765

Total segment operating income
 
$
58,598

 
$
4,548

 
$
28,746

 
$
54,050

 
$
(24,198
)

(1) Included within the RC segment operating income for the year ended December 31, 2016 is a $2.1 million gain on the sale of RCM6. Also included within the RC segment operating income for the years ended December 31, 2016, 2015, and 2014 is 453A interest expense of $2.5 million, $4.6 million and $3.4 million respectively, and interest expense related to the RCM6 note payable of $0.3 million, $2.5 million and $2.2 million, respectively.
(2) Included within the EC segment operating income for the year ended December 31, 2016 is a $0.9 million gain related to a termination of a sales-type lease.

A reconciliation of segment operating income to consolidated net income (loss) is included in Note 17 of the Consolidated Financial Statements included in Item 8 of this Report.

RC
The following table details the segment revenues of our respective equity method investments for the years ended December 31, 2016, 2015 and 2014:
 
 
Year ended December 31,
(in thousands)
 
2016
 
2015
 
2014
Earnings from Tinuum Group
 
$
41,650

 
$
8,651

 
$
43,584

Earnings from Tinuum Services
 
4,491

 
4,838

 
3,625

Loss from RCM6
 
(557
)
 
(4,568
)
 
(4,497
)
Earnings from equity method investments
 
$
45,584

 
$
8,921

 
$
42,712




43

RC earnings increased primarily due to increased equity earnings from Tinuum Group during the year ended December 31, 2016 compared to the year ended December 31, 2015, as presented above. Our equity earnings increased primarily due to an increase in cash distributions from Tinuum Group due to no significant RC facility installation costs in 2016 compared to 2015, as discussed in the consolidated results above. For the year ended December 31, 2016, Tinuum Group's consolidated earnings decreased $4.1 million from the comparable December 31, 2015 period due to a decrease in lease revenues driven by the reduced impact of the amortization of deferred revenues and changes in lease rates, which was partially offset by a reduction in cost of sales related to chemicals and royalties as well as a decrease in operating expenses related to the suspension of operations of all retained RC facilities in 2016.

As discussed above and in Note 7 of the Consolidated Financial Statements included in Item 8 of this Report, our earnings in Tinuum Group may not equal our pro-rata share due to the accounting related to our equity method investment. As such, our earnings in Tinuum Group increased by $33.0 million during the year ended December 31, 2016 compared to the year ended December 31, 2015 due to $46.2 million of cash distributions received that were in excess of our pro-rata share of cumulative earnings in Tinuum Group.

RC earnings were positively impacted during the year ended December 31, 2016 due to lower operating losses associated with our RCM6 equity method investment, which was sold during the first quarter of 2016.

RC earnings were negatively impacted during the year ended December 31, 2016 by a decrease in earnings from Tinuum Services primarily due to a decrease in the number of RC facilities being operated by Tinuum Services, as discussed in the consolidated results above.

RC earnings were also negatively impacted during the year ended December 31, 2016 by a decrease in royalties related to Tinuum Group's use of our M-45 License. During the year ended December 31, 2016 and 2015, there were 16.2 million tons and 22.0 million tons, respectively, of RC produced and sold using the M-45 License. The decrease in tonnage was due to a decrease in the per facility tonnage and a decrease in the number of RC facilities producing RC with our technologies, as well as an increase in certain RC facility operating expenses, as discussed in the consolidated results above.

RC segment operating income increased during the year ended December 31, 2016 compared to the same period in 2015. In addition to the impacts of RC earnings discussed above, RC segment operating income was positively impacted by a decrease in 453A interest expense. 453A interest expense decreased during the year ended December 31, 2016 due to a decrease in the tax liability being deferred as of December 31, 2016.

EC
Discussion of revenues derived from our EC segment and costs related thereto are included within our consolidated results in Item 8 of this Report.
EC segment operating income increased during the year ended December 31, 2016 compared to 2015 due to the earnings discussed within the consolidated results and decreases in operating expenses. Specifically, Payroll and benefits and Research and development expense, net decreased year over year by 5.7 million and $6.0 million, respectively. Additionally, impacting the year over year change was an increase in operating income due to the settlement of the remaining amounts owed to the former DSI Business Owner, resulting in a reduction of segment expenses of $0.9 million during the year ended December 31, 2016. Offsetting these items was the allowance recorded during the year ended December 31, 2015 of $0.5 million related to a note receivable.


