style="font-family:Times New Roman;font-size:10pt;">



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 March 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-54992
______________________________________
Advanced Emissions Solutions, Inc.
(Exact name of registrant as specified in its charter)
______________________________________
Delaware
27-5472457
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
9135 South Ridgeline Boulevard, Suite 200, Highlands Ranch CO,
000-54992
(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 ¨ No x
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 ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. (Check one):    Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at April 14, 2016
Common stock, par value $0.001 per share
22,011,494





INDEX
PAGE





Part I. – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
As of
(in thousands, except share data)
March 31, 2015
December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents
$
11,738

$
25,181

Receivables, net
16,999

16,594

Receivables, related parties, net
1,463

1,439

Restricted cash
2,527

2,527

Costs in excess of billings on uncompleted contracts
4,674

6,153

Prepaid expenses and other assets
2,582

2,535

Total current assets
39,983

54,429

Restricted cash, long-term
9,971

8,771

Property and equipment, net of accumulated depreciation of $6,432 and $5,924, respectively
4,398

4,808

Investment securities, restricted, long-term
336

336

Cost method investment
2,776

2,776

Equity method investments
20,266

19,584

Other assets
5,139

2,995

Total Assets
$
82,869

$
93,699

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
$
7,398

$
7,514

Accrued payroll and related liabilities
5,027

5,158

Current portion of notes payable, related parties
1,499

1,479

Billings in excess of costs on uncompleted contracts
19,592

22,518

Settlement and royalty indemnity obligation
4,068

3,749

Other current liabilities
6,814

6,739

Total current liabilities
44,398

47,157

Long-term portion of notes payable, related party
13,660

14,431

Settlement and royalty indemnification, long-term
19,210

20,273

Advance deposit, related party
5,797

6,524

Other long-term liabilities
5,894

6,011

Total Liabilities
88,959

94,396

Commitments and contingencies (Note 8)


Stockholders’ deficit:
Preferred stock: par value of $.001 and no par value per share, respectively, 50,000,000 shares authorized, none outstanding


Common stock: par value of $.001 per share, 100,000,000 shares authorized, 21,923,015 and 21,853,263 shares issued, and 21,699,217 and 21,643,342 shares outstanding at March 31, 2015 and December 31, 2014, respectively
22

22

Additional paid-in capital
110,908

110,169

Accumulated deficit
(117,020
)
(110,888
)
Total stockholders’ deficit
(6,090
)
(697
)
Total Liabilities and Stockholders’ Deficit
$
82,869

$
93,699

See Notes to the Condensed Consolidated Financial Statements.

1



Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
( in thousands, except per share data and percentages )
2015
2014
Revenues:
Equipment sales
$
21,115

$
203

Consulting services
368

749

Chemicals and other
274

31

Total revenues
21,757

983

Operating expenses:
Equipment sales cost of revenue, exclusive of depreciation and amortization
15,051

124

Consulting services cost of revenue, exclusive of depreciation and amortization
426

311

Chemical and other cost of revenue, exclusive of depreciation and amortization
238

16

Payroll and benefits
4,911

4,247

Rent and occupancy
631

559

Legal and professional fees
3,735

1,433

General and administrative
1,882

1,146

Research and development, net
1,250

279

Depreciation and amortization
531

438

Total operating expenses
28,655

8,553

Operating loss
(6,898
)
(7,570
)
Other income (expense):
Earnings from equity method investments
314

6,625

Royalties, related party
2,194

1,132

Interest income
12

27

Interest expense
(1,775
)
(793
)
Other
65

9

Total other income (expense), net
810

7,000

Loss before income tax expense
(6,088
)
(570
)
Income tax expense
44

13

Net loss
$
(6,132
)
$
(583
)
Loss per common share (Note 1):
Basic
$
(0.28
)
$
(0.03
)
Diluted
$
(0.28
)
$
(0.03
)
Weighted-average number of common shares outstanding:
Basic
21,696

21,465

Diluted
21,696

21,465

See Notes to the Condensed Consolidated Financial Statements.


