Edgar Filing: Advanced Emissions Solutions, Inc.

Document

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________

FORM 10-Q

______________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



¨	TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37822

______________________________________

Advanced Emissions Solutions, Inc.

(Exact name of registrant as specified in its charter)

______________________________________



Delaware		27-5472457
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



640 Plaza Drive, Suite 270, Highlands Ranch, CO		80129
(Address of principal executive offices)		(Zip Code)

(720) 598-3500
(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

______________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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



Large accelerated filer	o	Accelerated filer	x

Non-accelerated filer	o	Smaller reporting company	¨

		Emerging growth company	¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at August 1, 2017
Common stock, par value $0.001 per share		21,103,250

INDEX



		PAGE
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	1
	Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2017 and June 30, 2016	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and June 30, 2016	3
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	41
Item 4.	Controls and Procedures	41

PART II. - OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1a.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44

Part I. – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Advanced Emissions Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



	As of
(in thousands, except share data)	June 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	26,373		$	13,208
Restricted cash	3,000			13,736
Receivables, net	1,958			8,648
Receivables, related parties, net	1,866			1,934
Costs in excess of billings on uncompleted contracts	—			25
Prepaid expenses and other assets	1,736			1,357
Total current assets	34,933			38,908
Property and equipment, net of accumulated depreciation of $1,541 and $2,920, respectively	468			735
Cost method investment	1,016			1,016
Equity method investments	2,739			3,959
Deferred tax assets	53,290			61,396
Other long-term assets	1,711			1,282
Total Assets	$	94,157		$	107,296
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,617		$	1,920
Accrued payroll and related liabilities	1,135			2,121
Billings in excess of costs on uncompleted contracts	1,884			4,947
Legal settlements and accruals	4,327			10,706
Other current liabilities	8,208			4,017
Total current liabilities	17,171			23,711
Legal settlements and accruals, long-term	1,076			5,382
Other long-term liabilities	2,234			2,038
Total Liabilities	20,481			31,131
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding	—			—
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 22,438,617 and 22,322,022 shares issued, and 21,076,726 and 22,024,675 shares outstanding at June 30, 2017 and December 31, 2016, respectively	22			22
Treasury stock, at cost: 1,370,891 and -0- shares as of June 30, 2017 and December 31, 2016, respectively	(12,973		)	—
Additional paid-in capital	114,882			119,494
Accumulated deficit	(28,255		)	(43,351		)
Total stockholders’ equity	73,676			76,165
Total Liabilities and Stockholders’ Equity	$	94,157		$	107,296

See Notes to the Condensed Consolidated Financial Statements.

Advanced Emissions Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2017			2016			2017			2016
Revenues:
Equipment sales	$	24,619		$	8,213		$	29,727		$	29,919
Chemicals	846			613			3,127			1,047
Consulting services and other	—			125			—			320
Total revenues	25,465			8,951			32,854			31,286
Operating expenses:
Equipment sales cost of revenue, exclusive of depreciation and amortization	22,650			5,437			26,793			22,470
Chemicals cost of revenue, exclusive of depreciation and amortization	645			255			2,403			396
Consulting services and other cost of revenue, exclusive of depreciation and amortization	—			77			—			212
Payroll and benefits	2,033			3,956			4,215			7,759
Rent and occupancy	255			632			300			1,026
Legal and professional fees	1,219			1,982			2,254			4,965
General and administrative	809			1,346			2,072			2,092
Research and development, net	(414		)	(345		)	(222		)	(143		)
Depreciation and amortization	118			223			600			454
Total operating expenses	27,315			13,563			38,415			39,231
Operating loss	(1,850		)	(4,612		)	(5,561		)	(7,945		)
Other income (expense):
Earnings from equity method investments	10,155			13,754			23,969			19,331
Royalties, related party	1,866			669			3,621			1,859
Interest expense	(628		)	(1,573		)	(1,321		)	(3,537		)
Revision in estimated royalty indemnity liability	500			—			3,400			—
Other	7			(279		)	16			2,680
Total other income	11,900			12,571			29,685			20,333
Income before income tax expense	10,050			7,959			24,124			12,388
Income tax expense	3,642			99			9,028			152
Net income	$	6,408		$	7,860		$	15,096		$	12,236
Earnings per common share (Note 1):
Basic	$	0.29		$	0.36		$	0.68		$	0.55
Diluted	$	0.29		$	0.35		$	0.68		$	0.55
Weighted-average number of common shares outstanding:
Basic	21,866			21,875			21,961			21,895
Diluted	21,880			22,187			21,981			22,204
Cash dividends declared per common share outstanding:	$	0.25		$	—		$	0.25		$	—

See Notes to the Condensed Consolidated Financial Statements.

Advanced Emissions Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended June 30,
(in thousands)	2017			2016
Cash flows from operating activities
Net income	$	15,096		$	12,236
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	600			454
Debt prepayment penalty and amortization of debt issuance costs	73			1,380
Impairment of property, equipment, and inventory	—			517
Stock-based compensation expense	1,173			1,543
Earnings from equity method investments	(23,969		)	(19,331		)
Gain on sale of equity method investment	—			(2,078		)
Gain on settlement of note payable and licensed technology	—			(1,019		)
Other non-cash items, net	436			34
Changes in operating assets and liabilities:
Receivables	6,690			(627		)
Related party receivables	68			1,473
Prepaid expenses and other assets	(453		)	806
Costs incurred on uncompleted contracts	25,634			17,201
Deferred tax asset, net	8,106			—
Other long-term assets	(767		)	(2,630		)
Accounts payable	(303		)	(2,910		)
Accrued payroll and related liabilities	(987		)	(1,596		)
Other current liabilities	(1,227		)	(101		)
Billings on uncompleted contracts	(28,671		)	(20,910		)
Other long-term liabilities	164			(1,954		)
Legal settlements and accruals	(10,685		)	2,767
Distributions from equity method investees, return on investment	2,875			5,900
Net cash used in operating activities	(6,147		)	(8,845		)