44

Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During 2016, our liquidity position was positively affected primarily due to distributions from Tinuum Group and Tinuum Services, a reduction in the operation of retained RC facilities, proceeds received from the sale of our interest in RCM6 and the elimination of the related note payable, the elimination of our short term borrowings as well as the ability to utilize our bank line of credit ("Line of Credit") to support certain letters of credit. As a result, our working capital position improved by $40.6 million.
Our principal sources of liquidity currently include:
•
cash on hand;
•
cash provided by our operations, including the release of restricted cash;
•
distributions from Tinuum Group and Tinuum Services;
•
royalty payments from Tinuum Group; and
•
our Line of Credit.

In November 2016, we renegotiated the terms of our Line of Credit to update certain covenants and increase the borrowing amount to enable us to have borrowing capacity to provide short-term liquidity for operating purposes. From inception to the date of this amendment, we were unable to borrow on the Line of Credit as a result of not being in compliance with certain covenants. No borrowings were outstanding as of December 31, 2016 or December 31, 2015. A key provision in the terms of the amendment to the Line of Credit is the ability to use the facility to secure performance and other contractual and settlement obligations in lieu of pledging restricted cash, contingent upon our maintaining a minimum cash compensating balance and meeting certain financial metrics. At December 31, 2016, we held $13.7 million in restricted cash, and $3.0 million of this amount could potentially be released to unrestricted cash upon our fulfillment of the finalization of litigation matters, as discussed in Note 14 of the Consolidated Financial Statements included in Item 8 of this Report, as well as continued compliance with the applicable financial covenants. While such a release would be desirable, in the event we do not meet the conditions, we believe that our existing and forecasted liquidity from cash distributions and royalties as well as other expected operating results will result in cash flow and liquidity sufficient to fund our continuing operations.

Prior to June 2014, the Line of Credit was used primarily to provide collateral support for certain letters of credit that had been issued to customers related to certain contractual performance and payment guarantees, typically provided in lieu of surety bonds. Upon notification of covenant non-compliance related to the Line of Credit, we were required to secure such letters of credit with cash collateral. Additionally, we were required to provide collateral to other financial institutions that have issued letters of credit, providing security for continuing royalty indemnification obligations related to the settlement of certain litigation. The collateral amounts are disclosed on the Consolidated Balance Sheets as Restricted cash, Restricted cash, long-term and Investment securities, restricted, long-term. As of December 31, 2016 and December 31, 2015, these collateral amounts totaled $13.7 million and $12.0 million, respectively.
No amounts were drawn on the Line of Credit through the date of this filing.
On March 3, 2016, we sold our entire ownership interest in RCM6. We received a cash payment of $1.8 million related to the sale and have no future obligations related to previously recorded notes payable.
Our principal uses of liquidity during 2016 have included:

•
our business operating expenses;
•
payoff of the Credit Agreement;
•
interest expense on the Credit Agreement, notes payable, and 453A interest;
•
completion of the Restatement activities related to prior year financial statements;
•
delivering on our existing contracts and customer commitments;
•
corporate restructuring and realignment of our businesses; and
•
royalty indemnification payments.

On June 30, 2016, we, the required lenders under the Credit Agreement and the Administrative Agent agreed to terminate the Credit Agreement, prior to the maturity date of July 8, 2016, and we paid the total principal balance of the loans and advances made to or for the benefit of us, together with all accrued but unpaid interest, and the total amount of all fees, costs, expenses and other amounts owed by us thereunder, including a prepayment premium. The agreement included a waiver by the lenders for a portion of the prepayment premium of 4% reflected in the Credit Agreement.