2



Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
( in thousands)
2015
2014
Cash flows from operating activities
Net loss
$
(6,132
)
$
(583
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
531

438

Amortization of debt issuance costs
25

25

Impairment of property and equipment
48

55

Provision for bad debt expense and note receivable
511


Interest costs added to principal balance of notes payable

330

Share-based compensation expense
954

904

Earnings from equity method investments
(314
)
(6,625
)
Other non-cash items, net
(43
)
26

Changes in operating assets and liabilities, net of effects of acquired businesses:
Receivables
(56
)
28

Related party receivables
(24
)
(260
)
Prepaid expenses and other assets
(308
)
(818
)
Costs incurred on uncompleted contracts
2,231

(15,075
)
Restricted cash, long-term

(1,525
)
Other long-term assets
206

132

Accounts payable
(116
)
1,524

Accrued payroll and related liabilities
(131
)
(2,161
)
Other current liabilities
(377
)
(1,712
)
Billings on uncompleted contracts
(3,677
)
16,219

Advance deposit, related party
(727
)
(377
)
Other long-term liabilities
(65
)
164

Settlement and royalty indemnification obligation
(744
)
(340
)
Distributions from equity method investees, return on investment

1,250

Net cash used in operating activities
(8,208
)
(8,381
)

3



Three Months Ended March 31,
( in thousands)
2015
2014
Cash flows from investing activities
Purchase of investment securities, restricted

405

Increase in restricted cash
(1,200
)
(344
)
Acquisition of property and equipment
(111
)
(516
)
Advance on note receivable
(500
)

Acquisition of business
(2,124
)

Purchase of and contributions to equity method investees
(468
)
(3,652
)
Distributions from equity method investees in excess of cumulative earnings
100

6,588

Net cash provided by (used in) investing activities
(4,303
)
2,481

Cash flows from financing activities
Repayments on notes payable
(717
)

Proceeds received upon exercise of stock options

243

Repurchase of shares to satisfy minimum tax withholdings
(215
)

Net cash provided by (used in) financing activities
(932
)
243

Increase (Decrease) in Cash and Cash Equivalents
(13,443
)
(5,657
)
Cash and Cash Equivalents, beginning of period
25,181

37,890

Cash and Cash Equivalents, end of period
$
11,738

$
32,233

Supplemental disclosures of cash information:
Cash paid for interest
$
1,599

$
1,660

Cash paid for income taxes
44

89

Supplemental disclosure of non-cash investing and financing activities:
Restricted stock award reclassification (equity to liability)

501

Issuance of common stock to settle liabilities

127

Acquisition of equity method investment through note payable

13,301

See Notes to the Condensed Consolidated Financial Statements.


4



Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
Nature of Operations
Advanced Emissions Solutions, Inc. (“ADES” or the "Company"), a Delaware corporation with its principal office located in Highlands Ranch, Colorado, is principally engaged in providing environmental and emissions control equipment, technologies and specialty chemicals to the coal-burning electric power generation industry. Although the Company has historically operated at a net loss, the Company generates substantial earnings and tax credits under Section 45 of the Internal Revenue Code ("IRC") from its equity investments in certain entities and royalty payment streams related to technologies that are licensed to Clean Coal Solutions, LLC, a Colorado limited liability company ("CCS"). Such technologies allow CCS to provide their customers with various solutions to enhance combustion and reduced emissions of nitrogen oxide ("NO x ") and mercury from coal burned to generate electrical power. The Company’s sales occur principally throughout the United States. See Note 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 U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report are presented on a consolidated basis comprising ADES and its direct and indirect, wholly-owned subsidiaries: ADA-ES, Inc. ("ADA"), a Colorado corporation, BCSI, LLC ("BCSI"), a Delaware limited liability company, Advanced Clean Energy Solutions, LLC ("ACES"), a Delaware limited liability company, ADEquity, LLC ("ADEquity"), a Delaware limited liability company, ADA Environmental Solutions, LLC ("ADA LLC"), a Colorado limited liability company, ADA Intellectual Property, LLC ("ADA IP"), a Colorado limited liability company, ADA-RCM6, LLC ("ADA-RCM6"), a Colorado limited liability company, ADA Analytics, LLC, a Delaware limited liability company and ADA Analytics Israel Ltd. (collectively with ADA Analytics, LLC, "ADA Analytics"), an Israel limited liability company. ADA LLC and ADA IP had no operations in 2015 and 2014. Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated as of and for the three months ended March 31, 2015 and 2014 .
On March 14, 2014, the Company effected a two -for-one stock split of the Company’s common stock, which was completed in the form of a common stock dividend and all amounts have been retroactively adjusted for the split.
In the opinion of management, these 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, 2014 . Significant accounting policies disclosed therein have not changed.
Liquidity
During the three months ended March 31, 2015 the Company's working capital and cash balances continued to decline, due principally to continued losses. Such losses were driven primarily by poor operating performance related to Dry Sorbent Injection ("DSI") equipment, which is included within the Emissions Control - Manufacturing segment as of March 31, 2015 , substantial and continuing expenditures required to fund the re-audit and restatement ("Restatement") of certain of our prior consolidated financial statements, and a significant reduction in the receipt of cash distributions from CCS. This deterioration of working capital directly necessitated the securing of the loan transaction described in Note 12 ("Credit Agreement"). The Company expects that pressure on working capital will continue until such time as all Restatement activities are completed, including resolution of the SEC inquiry and the conclusion of the private litigation, both of which are described in Note 8 .
The Company's ability to generate sufficient cash flow required to meet ongoing operational needs and to meet obligations, including the repayment of the loan under the Credit Agreement, depends upon several factors, including executing on the Company's contracts and initiatives, receiving royalty payments from Clean Coal Solutions, LLC ("CCS") and distributions from CCS and Clean Coal Solutions Services, LLC ("CCSS"), and our ability to maintain a significant share of the market and increase operational efficiencies for emissions control equipment, chemicals and services. Increased distributions from CCS will likely be dependent upon the securing of additional tax equity investors for those CCS facilities that are currently not operating, or operating as retained Refined Coal ("RC") facilities. If we are unable to generate sufficient cash flow, we may be