	Six Months Ended June 30,
(in thousands)	2017			2016
Cash flows from investing activities
Distributions from equity method investees in excess of cumulative earnings	22,313			14,875
Maturity of investment securities, restricted	—			336
Acquisition of property and equipment, net	(247		)	(111		)
Contributions to equity method investees	—			(223		)
Proceeds from sale of equity method investment	—			1,773
Net cash provided by investing activities	22,066			16,650
Cash flows from financing activities
Borrowings on Line of Credit	808			—
Repayments on Line of Credit	(808		)	—
Repayments on short-term borrowings and notes payable, related party	—			(14,496		)
Short-term borrowing loan costs and debt prepayment penalty	—			(807		)
Repurchase of common shares to satisfy tax withholdings	(517		)	(85		)
Repurchase of common shares	(12,973		)	—
Net cash used in financing activities	(13,490		)	(15,388		)
Increase (decrease) in Cash and Cash Equivalents and Restricted Cash	2,429			(7,583		)
Cash and Cash Equivalents and Restricted Cash, beginning of period	26,944			20,973
Cash and Cash Equivalents and Restricted Cash, end of period	$	29,373		$	13,390
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,791		$	1,436
Cash paid (refunded) for income taxes	$	839		$	(72	)
Supplemental disclosure of non-cash investing and financing activities:
Stock award reclassification (liability to equity)	$	—		$	899
Settlement of RCM6 note payable	$	—		$	13,234
Non-cash reduction of equity method investment	$	—		$	11,156
Dividends payable	$	5,268		$	—

See Notes to the Condensed Consolidated Financial Statements.

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

Nature of Operations

Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in Highlands Ranch, Colorado. The Company is principally engaged in providing environmental and emissions control equipment, technologies and specialty chemicals to the coal-burning electric power generation industry. The Company generates substantial earnings and tax credits under Section 45 of the Internal Revenue Code ("IRC") from its equity investments in certain entities and royalty payment streams related to technologies that are licensed to Tinuum Group, LLC, a Colorado limited liability company ("Tinuum Group"). Such technologies allow Tinuum Group to provide various solutions to reduce mercury and nitrogen oxide ("NO_x") emissions at select coal-fired power generators through the burning of Refined Coal ("RC") placed in service by Tinnum Group. The Company’s sales occur principally throughout the United States. See Note 11 for additional information regarding the Company's operating segments.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its direct and indirect, wholly-owned subsidiaries. Also included within the unaudited Condensed Consolidated Financial Statements are the Company's investments, Tinuum Group and Tinuum Services, LLC ("Tinuum Services"), which are accounted for using the equity method of accounting. As discussed in Note 2, the Company sold its equity investment in RCM6, LLC ("RCM6") in March 2016, which was also accounted for using the equity method prior to the sale.

Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated for all periods presented in this Quarterly Report.

In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K"). Significant accounting policies disclosed therein have not changed.

Earnings Per Share

Basic earnings per share is computed using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend and participating rights in undistributed earnings. The Company's restricted stock awards ("RSA's") granted prior to December 31, 2016 contain non-forfeitable rights to dividends or dividend equivalents and are deemed to be participating securities. RSA's granted subsequent to December 31, 2016 do not contain non-forfeitable rights to dividends and are not deemed to be participating securities. On June 14, 2017, the Company declared a cash dividend of $0.25 per share on the outstanding shares of the Company’s common stock. See further discussion in Note 7.

Under the two-class method, net income for the period is allocated between common stockholders and the holders of the participating securities based on the weighted-average number of common shares outstanding during the period, excluding participating, unvested RSA's ("common shares"), and the weighted-average number of participating unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to arrive at basic earnings per common share and participating security for the period, respectively. Because the participating, unvested RSA's possess substantially the same rights to undistributed earnings as common shares outstanding, there is no difference between the calculated basic earnings per share for common shares and participating securities. Accordingly, and pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings per share attributable to participating securities in the Consolidated Statements of Operations.

Diluted earnings per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. Potentially dilutive securities consist of both unvested, participating and non-participating RSA's, as well as outstanding options to purchase common stock ("Stock Options") and contingent performance stock units ("PSU's") (collectively, "Potential dilutive shares"), and the dilutive effect, if any, for non-participating RSA's, Stock Options and PSU's is computed using the treasury stock method. For participating RSA's, the dilutive effect, if any, is determined using the greater of dilution as calculated under the treasury stock method or the two-class method. Potential dilutive shares are excluded from diluted earnings per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential dilutive shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period.

Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSU's granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential dilutive shares related to PSU's is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to such PSU's. See Note 8 for additional information related to PSU's.

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



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2017		2016		2017		2016
Net income	$	6,408	$	7,860	$	15,096	$	12,236
Less: Undistributed income allocated to participating securities	45		83		140		109
Income attributable to common stockholders	$	6,363	$	7,777	$	14,956	$	12,127

Basic weighted-average common shares outstanding	21,866		21,875		21,961		21,895
Add: dilutive effect of equity instruments	14		312		20		309
Diluted weighted-average shares outstanding	21,880		22,187		21,981		22,204
Earnings per share - basic	$	0.29	$	0.36	$	0.68	$	0.55
Earnings per share - diluted	$	0.29	$	0.35	$	0.68	$	0.55

For the three and six months ended June 30, 2017 and 2016, options to purchase 0.2 million shares of common stock for each of the periods presented were outstanding, but were not included in the computation of diluted net income per share because the exercise price exceeded the value of the shares and the effect would have been anti-dilutive. For the three and six months ended June 30, 2017 and 2016, options to purchase of 0.4 million, 0.2 million, 0.4 million and 0.2 million shares of common stock, respectively, which vest based on the Company achieving specified performance targets, were outstanding, but not included in the computation of diluted net income per share because they were determined not to be contingently issuable.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 2016 Form 10-K. Actual results could differ from these estimates.