45

In February 2016, we entered into an agreement with the DSI Business Owner to settle the remaining amounts owed to the DSI Business Owner as of the date of the agreement of approximately $1.1 million for $0.3 million, which was paid in the first quarter of 2016.
Our 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 our contracts and initiatives, receiving royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, and increasing our share of the market for EC products, and, in particular EC chemical revenues. Increased distributions from Tinuum Group will likely be dependent upon both preserving existing contractual relationships and securing additional tax equity investors for those Tinuum Group RC facilities that are currently not operating.
Sources and Uses of Cash
Year ended December 31, 2016 Compared to Year ended December 31, 2015
Cash, cash equivalents and restricted cash increased from $21.0 million as of December 31, 2015 to $26.9 million as of December 31, 2016, an increase of $6.0 million. The following table summarizes our cash flows for the years ended December 31, 2016 and 2015, respectively.
 
 
Years Ended December 31,
 
 
(in thousands)
 
2016
 
2015
 
Change
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(18,257
)
 
$
(29,869
)
 
$
11,612

Investing activities
 
39,899

 
4,334

 
35,565

Financing activities
 
(15,671
)
 
10,029

 
(25,700
)
Net change in Cash and Cash Equivalents and Restricted Cash
 
5,971

 
(15,506
)
 
21,477

Additionally, the following table summarizes the cash flows of Tinuum Group, whose cash distributions to us most significantly impact our consolidated cash flow results, for the years ended December 31, 2016 and 2015, respectively.
 
 
Years Ended December 31,
 
 
(in thousands)
 
2016
 
2015
 
Change
Tinuum Group cash, beginning of year
 
$
6,183

 
$
3,870

 
$
2,313

Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
79,723

 
37,750

 
41,973

Investing activities
 
(2,846
)
 
(30,061
)
 
27,215

Financing activities
 
(72,163
)
 
(5,376
)
 
(66,787
)
Net change in cash
 
4,714

 
2,313

 
2,401

Tinuum Group cash, end of year
 
$
10,897

 
$
6,183

 
$
4,714

Cash flow from operating activities
Cash flows used in operating activities reflect the operating losses as well as the timing of our working capital requirements, in addition to other items discussed herein.
Our cash expenditures for legal and professional fees for the year ended December 31, 2016 decreased from the comparable prior year primarily due to a reduction in the professional resources deployed to address the Restatement, which decreased by $6.1 million from the year ended December 31, 2015.
Deferred revenue and project costs resulted in a change in a use of operating cash flows on a net basis of $6.0 million due to production of ACI and DSI equipment systems.
A reduction in advanced deposits received related to royalty earnings from Tinuum Group negatively impacted operating cash flows by $3.0 million and $3.5 million for the years ended December 31, 2016 and 2015, respectively. During the fourth quarter of 2016, we made a final payment of $1.4 million to Tinuum Group to repay in full the royalty advanced deposit.
Our operating cash flow may also be significantly impacted by distributions from our equity investees, which are classified as either a return on investment within operating cash flows or a return in excess of cumulative earnings within investing cash flows. During 2016, we received $33.0 million more in total cash distributions from equity method investees than we did in