5



unable to meet our operational needs and/or repay our loan when due. Should this be the case, we will seek to refinance the loan or obtain alternative financing. If we are unable to refinance the loan or obtain alternative financing, our lenders would be entitled to take possession of the collateral securing the indebtedness, which includes substantially all of our assets, to the extent permitted by the Credit Agreement and applicable law.
Earnings (Loss) Per Share
The Company computes earnings (loss) per share in accordance with FASB ASC 260-10. Under this guidance, unvested restricted stock awards ("RSA's") that contain non-forfeitable rights to dividends or dividend equivalents are deemed to be participating securities and, therefore, are included in computing basic earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings (losses). The Company did not declare any cash dividends during the three months ended March 31, 2015 or 2014 .
Under the two-class method, net income (loss) for the period is allocated between common stockholders and the holders of the participating securities, in this case, the weighted-average number of unvested restricted stock awards outstanding during the period. The allocated, undistributed income (loss) for the period is then divided by the weighted-average number of common shares and participating securities outstanding during the period to arrive at basic earnings (loss) per common share or participating security for the period, respectively. Because the Company did not declare any dividends during the periods presented, and because the unvested RSA's possess substantially the same rights to undistributed earnings as common shares outstanding, there is no difference between the calculated basic earnings (loss) per share for common shares and participating securities. Accordingly, and pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings (loss) per share attributable to participating securities on its Consolidated Statements of Operations.
Diluted earnings (loss) per share takes into consideration shares of common stock and unvested RSA's outstanding (computed under basic earnings (loss) per share) and potentially dilutive shares of common stock. Potentially dilutive shares consist of vested, in-the-money outstanding options, Stock Appreciation Rights ("SAR's") and contingent Performance Share Unit's ("PSU's") (collectively "Potential dilutive shares"). When there is a loss from continuing operations, all potentially dilutive shares become anti-dilutive and are thus excluded from the calculation of diluted loss per share.
Each PSU represents a contingent right to receive shares of the Company’s common stock, that may range from zero to two times the number of PSU's granted on the award date, should the Company meet certain performance measures over the requisite performance period. The number of potentially dilutive shares related to PSU's is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period was the end of the contingency period applicable to such PSU's.
The following table sets forth the calculations of basic and diluted earnings per share:
Three Months Ended March 31,
(in thousands, except per share amounts)
2015
2014
Net loss
$
(6,132
)
$
(583
)
Less: Undistributed loss allocated to participating securities
(64
)
(8
)
Loss attributable to common stockholders
$
(6,068
)
$
(575
)





Basic weighted-average common shares outstanding (1)
21,696

21,465

Add: dilutive effect of equity instruments


Diluted weighted average shares outstanding
21,696

21,465

Loss per common share - basic
$
(0.28
)
$
(0.03
)
Loss per common share - diluted
$
(0.28
)
$
(0.03
)
(1) The number of shares and per share amounts have been retroactively restated to reflect the two -for-one stock split of the Company’s common stock, which was effected in the form of a common stock dividend distributed on March 14, 2014.