Reclassifications

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

New Accounting Guidance

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and its related amendments are effective for reporting periods (including interim periods) beginning after December 31, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company will adopt the standard under the modified retrospective method effective January 1, 2018, which will be reflected in

its financial statements as of and for the three months ended March 31, 2018. Based on the Company's current assessment of the standard, the Company has determined that the timing of revenue recognition for equipment sales may be impacted, but that revenues generated from chemical sales and consulting services, based upon historical contract structures, will likely not be materially impacted. During the quarter ended June 30, 2017, the Company continued its assessment of the standard for the impact to the financial statements as of the adoption date, commenced a detailed review of individual customer contracts, commenced review of controls and procedures that may need to be revised or added from the adoption of the standard, developed a timeline for completion of the various phases of the Company's implementation plan for the standard, including documentation of the standard's financial statement impact at adoption, financial statement presentation and disclosure changes and reviews over potential changes to existing revenue recognition policies, controls and procedures. As a result, the Company may revise its initial quantitative and qualitative assessments of the financial impacts on its current revenue streams and related costs.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10) - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). This standard provides guidance on how entities measure certain equity investments and present changes in the fair value. This standard requires that entities measure certain equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. ASU 2016-01 is effective for fiscal years beginning after December 31, 2017. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date and have lease terms of more than 12 months. This topic retains the distinction between finance leases and operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and must be applied under a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, and must be adopted under a modified retrospective method approach. Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification in Topic 718. Under the standard, an entity does not apply modification accounting if the fair value, vesting conditions, and classification of the stock-based awards are the same immediately before and after the modification. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this standard. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for which financial statements have not yet been issued. The Company elected to adopt ASU 2017-09 effective with the beginning of its second fiscal quarter of 2017, April 1, 2017, and there was no material impact on the Company's financial statements or disclosures.

Note 2 - Equity Method Investments

Tinuum Group, LLC

The Company's ownership interest in Tinuum Group was 42.5% as of June 30, 2017 and December 31, 2016. Tinuum Group supplies technology equipment and technical services to cyclone-fired and other boiler users, but Tinuum Group's primary purpose is to put into operation facilities that produce and sell RC that lower emissions and therefore qualify for tax credits available under Section 45 of the IRC ("Section 45 tax credits"). Tinuum Group has been determined to be a variable interest entity ("VIE"); however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined that the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.

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



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2017			2016
Gross profit	$	25,027		$	21,154		$	47,083		$	47,680
Operating, selling, general and administrative expenses	4,327			4,956			9,801			10,468
Income from operations	20,700			16,198			37,282			37,212
Other expenses	(359		)	(3,021		)	(947		)	(4,036		)
Class B preferred return	(505		)	(1,043		)	(1,142		)	(2,186		)
Loss attributable to noncontrolling interest	7,926			3,951			17,287			5,907
Net income available to Class A members	$	27,762		$	16,085		$	52,480		$	36,897
ADES equity earnings from Tinuum Group	$	9,138		$	12,832		$	22,313		$	18,275

As of June 30, 2017 and December 31, 2016, the amount of Tinuum Group's temporary Class B preferred equity was $11.5 million and $18.3 million, respectively.

The difference between the Company's proportionate share of Tinuum Group's Net income available to Class A members (at its equity interest of 42.5%) as presented in the table below and the Company's earnings from its Tinuum Group equity method investment as reported in the Condensed Consolidated Statements of Operations relates to the Company receiving distributions in excess of the carrying value of the equity investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed below.

As shown in the tables below, the Company’s carrying value in Tinuum Group was reduced to zero for the three and six months ended June 30, 2017, as cumulative cash distributions received from Tinuum Group exceeded the Company's pro-rata share of cumulative earnings in Tinuum Group. The carrying value of the Company's investment in Tinuum Group shall remain zero as long as the cumulative amount of distributions received from Tinuum Group continues to exceed the Company's cumulative pro-rata share of Tinuum Group's Net income available to Class A members. For periods during which the ending balance of the Company's investment in Tinuum Group is zero, the Company only recognizes equity earnings from Tinuum Group to the extent that cash distributions are received from Tinuum Group during the period. For periods during which the ending balance of the Company's investment is greater than zero (e.g., when the cumulative earnings in Tinuum Group exceeds cumulative cash distributions received), the Company recognizes its pro-rata share of Tinuum Group's Net income available to Class A members for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period. During the three and six months ended June 30, 2017, the Company's cumulative amount of distributions received from Tinuum Group exceeded the Company's cumulative pro-rata share of Tinuum Group's Net income available to Class A members. As such, the Company recognized equity earnings from Tinuum Group for the three and six months ended June 30, 2017 of $9.1 million and $22.3 million, respectively. During the three and six months ended June 30, 2016, the Company's cumulative share of pro-rata Tinuum Group income exceeded the amount of its cumulative income recognized due to cash being distributed. As such, the Company recognized equity earnings from Tinuum Group in the amount of $12.8 million and $18.3 million, respectively. As of June 30, 2017 and 2016, the Company's carrying value in Tinuum Group was zero and zero, respectively.

Thus, the amount of equity earnings or loss reported on the Company's Condensed Consolidated Statement of Operations may differ from a mathematical calculation of net income or loss attributable to the equity interest based upon the factor of the equity interest and the Net income or loss attributable to Class A members as shown on Tinuum Group’s statement of operations. Additionally, for periods during which the carrying value of the Company's investment in Tinuum Group is greater than zero, distributions from Tinuum Group are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows. For periods during which the carrying value of the Company's investment in Tinuum Group is zero, such cash distributions are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees in excess of investment basis" within Investing cash flows.

The following tables presents the Company's investment balance, equity earnings and cash distributions in excess of the investment balance for the three and six months ended June 30, 2017 and 2016 (in thousands):



Description	Date(s)	Investment balance			ADES equity earnings (loss)			Cash distributions		Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
Beginning balance	12/31/2016	$	—		$	—		$	—	$	(9,894	)
ADES proportionate share of income from Tinuum Group ⁽¹⁾	First Quarter	10,457			10,457			—		—
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)	First Quarter	(9,894		)	(9,894		)	—		9,894
Cash distributions from Tinuum Group	First Quarter	(13,175		)				13,175		—
Adjustment for current year cash distributions in excess of investment balance	First Quarter	12,612			12,612			—		(12,612		)
Total investment balance, equity earnings (loss) and cash distributions	3/31/2017	$	—		$	13,175		$	13,175	$	(12,612	)
ADES proportionate share of income from Tinuum Group ⁽¹⁾	Second Quarter	$	11,761		$	11,761		$	—	$	—
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)	Second Quarter	(11,761		)	(11,761		)	—		11,761
Cash distributions from Tinuum Group	Second Quarter	(9,138		)	—			9,138		—
Adjustment for current year cash distributions in excess of investment balance	Second Quarter	9,138			9,138			—		(9,138		)
Total investment balance, equity earnings (loss) and cash distributions	6/30/2017	$	—		$	9,138		$	9,138	$	(9,989	)