46

2015 due to the suspension of operations of retained RC facilities, a decrease in RC facility installations by Tinuum Group and an increase in invested facilities.
Cash flow from investing activities
Maturity of investments in securities, restricted
We are required to provide collateral in the form of restricted cash for certain letters of credit for future payments related to royalty indemnification obligations and other payments as discussed in Note 14 of the Consolidated Financial Statements included in Item 8 of this Report. Cash is pledged as security for letters of credit in the same amount as the obligations. During 2016, we ceased to pledge investments to support these letters of credit and instead used restricted cash as necessary.
Acquisition and disposal of property and equipment, net
Acquisitions of property and equipment were $0.3 million and $0.5 million for the years ended December 31, 2016 and December 31, 2015, respectively.
Proceeds from the sale of property and equipment, net
Proceeds from the sale of property and equipment were $0.1 million and $0.9 million for the years ended December 31, 2016 and December 31, 2015, respectively. During 2015, we disposed of property and equipment related to the termination of manufacturing operations at our BCSI fabrication facility.
Advance on note receivable
In December 2014, we loaned $0.5 million to an independent third party to provide financing for the pursuit of emissions technology projects, bearing annual interest of 8%. Interest and principal were payable at maturity of the agreement in June 2015. In March 2015, we loaned an additional $0.5 million to the third party, also bearing annual interest at 8%. All interest and principal payments under both loans were then deferred until March 2018.
Acquisition of a business
During March 2015, we acquired certain assets of Clearview, which operated as ADA Analytics, for $2.4 million cash, as described in Note 8 of the Consolidated Financial Statements included in Item 8 of this Report, $2.1 million of which was paid during 2015, with the balance being paid in 2014. We acquired the in-process research and development assets of Clearview in order to potentially commercialize and expand our analytics services available to customers. However, in August 2015, as part of a broader strategic restructuring of our business to simplify our operating structure in a manner that creates increased customer focus, better supports sales and product delivery and also aligns our cost structure as the EC market shifts towards compliance solutions for the MATS, our management approved an action to wind down operations of ADA Analytics.
Equity method investment
On February 10, 2014, we purchased a 24.95% membership interest in RCM6, which owned a single RC facility that produced RC that qualified for Section 45 tax credits. As part of the purchase, we were 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. During the years ended December 31, 2016 and 2015, we funded capital calls and made variable payments of $0.2 million and $2.4 million, respectively.
Proceeds from sale of equity method investment
As discussed in Note 7 of the Consolidated Financial Statements included in Item 8 of this Report, we sold our investment in RCM6 in March 2016. Proceeds from the sale included $1.8 million in cash and the assumption, by the buyer, of all unpaid amounts outstanding under the original note payable.
As discussed within the Results of Operations and the operating cash flow activities above, our investing cash flow may also be significantly impacted by the classification of cash distributions from equity method investees as either a return on investment within operating cash flows or a return in excess of investment basis within investing cash flows.
Cash flow from financing activities
Short term borrowings
On June 30, 2016, we, the required lenders under the Credit Agreement and the Administrative Agent agreed to terminate the Credit Agreement, and we paid all outstanding amounts owed under the Credit Agreement of $9.9 million. During the year ended December 31, 2016, we paid $0.8 million in debt issuance costs related to the Second Amendment and amendment fees related to the Line of Credit. Additionally, during the year ended December 31, 2016, we paid a debt prepayment penalty of $0.2 million due to paying off the Credit Agreement prior to maturity.


47

Notes payable activity
During the year ended December 31, 2016 and 2015 we used $1.2 million and $1.5 million cash, respectively, for repayments of principal on the RCM6 and the DSI Business Owner notes payable, as described in Note 9 of the Consolidated Financial Statements included in Item 8 of this Report.
Equity award activity
During the years ended December 31, 2016 and 2015, we used $0.2 million and $0.3 million, respectively, for the repurchase of shares to satisfy tax withholdings upon the vesting of equity based awards.

Year ended December 31, 2015 Compared to Year ended December 31, 2014
Cash, cash equivalents and restricted cash decreased from $36.5 million as of December 31, 2014 to $21.0 million as of December 31, 2015, a decrease of $15.5 million, primarily due to an increase in expenses and cash expenditures for payroll and benefits, legal and professional fees and general and administrative costs. Additional decreases in cash were related to acquisitions of property and equipment, cost method investments and equity method investees of $2.9 million, payment of settlement royalties of $3.7 million, and payments related to extended equipment contracts of $8.7 million.
 
 
Years Ended December 31,
 
 
(in thousands)
 
2015
 
2014
 
Change
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(29,869
)
 
(40,161
)
 
10,292

Investing activities
 
4,334

 
32,648

 
(28,314
)
Financing activities
 
10,029

 
(1,565
)
 
11,594

Net change in Cash and Cash Equivalents and Restricted Cash
 
(15,506
)
 
(9,078
)
 
(6,428
)
Additionally, the following table summarizes the cash flows of Tinuum Group, whose cash distributions to us most significantly impact our consolidated cash flow results, for the years ended December 31, 2016 and 2015, respectively.
 
 
Years Ended December 31,
 
 
(in thousands)
 
2015
 
2014