6



The table below shows the number of shares that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive to the calculation:
Three Months Ended March 31,
(share data in thousands)
2015
2014
Stock options
19

143

Restricted stock awards
181

282

Performance share units
190

193

Total shares excluded from diluted shares outstanding
390

618

Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 . Actual results could differ from these estimates.
New Accounting Guidance
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Topic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items that simplifies income statement presentation by eliminating extraordinary items from U.S. GAAP. This guidance is to be applied either prospectively or retrospectively and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted provided the guidance is applied from the beginning of the annual year of adoption. The Company has adopted the guidance as of January 1, 2014 and the adoption of this standard did not have an impact on the Company's consolidated financial position or results of operations.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis that meant to clarify the consolidation reporting guidance in U.S. GAAP. This guidance is to be applied using a retrospective method or a modified retrospective method, as outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating this guidance but does not believe the adoption of this standard will impact the Company's financial statements and disclosures.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , which requires an entity to present debt issuance costs related to a debt liability as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this standard impacted the presentation of certain financial statement line items within the Company’s consolidated balance sheets and related disclosures, but did not affect the Company’s consolidated results of operations.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting Measurement-Period Adjustments , which eliminates the requirement for an entity to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is completed. ASU 2015-16 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. The adoption of this standard will not have an impact on the Company's financial position and results of operations.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes , to simplify the presentation of deferred income taxes. The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in the update. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The adoption of this standard will not have an impact on the Company's financial position.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities . This new 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

7



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.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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 apply 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 March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), which requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. ASU 2016-06 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and must apply a modified retrospective transition approach. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323), which simplifies the accounting for equity method investments by removing the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and must apply a prospective adoption approach. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarify the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation- Improvements to Employee Share-Based Payment Accounting (Topic 718), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company is currently evaluating the guidance to determine the Company's adoption method and the effect it will have on the Company's Consolidated Financial Statements.


8




Note 2 - Restructuring
The Company recorded restructuring charges during the three months ended March 31, 2015 in connection with the departure of an executive officer 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. The Company incurred additional charges during the remainder of 2015 associated with a reduction in force, the departure of executive officers, the closing of BCSI's facilities and management's further alignment of the business with strategic objectives, which impacted all segments of the Company's business.

The Company did not record restructuring charges during the three months ended March 31, 2014 .
A summary of the net pretax charges, incurred by segment, for each period is as follows:
Pretax Charge
(in thousands, except employee data)
Approximate Number of Employees
Refined Coal
Emission Control - ACI
Emissions Control - BCSI
Research & Development
All Other and Corporate
Total
Three Months Ended March 31, 2015
Restructuring charges
4

$

$

$

$

479

$
479

Changes in estimates

(10
)



(10
)
Total pretax charge, net of reversals
$

$
(10
)
$

$

479

$
469


The following table summarizes the Company’s utilization of restructuring accruals for the three months ended March 31, 2015 :
(in thousands)
Employee Severance
Remaining accrual as of December 31, 2014
$
1,690

Expense provision (1)
479

Cash payments and other (1)
(796
)
Change in estimates
(10
)
Remaining accrual as of March 31, 2015
$
1,363


(1) Included within the Expense provision and Cash payments and other line items in the above table is equity based compensation of $0.1 million for the three months ended March 31, 2015 , resulting from the accelerated vesting of modified equity-based compensation awards for certain terminated employees.

Restructuring accruals are included within the Accrued payroll and related liabilities line item in the Condensed Consolidated Balance Sheets . Restructuring expenses are included within the Payroll and benefits line item in the Condensed Consolidated Statements of Operations .
Note 3 - Acquisition
2015 Acquisition
In November 2014 , the Company entered into an agreement with InSyst Ltd. and ClearView Monitoring Solutions Ltd. (collectively "ClearView"), both Israel based companies specializing in data analytics, to allow the Company the exclusive option to purchase certain assets of ClearView. The Company paid $0.2 million related to this option, which was included within the Prepaid expenses and other assets line item within the Condensed Consolidated Balance Sheets as of December 31, 2014 . In January 2015 , the Company notified ClearView that it had elected to exercise its exclusive option to purchase certain assets of ClearView.