Description	Date(s)	Investment balance			ADES equity earnings (loss)			Cash distributions		Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
Beginning balance	12/31/2015	$	—		$	—		$	—	$	(3,263	)
ADES proportionate share of income from Tinuum Group⁽¹⁾	First Quarter	8,706			8,706			—		—
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)	First Quarter	(3,263		)	(3,263		)	—		3,263
Cash distributions from Tinuum Group	First Quarter	(3,400		)	—			3,400		—
Total investment balance, equity earnings (loss) and cash distributions	3/31/2016	$	2,043		$	5,443		$	3,400	$	—
ADES proportionate share of income from Tinuum Group ⁽¹⁾	Second Quarter	$	6,758		$	6,758		$	—	$	—
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)	Second Quarter	—			—			—		—
Cash distributions from Tinuum Group	Second Quarter	(14,875		)	—			14,875		—
Adjustment for current year cash distributions in excess of investment balance	Second Quarter	6,074			6,074			—		(6,074		)
Total investment balance, equity earnings (loss) and cash distributions	6/30/2016	$	—		$	12,832		$	14,875	$	(6,074	)

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

Tinuum Services, LLC

The Company has a 50% voting and economic interest in Tinuum Services, which is equivalent to the voting and economic interest of NexGen Refined Coal, LLC ("NexGen"). The Company has determined that Tinuum Services is not a VIE and has evaluated the consolidation analysis under the Voting Interest Model. Because the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. The Company’s investment in Tinuum Services as of June 30, 2017 and December 31, 2016 was $2.7 million and $4.0 million, respectively.

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



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2017			2016
Gross loss	$	(17,249	)	$	(14,473	)	$	(30,128	)	$	(27,098	)
Operating, selling, general and administrative expenses	37,325			31,128			71,953			67,390
Loss from operations	(54,574		)	(45,601		)	(102,081		)	(94,488		)
Other income (expenses)	84			(20		)	69			(40		)
Loss attributable to noncontrolling interest	56,523			47,465			105,322			97,754
Net income	$	2,033		$	1,844		$	3,310		$	3,226
ADES equity earnings from Tinuum Services	$	1,017		$	922		$	1,656		$	1,613

Included within the Consolidated Statements of Operations of Tinuum Services for the three and six months ended June 30, 2017 and 2016, respectively, were losses related to VIE's of Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are removed from the net income of Tinuum Services as they are losses attributable to a noncontrolling interest.

RCM6, LLC

On March 3, 2016, the Company sold its 24.95% membership interest in RCM6 for a cash payment of $1.8 million and the assumption, by the buyer, of an outstanding note payable made by the Company in connection with its purchase of RCM6 membership interests from Tinuum Group. In doing so, the Company recognized a gain on the sale of $2.1 million for the six months ended June 30, 2016, which is included within the Other line item in the Condensed Consolidated Statements of Operations. As a result of the sale of its ownership interest, the Company ceased to be a member of RCM6 and, as such, is no longer subject to any quarterly capital calls and variable payments to RCM6. In addition, the Company has no future obligations related to the previously recorded note payable. However, the Company will still receive its pro-rata share of income and cash distributions through its ownership in Tinuum Group based on the RCM6 lease payments made to Tinuum Group.

Prior to the sale of its ownership interest, the Company recognized equity losses related to its investment in RCM6 of $0.6 million for the three months ended March 31, 2016. The following table summarizes the results of operations of RCM6 for the three and six months ended June 30, 2016:



	January 1 - March 3,
(in thousands)	2016
Gross loss	$	(555	)
Operating, selling, general and administrative expenses	360
Loss from operations	(915		)
Other expenses	(52		)
Net loss	$	(967	)
ADES equity losses from RCM6	$	(557	)

The following table details the components of the Company's respective equity method investments included within the Earnings from equity method investments line item on the Condensed Consolidated Statements of Operations:



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2017		2016		2017		2016
Earnings from Tinuum Group	$	9,138	$	12,832	$	22,313	$	18,275
Earnings from Tinuum Services	1,017		922		1,656		1,613
Loss from RCM6	—		—		—		(557		)
Earnings from equity method investments	$	10,155	$	13,754	$	23,969	$	19,331

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



	Six Months Ended June 30,
(in thousands)	2017		2016
Distributions from equity method investees, return on investment
Tinuum Group	$	—	$	3,400
Tinuum Services	2,875		2,500
	$	2,875	$	5,900
Distributions from equity method investees in excess of investment basis
Tinuum Group	$	22,313	$	14,875
	$	22,313	$	14,875

Note 3 - Cost Method Investment

In November 2014, the Company acquired 411,765 shares of common stock, representing approximately an 8% ownership interest, in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage, for $2.8 million in cash (the "Highview Investment"). The Company evaluated the Highview Investment and determined that it should account for the investment under the cost method. The Highview Investment is evaluated for impairment upon an indicator of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. As of December 31, 2016, the Company recorded an impairment charge of $1.8 million based on an estimated fair value of £2.00 per share, compared to the carrying value prior to the impairment charge of £4.25 per share. The estimated fair value as of December 31, 2016 was based on an equity raise that occurred during the first quarter of 2017 at a price of £2.00 per share. As of June 30, 2017, there were no indicators of impairment identified with respect to the Highview Investment.

Note 4 - Borrowings

Line of Credit

On November 30, 2016, ADA-ES, Inc., a wholly-owned subsidiary of the Company ("ADA"), as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment (the "Tenth Amendment") to the 2013 Loan and Security Agreement (the "Line of Credit" or "LOC"). The Tenth Amendment increased the Line of Credit to $15 million, extended the maturity date of the Line of Credit to September 30, 2017 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") related to equipment projects, the Royalty Award, as defined in Note 6, and certain other agreements. Additionally, this amendment secured the Line of Credit with amounts due to the Company from an additional existing Refined Coal facility lease, which amounts also factor into the borrowing base limitation, and amended certain financial covenants. Pursuant to the Tenth Amendment, the Company was required to maintain a deposit account with the Lender, initially with a minimum balance of $6.0 million, and as of June 30, 2017, $3.0 million, based on the Company meeting certain conditions and maintaining minimum trailing twelve month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Tenth Amendment) of $24.0 million. The minimum deposit balances are classified as Restricted Cash on the Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016.

As of June 30, 2017, there were no outstanding borrowings under the Line of Credit, however, LC's in the aggregate amount of $10.7 million were secured under the Line of Credit, resulting in borrowing availability of $4.3 million.