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


9



A summary of the purchase consideration and allocation of the purchase consideration is as follows:
(in thousands)
Purchase consideration:
Cash paid
$
2,360

Fair value of liabilities assumed:
Accrued liabilities
10

Contingent consideration
451

Total fair value of liabilities assumed
461

Total purchase consideration
$
2,821

Allocation of purchase consideration
Receivables
$
360

Property and equipment and other
82

Intangibles - in process research and development
2,379

Total
$
2,821

The transaction called for a series of contingent payments based upon the achievement of sales and sales targets. These contingent payments are classified as purchase consideration. As part of the purchase price, the Company recorded a $0.5 million liability for the contingent consideration based upon the net present value of the Company's estimate of the future payments.
During August 2015, as part of a broader strategic restructuring of the Company's business to simplify its operating structure in a manner that creates increased customer focus, better supports sales and product delivery and also aligns the Company’s cost structure as the emissions control market shifts towards compliance solutions for the Federal Mercury and Air Toxics Standards ("MATS"), the Company’s management approved an action to wind down operations of ADA Analytics. As a result of these actions, the Company fully impaired the carrying value of the assets and reversed the liability for the contingent consideration, thereby recognizing net impairment expense in the amount of $1.9 million during the third quarter of 2015.
Note 4 - Equity Method Investments
Clean Coal Solutions, LLC
The Company's ownership interest in CCS was 42.5% as of March 31, 2015 and December 31, 2014 . CCS supplies technology, equipment and technical services to cyclone-fired, pulverized coal and other boiler users, but CCS's primary purpose is to put into operation facilities that produce Refined Coal ("RC") that qualifies for tax credits available under Section 45 of the IRC ("Section 45 tax credits"). CCS has been determined to be a variable interest entity ("VIE"); however, the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined the partners of CCS with voting rights had identical voting interests, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact the VIE’s economic performance were shared.
As shown in the tables below, the Company’s carrying value in CCS has been reduced to zero in all periods presented, as cumulative cash distributions from CCS have exceeded the Company's pro-rata share of cumulative earnings in CCS. If CCS subsequently reports net income, the Company will not record its pro-rata share of such net income until cumulative share of pro-rata income equals or exceeds the amount of its cumulative income recognized due to cash being distributed. Until such time, the Company will only report income from CCS to the extent of cash distributions.
As such, equity income or loss reported on our income statement may differ from a mathematical calculation of net income or loss attributable to our equity interest based upon the factor of our equity interest and the net income or loss attributable to equity owners as shown on CCS’s income statement. Likewise, distributions from equity method investees are reported on our 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 investment basis” within Investing cash flows.

10



The following tables summarize the results of operations of CCS for the three months ended March 31, 2015 and 2014 , respectively:
Three Months Ended March 31,
(in thousands)
2015
2014
Gross profit
$
30,928

$
17,210

Operating expenses
5,355

4,421

Income from operations
25,573

12,789

Other expenses
(799
)
(243
)
Class B preferred return
(1,730
)
(2,334
)
Loss attributable to noncontrolling interest
1,330

2,104

Net income available to Class A members
$
24,374

$
12,316

ADES equity earnings
$
100

$
6,588

The difference between the Company's proportionate share of CCS's net income and the Company's earnings from its CCS equity method investment as reported on its Condensed Consolidated Statements of Operations relates to the Company receiving distributions in excess of the carrying value of the investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur. When CCS subsequently reports income, the Company does not record its share of such income until it equals the amount of distributions in excess of carrying value that were previously recognized in income.
The following table presents the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, on a quarterly basis, for the three months ended March 31, 2015 ( in thousands ):
Description
Date(s)
Investment balance
ADES equity earnings (loss)
Cash distributions
Cash distributions and equity loss in (excess) of investment balance
Beginning balance
12/31/14
$

$

$

$
(29,877
)
ADES proportionate share of income from CCS (1)
First Quarter
9,827

9,827



Increase of equity loss in excess of investment balance (prior to cash distributions)
First Quarter
(9,827
)
(9,827
)

9,827

Cash distributions from CCS
First Quarter
(100
)

100


Adjustment for current year cash distributions in excess of investment balance
First Quarter
100

100


(100
)
Total investment balance, equity earnings (loss) and cash distributions
3/31/2015
$

$
100

$
100

$
(20,150
)
The following table presents the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, on a quarterly basis, for the three months ended March 31, 2014 ( in thousands ):
Description
Date(s)
Investment balance
ADES equity earnings (loss)
Cash distributions
Cash distributions and equity loss in (excess) of investment balance
Beginning balance
12/31/13
$

$

$

$
(12,906
)
ADES proportionate share of income from CCS (1)
First Quarter
4,644

4,644



Increase of equity loss in excess of investment balance (prior to cash distributions)
First Quarter
(4,644
)
(4,644
)

4,644

Cash distributions from CCS
First Quarter
(6,588
)

6,588


Adjustment for current year cash distributions in excess of investment balance
First Quarter
6,588

6,588


(6,588
)
Total investment balance, equity earnings (loss) and cash distributions
3/31/14
$

$
6,588

$
6,588

$
(14,850
)

11



(1) The amounts of the Company's 42.5% proportionate share of net income as shown in the table above differ from mathematical calculations of the Company’s 42.5% equity interest in CCS multiplied by the amounts of Net Income available to Class A members as shown in the table above of CCS results of operations due to adjustments related to the Redeemable Class B preferred return and the elimination of CCS earnings attributable to RCM6, of which the Company owned 24.95% during the periods presented during the years ended December 31, 2015 and 2014.
Clean Coal Solutions Services, LLC
On January 20, 2010, the Company, together with NexGen Refined Coal, Inc. ("NexGen"), formed Clean Coal Solutions Services, LLC ("CCSS"), a Colorado limited liability company, for the purpose of operating the RC facilities leased or sold to third parties. The Company has determined that CCSS is not a VIE and has evaluated the consolidation analysis under the Voting Interest Model. The Company has a 50% voting and economic interest in CCSS, which is equivalent to the voting and economic interest of NexGen. Therefore, as the Company does not have greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for the investment under the equity method of accounting. The Company’s investment in CCSS as of March 31, 2015 and December 31, 2014 were $5.2 million and $4.1 million , respectively.
The following table summarizes the results of operations of CCSS:
Three Months Ended March 31,
(in thousands)
2015
2014
Gross loss
$
(10,163
)
$
(4,405
)
Operating expenses
37,945

21,698

Loss from operations
(48,108
)
(26,103
)
Other expenses
(6
)
(4
)
Loss attributable to noncontrolling interest
50,158

27,867

Net income
$
2,044

$
1,760

ADES equity earnings
$
1,022

$
880

Included within the Consolidated Statement of Operations of CCSS for the three months ended March 31, 2015 and 2014 , respectively, were losses related to VIE's of CCSS. These losses do not impact the Company's equity earnings from CCSS as 100% of those losses are removed from the net income of CCSS as they are losses attributable to a noncontrolling interest.
RCM6, LLC
On February 10, 2014, the Company purchased a 24.95% membership interest in RCM6, LLC ("RCM6"), which owns a single RC facility that produces RC that qualifies for Section 45 tax credits, from CCS through an up-front payment of $2.4 million and an initial note payable to CCS of $13.3 million . Due to the payment terms of the note purchase agreement, the note payable is periodically negatively amortizing and the note payable balance as of March 31, 2015 and December 31, 2014 was $13.6 million and $14.2 million , respectively. In addition to the up front and subsequent note payments, the Company is also subject to quarterly capital calls and variable payments based upon differences in originally forecasted RC production as of the purchase date and actual quarterly production. The following table contains the capital calls and variable payments made by the Company related to its investment in RCM6 during the three months ended March 31, 2015 and 2014 , respectively:
Three Months Ended March 31,
(in thousands)
2015
2014
Capital calls and variable payments
$
468

$
1,257

RCM6 has been determined to be a VIE, however, during the periods presented, the Company did not have the power to direct the activities that most significantly impacted the variable interest entity’s economic performance and has therefore accounted for the investment under the equity method of accounting.
As of March 31, 2015 and December 31, 2014 , the Company’s ownership in RCM6 was 24.95% . The Company’s investment in RCM6 as of March 31, 2015 and December 31, 2014 was $15.1 million and $15.4 million , respectively. On March 3, 2016, the Company sold its 24.95% membership interest in RCM6 as further described in Note 12 .