Letters of Credit

The Company has LC's related to equipment projects, the Royalty Award and certain other agreements. During March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million, which was funded by borrowing availability under the Line of Credit. The Company subsequently repaid this amount to the Lender as of March 31, 2017. The Company is contesting the draw on this LC and is pursuing actions to recover this amount from the customer. This amount is included in Other long-term assets on the Condensed Consolidated Balance Sheets.

The following tables summarize the LC's outstanding and collateral, by asset type, reported on the Condensed Consolidated Balance Sheets:



	As of June 30, 2017
(in thousands)	LC Outstanding		Utilization of LOC Availability		Restricted Cash
Contract performance - equipment systems	$	83	$	83	$	—
Royalty Award	10,650		10,650		—
Total LC outstanding	$	10,733	$	10,733	$	—



	As of December 31, 2016
(in thousands)	LC Outstanding		Utilization of LOC Availability		Restricted Cash
Contract performance - equipment systems	$	1,855	$	1,776	$	86
Royalty Award	7,150		—		7,150
Total LC outstanding	$	9,005	$	1,776	$	7,236

Credit Agreement

On June 30, 2016, the Company, the required lenders and the administrative lender under a $15.0 million short-term loan (the "Credit Agreement") agreed to terminate the Credit Agreement prior to the maturity date of July 8, 2016, effective upon the Company’s prepayment on June 30, 2016 of $9.9 million, which was comprised of the total principal balance of the loan and advances made to or for the benefit of the Company, together with all accrued but unpaid interest, and the total amount of all fees, costs, expenses and other amounts owed by the Company thereunder, including a prepayment premium.

Tinuum Group - RCM6 Note Payable

The Company acquired a 24.95% membership interest in RCM6 from Tinuum Group in February 2014 through an up-front payment and a note payable (the "RCM6 Note Payable"). Due to the payment terms of the note purchase agreement, the RCM6 Note Payable periodically added interest to the outstanding principal balance. The stated rate associated with the RCM6 Note Payable was 1.65% and the effective rate of the RCM6 Note Payable at inception was 20%. As discussed in Note 2, on March 3, 2016, the Company sold its 24.95% membership interest in RCM6 and, as a result, the Company has no future obligations related to the previously recorded RCM6 Note Payable.

DSI Business Owner

In February 2016, the Company entered into an agreement to settle an outstanding note payable of approximately $1.1 million for $0.3 million with the former owner of a business ("DSI Business Owner") acquired by the Company in 2012, which was paid during the first quarter of 2016. The Company recognized a gain related to the settlement of $0.9 million, which is included in the Other line item in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2016.

Note 5 - Fair Value Measurements

Fair value of financial instruments

The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, deposits and accrued expenses, approximate fair value due to the short maturity of these instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:



	As of June 30, 2017				As of December 31, 2016
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Instruments:
Cost method investment ⁽¹⁾	$	1,016	$	1,016	$	1,016	$	1,016
Highview technology license payable	$	210	$	210	$	207	$	207

(1) Fair value is based on the investee's recently completed equity raise at £2.00 per share. Refer to Note 3 for further discussion of this investment. The fair value measurement represents a Level 3 measurement as it is based on significant inputs not observable in the market.

Concentration of credit risk

The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, which were held at one and two financial institutions as of June 30, 2017 and December 31, 2016, respectively. If those institutions were to be unable to perform their obligations, the Company would be at risk regarding the amount of cash and investments in excess of the Federal Deposit Insurance Corporation limits ($250 thousand) that would be returned to the Company.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2017 and December 31, 2016, the Company had no financial instruments carried and measured at fair value on a recurring basis.

Note 6 - Commitments and Contingencies

Legal Proceedings

The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and

judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below.

Securities class action lawsuit: United Food and Commercial Workers Union v. Advanced Emissions Solutions, Inc., No. 14-cv-01243-CMA-KMT (U.S. District Court, D. Colo.)

As of December 31, 2016, the Company had a recorded liability and insurance receivable of $4.0 million in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. On February 10, 2017, the Company received an order and final judgment that the lawsuit was settled, and the entire case had been dismissed with prejudice. The Company's insurance carriers funded the full settlement in November 2016. As of June 30, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.

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

As of December 31, 2016, the Company had a recorded liability and insurance receivable of $0.6 million in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. A settlement for this lawsuit was approved and the case was closed on January 4, 2017, and the Company's insurance carriers funded the full settlement in January 2017. As of June 30, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.

SEC Inquiry

On March 29, 2017, the Company and the Securities and Exchange Commission reached a settlement to resolve a previously disclosed investigation into certain accounting issues, as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Without admitting or denying the SEC’s allegations, the Company agreed to the terms of the settlement and agreed to pay a civil monetary penalty of $0.5 million. The Company had fully reserved for this penalty as of June 30, 2016. The penalty was paid in the first quarter of 2017.

Settlement and royalty indemnity

In August 2008, Norit International N.V. f/k/a Norit N.V. ("Norit") filed a lawsuit against the Company asserting claims for misappropriation of trade secrets and other claims related to the Company's ADA Carbon Solutions, LLC joint venture ("Carbon Solutions") that built an activated carbon manufacturing plant (the “Red River Plant”). In August 2011, the Company and Norit entered into a settlement agreement whereby the Company paid amounts related to the non-solicitation breach of contract claim, and ADA was also required to pay additional damages related to certain future revenues generated from the Red River Plant through the second quarter of 2018 (the "Royalty Award"). Payments of amounts due under the Royalty Award for each quarter are payable three months after such quarter ends. In October 2011, an arbitration panel endorsed and confirmed the terms of the settlement agreement.

Additionally, during November 2011, the Company entered into an Indemnity Settlement Agreement whereby the Company agreed to settle certain indemnity obligations asserted against the Company related to the Norit litigation and relinquished all of its equity interest in Carbon Solutions to Carbon Solutions and amended the Intellectual Property License Agreement dated October 1, 2008 between the Company and Carbon Solutions. Under a provision of the Royalty Award, in the event that the Company declares or otherwise issues a dividend to any or all of its stockholders prior to January 1, 2018, other than repurchases of common stock under employee stock plans, the Company must increase its LC amounts as collateral for payments due to Norit, equal to 50% of the aggregate fair market value of such dividends (the "Dividends Provision"). Additionally, the first time that the Company achieves earnings in excess of $20.0 million for a fiscal year ended prior to January 1, 2018, the Company must also increase its LC amounts as collateral by $5.0 million for payments due to Norit (the "Earnings Provision"). Any increase due to the Dividends Provision or the Earnings Provision should not cause the outstanding LC's to exceed the remaining estimated Royalty Award. Based on the Company's achievement of $97.7 million of net income for the fiscal year ended December 31, 2016, in March 2017 and pursuant to the Earnings Provision, the Company provided an additional LC of $5.0 million that is secured under the Line of Credit as of June 30, 2017. Although the Company executed a stock repurchase and declared a dividend during the three months ended June 30, 2017, the Company was not required to increase its outstanding LC amounts as the existing LC’s are of a sufficient amount to support future estimated payments due related to the Royalty Award.

During the first quarter of 2017, the Company revised its estimate for future Royalty Award payments based in part on an updated forecast provided to the Company from Carbon Solutions. This forecast included a material reduction in estimated

future revenues generated at the Red River Plant. Based primarily on the updated forecast, the Company recorded a $2.9 million reduction to the Royalty Award accrual as of March 31, 2017.

During the second quarter of 2017, the Company revised its estimate for future Royalty Award payments based in part on an updated forecast provided to the Company from Carbon Solutions. This forecast included a material reduction in estimated future revenues generated at the Red River Plant. Based primarily on the updated forecast, the Company recorded a $0.5 million reduction to the Royalty Award accrual as of June 30, 2017.

As of June 30, 2017 and December 31, 2016, the Company carried the components of the Royalty Award in Legal settlements and accruals in the Condensed Consolidated Balance Sheets of $4.3 million and $5.7 million, respectively, and in Legal settlements and accruals, long-term of $1.1 million and $5.4 million, respectively. Future amounts to be paid related to the Royalty Award may differ from current estimates due to future adjusted sales of activated carbon from the Red River Plant.

The following table summarizes the Company's legal settlements and accruals as described above, which are presented in the Condensed Consolidated Balance Sheets:



	As of
(in thousands)	June 30, 2017		December 31, 2016
Settlement and Royalty Indemnification	$	4,327	$	5,656
Legal settlements	—		5,050
Legal settlements and accruals	4,327		10,706
Settlement and Royalty Indemnification, long-term	1,076		5,382
Legal settlements and accruals, long-term	1,076		5,382
Total legal settlements and accruals	$	5,403	$	16,088

Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan

The Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan “(the “Plan”) is subject to the jurisdiction of the Internal Revenue Service ("IRS") and the Department of Labor ("DOL"). The DOL opened an investigation into the Plan, and the Company is responding to all requests for documents and information from the DOL. The DOL has not issued any findings as of the date of this report and any potential loss is not probable or estimable, thus no accruals have been recorded as of June 30, 2017.

Other Commitments and Contingencies

Tinuum Group

The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen and two entities affiliated with NexGen have provided an affiliate of the Goldman Sachs Group, Inc. with limited guaranties (the "Tinuum Group Party Guaranties") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contributions from the other party equal to 50% of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guaranties.

Performance Guarantee on Equipment Systems

In the normal course of business related to ACI and DSI systems, the Company may guarantee certain performance thresholds during a discrete performance testing period that do not extend beyond six months from the initial test date, the commencement of which is determined by the customer. Performance thresholds include such matters as the achievement of a certain level of mercury removal and other emissions based upon the injection of a specified quantity of a qualified activated carbon or other chemical at a specified rate given other plant operating conditions, and availability of equipment and electric power usage. In the event the equipment fails to perform as specified during the testing period, the Company may have an obligation to correct or replace the equipment. In the event the performance thresholds are not achieved, the Company may have a “make right” obligation within the contract limits. During the three and six months ended June 30, 2017, the Company was not presented with any performance guarantees nor did it incur any additional claims. Additional performance guarantee claims, if incurred, are included within the Equipment sales cost of revenue line in the Condensed Consolidated Statements of Operations.

Note 7 - Stockholders' Equity

Stock Repurchase

On May 5, 2017, the Company’s Board of Directors ("Board") authorized the commencement of a modified Dutch Auction tender offer ("Tender Offer") to purchase for cash up to 925,000 shares of the Company's common stock at a price per share of not less than $9.40 nor greater than $10.80, for a maximum aggregate purchase price of $10.0 million, with an option to purchase an additional 2% of the outstanding shares of common stock if the Tender Offer was oversubscribed. The Tender Offer expired on June 6, 2017 and a total of 2,858,425 shares were validly tendered and not properly withdrawn at or below the final purchase price of $9.40 per share.

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

The Company’s Board and executive officers did not participate in the Tender Offer, except for one director of the Board, who is a manager of a financial institution and holds dispositive powers over the shares of the Company's common stock held by the financial institution, which tendered 70,178 of its shares of the Company's common stock in order to continue to own less than 4.99% of the outstanding shares of the Company's common stock upon the expiration of the Tender Offer.

Quarterly Cash Dividend

On June 14, 2017, the Board declared a quarterly cash dividend (the "Dividend") of $0.25 per share on the outstanding shares of the Company’s common stock to the stockholders of record as of the close of business on June 28, 2017. The total amount of the Dividend was $5.3 million and was accrued as of June 30, 2017. The Dividend is included in both Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet as of June 30, 2017, of which $5.2 million was paid on July 17, 2017 (the "Payment Date"). A portion of the Dividend remains accrued subsequent to the Payment Date, is included in Other long-terms liabilities as of June 30, 2017, and represents dividends accumulated on nonvested shares of common stock held by employees of the Company that contain forfeitable dividend rights that are not payable until the underlying shares vest.

Tax Asset Protection Plan

On May 5, 2017, the Board approved a Tax Asset Protection Plan designed to protect the Company’s ability to utilize its net operating losses and tax credits, which totaled approximately $113 million as of December 31, 2016.

United States federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if ADES experiences an “ownership change” (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of ADES by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period.

The Tax Asset Protection Plan is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of the Company’s outstanding common stock and will expire on the earlier of (a) May 4, 2018, or (b) the date of the 2018 Annual Meeting of Stockholders. The Tax Asset Protection Plan may also be terminated earlier in accordance with the terms thereof.

Note 8 - Stock-Based Compensation

The Company grants equity based awards to employees and non-employee directors. Equity based awards include RSA's, Stock Options, PSU's and Stock Appreciation Rights ("SAR's"). Stock-based compensation expense related to employees is included within the Payroll and benefits line item in the Condensed Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors is included within the General and administrative line item in the Condensed Consolidated Statements of Operations.

Total stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2017		2016		2017		2016
Restricted stock award expense	$	367	$	584	$	805	$	982
Stock option expense	165		103		300		139
PSU expense	34		125		68		316
SAR expense	—		95		—		106
Total stock-based compensation expense	$	566	$	907	$	1,173	$	1,543

The amount of unrecognized compensation cost as of June 30, 2017, and the expected weighted-average period over which the cost will be recognized is as follows:



	As of June 30, 2017
(in thousands)	Unrecognized Compensation Cost		Expected Weighted-Average Period of Recognition (in years)
Restricted stock award expense	$	2,043	2.52
Stock option expense	431		1.15
PSU expense	69		0.51
Total unrecognized stock-based compensation expense	$	2,543	2.23

Restricted Stock Awards

Restricted stock is typically granted with vesting terms of three years. The fair value of restricted stock awards is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for restricted stock awards is recognized over the entire vesting period on a straight-line basis. A summary of restricted stock award activity under the Company's various stock compensation plans for the six months ended June 30, 2017 is presented below:



	Shares		Weighted- Average Grant Date Fair Value
Non-vested at January 1, 2017	297,347		$	8.03
Granted	159,092		$	9.58
Vested	(183,450	)	$	7.94
Forfeited	(1,202	)	$	9.01
Non-vested at June 30, 2017	271,787		$	9.00

Stock Options

Stock options generally vest over three years and have a contractual limit of five years from the date of grant to exercise. The fair value of stock options granted is determined on the date of grant using the Black-Scholes option pricing model and the related expense is recognized on a straight-line basis over the entire vesting period.

A summary of option activity for the six months ended June 30, 2017 is presented below:



	Number of Options Outstanding and Exercisable	Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Contractual Term (in years)
Options outstanding, January 1, 2017	632,446	$	11.61
Options granted	—	—
Options exercised	—	—
Options expired / forfeited	—	—
Options outstanding, June 30, 2017	632,446	$	11.61	$	167	2.67
Options exercisable as of June 30, 2017	251,114	$	13.38	$	67	2.85

Performance Share Units

Compensation expense is recognized for PSU awards on a straight-line basis over the applicable service period, which is generally three years, based on the estimated fair value at the date of grant using a Monte Carlo simulation model. There were no PSU's granted during the six months ended June 30, 2017.

A summary of PSU activity for the six months ended June 30, 2017 is presented below:



	Units		Weighted- Average Grant Date Fair Value
Non-vested at January 1, 2017	49,516		$	25.20
Granted	—		—
Vested / Settled ⁽¹⁾	(30,110	)	$	(28.59	)
Forfeited / Canceled	—		—
Non-vested at June 30, 2017	19,406		$	19.95

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



	Year of Grant	Net Number of Issued Shares upon Vesting	Shares Withheld to Settle Tax Withholding Obligations	TSR Multiple Range		Russell 3000 Multiple
	Year of Grant	Net Number of Issued Shares upon Vesting	Shares Withheld to Settle Tax Withholding Obligations	Low	High	Low	High
Six Months Ended June 30, 2017
	2014	6,476	3,573	0.75	1.00	—	—
	2015	3,869	2,310	0.60	0.60	—	—
Six Months Ended June 30, 2016
	2013	28,566	1,572	0.63	1.00	—	—
	2014	11,487	—	0.63	0.63	—	—
	2015	13,529	—	0.50	0.50	—	—

Stock Appreciation Rights

SAR's generally vest over three years and have a contractual limit of five years from the date of grant to exercise. The fair value of SAR's granted is determined on the date of grant using the Black-Scholes option pricing model and the related expense is recognized on a straight-line basis over the derived service period of the respective awards. The Company did not grant any SAR's during the six months ended June 30, 2017.

Note 9 - Income Taxes

For the three and six months ended June 30, 2017, the Company recorded income tax expense of $3.6 million and $9.0 million, respectively, compared to income tax expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2016, respectively. The income tax expense recorded for the three and six months ended June 30, 2017 was comprised of estimated federal income tax expense of $3.5 million and $8.7 million, respectively, and estimated state income tax expense of $0.1 million and $0.3 million, respectively. The income tax expense recorded for the three and six months ended June 30, 2016 related to estimated state income tax expense.

For the three and six months ended June 30, 2017 and 2016, the Company's income tax expense and effective tax rates based on forecasted pretax income were:



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except for rate)	2017			2016			2017			2016
Income tax expense	$	3,642		$	99		$	9,028		$	152
Effective tax rate	36		%	1		%	37		%	1		%

The effective tax rate for the three and six months ended June 30, 2017 was different from the federal statutory rate primarily due to state income tax expense, net of federal benefit.

The effective tax rate for the three and six months ended June 30, 2016 was different from the statutory rate primarily due to the utilization of federal operating losses and the Company's full valuation allowances against federal and state net operating losses and federal tax credits, offset by estimated state income tax expense.

The Company assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.

Note 10 - Supplemental Financial Information

Supplemental Balance Sheet Information

The following table summarizes the components of Prepaid expenses and other assets and Other long-term assets as presented in the Condensed Consolidated Balance Sheets:



	As of
(in thousands)	June 30, 2017		December 31, 2016
Prepaid expenses and other assets:
Prepaid expenses	$	1,658	$	1,169
Other	78		188
	$	1,736	$	1,357
Other long-term assets:
Deposits	$	223	$	263
Intangibles	758		696
Other	730		323
	$	1,711	$	1,282

The following table details the components of Other current liabilities and Other long-term liabilities as presented in the Condensed Consolidated Balance Sheets:



	As of
(in thousands)	June 30, 2017		December 31, 2016
Other current liabilities:
Accrued interest	$	49	$	618
Accrued losses on equipment contracts	104		183
Taxes payable	754		244
Dividends payable	5,237		—
Deferred revenue	45		76
Warranty liabilities	601		287
Deferred rent	—		369
Asset retirement obligation	527		1,312
Other	891		928
	$	8,208	$	4,017
Other long-term liabilities:
Deferred rent	203		38
Deferred revenue, related party	2,000		2,000
Dividends payable	31		—
	$	2,234	$	2,038

The tables below details additional components of Other current liabilities and Other long-term liabilities as presented above:

The changes in the carrying amount of the Company’s warranty obligations from December 31, 2016 through June 30, 2017 are as follows:



	As of
(in thousands)	June 30, 2017
Balance, beginning of period	$	287
Warranties accrued, net	580
Consumption of warranty obligations accrued	(291		)
Change in estimate related to previous warranties accrued	25
Balance, end of period	$	601

Included within Other current liabilities as of June 30, 2017 and Other long-term liabilities as of December 31, 2016 is the Company's asset retirement obligation. Changes in the Company's asset retirement obligations are as follows:



	As of
(in thousands)	June 30, 2017
Asset retirement obligation, beginning of period	$	1,312
Accretion	33
Liabilities settled	(19		)
Changes due to amount and timing of reclamation	(799		)
Asset retirement obligations, end of period	$	527

The Company's estimate for its asset retirement obligation was reduced during the three and six months ended June 30, 2017 as the scope of the asset retirement obligation was reduced. The change in estimate was recorded within the Research and development, net line item of the Condensed Consolidated Statements of Operations as the asset retirement obligation related to a research project which expenses were originally recorded within the same line item.

Supplemental Condensed Consolidated Statements of Operations Information

The following table details the components of Interest expense in the Condensed Consolidated Statements of Operations:



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2017		2016		2017		2016
453A interest	$	566	$	354	$	1,032	$	1,145
Interest on RCM6 note payable, related party	—		—		—		263
Credit agreement interest	36		1,215		73		2,112
Other	26		4		216		17
	$	628	$	1,573	$	1,321	$	3,537

The following table details the components of the Other line item of the Condensed Consolidated Statements of Operations:



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2017		2016			2017		2016
Gain on sale of equity method investment	$	—	$	—		$	—	$	2,078
Gain on settlement of note payable and licensed technology	—		151			—		1,019
Other	7		(430		)	16		(417		)
	$	7	$	(279	)	$	16	$	2,680

Note 11 - Business Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision making group, in deciding how to allocate resources and in assessing financial performance. As of June 30, 2017, the Company's CODM was the Company's CEO. The Company's operating and reportable segments are organized by products and services provided.

As of June 30, 2017, the Company has two reportable segments: (1) Refined Coal ("RC"); and (2) Emissions Control ("EC").

The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:


•	The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2016 Form 10-K, except as described below.


•	Segment revenue includes the Company's equity method earnings and losses from the Company's equity method investments. Segment revenue also includes the Company's royalty earnings from Tinuum Group.

•

Segment operating income (loss) includes the Company's equity method earnings and losses from the Company's equity method investments, royalty earnings from Tinuum Group (including depreciation and amortization expense), gains related to sales of equity method investments and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Rent and occupancy, Legal and professional fees, and General and administrative.


•	All items not included in operating income, except as noted below, are excluded from the RC and EC segments.

As of June 30, 2017 and December 31, 2016, substantially all of the Company's material assets are located in the U.S. and all significant customers are either U.S. companies or the U.S. Government. The following table presents the Company's operating segment results for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2017			2016
Revenues:
Refined Coal:
Earnings in equity method investments	$	10,155		$	13,754		$	23,969		$	19,331
Royalties	1,866			669			3,621			1,859
	12,021			14,423			27,590			21,190
Emissions Control:
Equipment sales	24,619			8,213			29,727			29,919
Chemicals	846			613			3,127			1,047
Consulting services	—			125			—			320
	25,465			8,951			32,854			31,286
Total segment reporting revenues	37,486			23,374			60,444			52,476
Adjustments to reconcile to reported revenues:
Refined Coal:
Earnings in equity method investments	(10,155		)	(13,754		)	(23,969		)	(19,331		)
Royalties	(1,866		)	(669		)	(3,621		)	(1,859		)
	(12,021		)	(14,423		)	(27,590		)	(21,190		)
Total reported revenues	$	25,465		$	8,951		$	32,854		$	31,286

Segment operating income:
Refined Coal ⁽¹⁾	$	11,133		$	14,199		$	26,158		$	22,061
Emissions Control	1,887			2,118			2,160			6,700
Total segment operating income	$	13,020		$	16,317		$	28,318		$	28,761

(1) Included within the RC segment operating income for the three months ended June 30, 2016 is a $2.1 million gain on the sale of RCM6 and for the three months ended June 30, 2017 and 2016, 453A interest expense of $0.6 million and $0.4 million, respectively. Included within the RC segment operating income for the six months ended June 30, 2017 and 2016, are 453A interest expense of $1.0 million and $1.1 million, respectively, and interest expense related to the RCM6 note payable of zero and $0.3 million, respectively.

A reconciliation of reportable segment operating income to the Company's consolidated net income is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2017			2016

Segment operating income	$	13,020		$	16,317		$	28,318		$	28,761
Adjustments to reconcile to net income attributable to ADES
Corporate payroll and benefits	(1,343		)	(2,866		)	(3,153		)	(5,912		)
Corporate rent and occupancy	(91		)	(272		)	(117		)	(501		)
Corporate legal and professional fees	(1,129		)	(1,982		)	(2,127		)	(4,909		)
Corporate general and administrative	(797		)	(1,373		)	(1,656		)	(2,146		)
Corporate depreciation and amortization	(51		)	(128		)	(258		)	(258		)
Corporate interest (expense) income, net	(59		)	(1,214		)	(283		)	(2,121		)
Other income (expense), net	500			(523		)	3,400			(526		)
Income tax expense	(3,642		)	(99		)	(9,028		)	(152		)
Net income	$	6,408		$	7,860		$	15,096		$	12,236

Corporate general and administrative expenses listed above include certain costs that benefit the business as a whole but are not directly related to one of the Company's segments. Such costs include, but are not limited to, accounting and human resources staff, information systems costs, legal fees, facility costs, audit fees and corporate governance expenses.

Segment assets were as follows as of the dates presented:



	As of
(in thousands)	June 30, 2017		December 31, 2016
Refined Coal	$	5,069	$	6,310
Emissions Control	31,067		24,551
All Other and Corporate	58,021		76,435
Consolidated	$	94,157	$	107,296

Note 12 - Restructuring

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

A summary of the net pretax charges, incurred by segment, excluding facility charges shown below, is as follows:

Pretax Charge

(in thousands, except employee data)

Approximate Number of Employees

Refined Coal

Emissions Control

All Other and Corporate

Total

Three Months Ended June 30, 2016

Restructuring charges

—

468