12



The following table summarizes the results of operations of RCM6:
Three Months Ended March 31,
(in thousands)
2015
2014
Gross loss
$
(800
)
$
(1,559
)
Operating expenses
461

444

Loss from operations
(1,261
)
(2,003
)
Other expenses
(72
)
(106
)
Net loss
$
(1,333
)
$
(2,109
)
ADES equity losses
$
(808
)
$
(843
)
The purchase of RCM6 resulted in the Company recording a basis difference related to property, plant and equipment and identifiable intangible assets. The difference between the Company's proportionate share of RCM6' net loss and the Company's equity losses noted above is due to depreciation and amortization related to the basis difference allocated to property, plant and equipment and identifiable intangible assets upon the purchase of RCM6. During the three months ended March 31, 2015 and 2014 , the Company adjusted its equity method earnings in RCM6 by $0.5 million and $0.3 million respectively, due to this basis difference.
On March 3, 2016, the Company sold its entire ownership interest in RCM6. The Company received a cash payment of $1.8 million related to the sale and has no future obligations related to the previously recorded note payable.
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 March 31,
(in thousands)
2015
2014
Earnings from CCS
$
100

$
6,588

Earnings from CCSS
1,022

880

Loss from RCM6
(808
)
(843
)
Earnings from equity method investments
$
314

$
6,625

The following table details the components of the cash distributions from the Company's respective equity method investments included within the Condensed Consolidated Statements of Cash Flows . Distributions from equity method investees are reported on our Condensed Consolidated Statements of Cash Flows as “return on investment” within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as “distributions in excess of cumulative earnings” within Investing cash flows.
Three Months Ended March 31,
(in thousands)
2015
2014
Distributions from equity method investees, return on investment
CCSS
$

$
1,250

$

$
1,250

Distributions from equity method investees in excess of investment basis
CCS
$
100

$
6,588

$
100

$
6,588

Note 5 - Investments

The Company had investment securities related to certificates of deposit in the amount of $0.3 million as of March 31, 2015 and December 31, 2014 . No unrealized gains or losses were recorded as of March 31, 2015 and December 31, 2014 related to these investment securities.

The Company also had a cost method investment in the amount of $2.8 million as of March 31, 2015 and December 31, 2014 . No unrealized gains or losses were recorded as of March 31, 2015 and December 31, 2014 related to this investment security.


13



The Company's investment securities have maturities ranging from one to five years as of March 31, 2015 .

In November 2014, the Company acquired an 8% ownership interest in the common stock of Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage, for $2.8 million in cash. The Company evaluated the investment and determined that it should account for the investment under the cost method. This investment is evaluated for impairment upon an indicator of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. As of March 31, 2015 and December 31, 2014 , no indicators of impairment had been identified. When there are no indicators of impairment present, the Company estimates the fair value for the Highview investment only if it is practical to do so. As of March 31, 2015 and December 31, 2014 , the Company estimated that the fair value of the cost method investment approximated the November 2014 purchase price due to the proximity of the purchase date to December 31, 2014 and March 31, 2015 .

Note 6 - Borrowings

The following table summarizes the Company's notes payable, all of which are with related parties, as of March 31, 2015 and December 31, 2014 :
As of
(in thousands)
March 31,
2015
December 31,
2014
Current portion of long-term borrowings
RCM6 note payable
$
888

$
874

DSI Business Owner note payable
611

605

Total current portion of long-term borrowings
1,499

1,479

Long-term borrowings
RCM6 note payable
12,696

13,312

DSI business owner note payable
964

1,119

Total Long-term borrowings
13,660

14,431

Total Borrowings
$
15,159

$
15,910

CCS - RCM6 Note Payable
As described in Note 4, the Company acquired membership interests in RCM6 from CCS in February 2014, through an up-front payment and a note payable. Due to the payment terms of the note purchase agreement, the note payable periodically adds interest to the outstanding note payable principle balance. The stated rate associated with the note is 1.65% and the effective rate of the note at inception was 20% . Due to the difference between the stated rate and the effective rate, the note payable is carried at a discount of $9.6 million and $10.1 million as of March 31, 2015 and December 31, 2014 , respectively. Unpaid principal and interest on the note are due in 2022.
As described in Note 12 , on March 3, 2016, the Company sold its 24.95% membership interest in RCM6 and, as a result, the Company currently has no future note payable obligations related to its RCM6 equity investment.
DSI Business Owner
As of December 31, 2014, the Company terminated the consulting portion of the agreements the former, sole-owner of companies from which BCSI acquired its assets ("DSI Business Owner"), as described in Note 9 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014. However, per the terms of the remaining agreements the Company was required to make all remaining payments structured as a note payable through the third quarter of 2017. In February 2016, the Company entered into an agreement with the DSI Business Owner and settled the remaining amounts owed as of the date of the agreement of approximately $1.1 million for $0.3 million which was paid during the first quarter of 2016.
Note 7 - Fair Value Measurements
Fair value of financial instruments
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, deposits and accrued expenses approximate fair value due to the short maturity of these instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:

14



As of March 31, 2015
As of December 31, 2014
(in thousands)
Carrying Value
Fair Value
Carrying Value
Fair Value
Financial Instruments:
Investment securities:
Investment securities, restricted, long-term
$
336

$
336

$
336

$
336

Cost method investment
$
2,776

$
2,776

$
2,776

$
2,776

Notes Payable:
Current portion of notes payable, related party
$
1,499

$
1,461

$
1,479

$
1,439

Long-term portion of notes payable, related party
$
13,660

$
13,601

$
14,431

$
14,356

Highview technology license payable
$
223

$
223

$
155

$
155

Highview technology license payable, long-term
$
1,165

$
1,165

$
1,389

$
1,389


Concentration of credit risk
The Company's certificates of deposit investment securities, and virtually all of the Company’s restricted and unrestricted cash accounts, are at two financial institutions. If those institutions were to be unable to perform their obligations, the Company would be at risk regarding the amount of cash and investment in excess of the federal deposit insurance corporation limits ( $250 thousand ) that would be returned to the Company.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The estimated fair values of investment securities are described below. Refer to Note 5 of these Consolidated Financial Statements for additional information regarding the Company’s investment securities.
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The Company uses the hierarchy prescribed in the accounting guidance for fair value measurements, based upon the available inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

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

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

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

Financial instruments carried and measured at fair value on a recurring basis are presented in the table below according to the fair value hierarchy described above:
As of March 31, 2015
Fair Value Measurement Using
(in thousands)
Level 1
Level 2
Level 3
Assets at Fair Value
Assets:
Investment securities, restricted, long-term
$

$
336

$

$
336

Total assets at fair value
$

$
336

$

$
336

Liabilities:
Contingent consideration
$

$

$
451

$
451

Total liabilities at fair value
$

$

$
451

$
451


15



As of December 31, 2014
Fair Value Measurement Using
(in thousands)
Level 1
Level 2
Level 3
Assets at Fair Value
Assets:
Investment securities, restricted, long-term
$

$
336

$

$
336

Total assets at fair value
$

$
336

$

$
336


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

As discussed in Note 3 , during the first quarter of 2015, contingent consideration was recorded related to the acquisition of ClearView. The transaction called for a series of contingent payments based upon the achievement of sales and sales targets. As part of the purchase price, the Company recorded a $0.5 million liability for the contingent consideration due to the sellers based upon the net present value of the Company's estimate of the future payments. This fair value measurement represents a Level 3 measurement as it is based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date.

As part of the broader restructuring plan discussed in Note 3 , during the third quarter, the Company recognized a non-cash gain related to the reversal of the contingent consideration liability as the achievement of sales and sales targets would not be met.

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

Assets and liabilities measured on a non-recurring basis are presented in the following tables:
As of March 31, 2015
Fair Value Measurement Using
(in thousands)
Level 1
Level 2
Level 3
Fair Value
Total Losses
Assets:
Impaired note receivable
$

$

$

$

$
(1,000
)
Total assets at fair value
$

$

$

$

$
(1,000
)

The Company recorded impairment charges related to a Note Receivable. The fair value of the impaired note receivable, determined to be fully impaired, was estimated using a discounted cash flow analysis. The fair value measurements represent a Level 3 measurement.
As of December 31, 2014
Fair Value Measurement Using
(in thousands)
Level 1
Level 2
Level 3
Fair Value
Total Losses
Assets:
Property and equipment
$

$

$
424

$
424

$
(355
)
Impaired note receivable




(500
)
Total assets at fair value
$

$

$
424

$
424

$
(855
)

During the fourth quarter of 2014, the Company recorded impairments on property and equipment with a total carrying value of $0.8 million , as a result of ongoing negative cash flows related to assets specifically related to the Company's Dry Sorbent Injection ("DSI") system fabrication facility. The fair values of the impaired assets as of December 31, 2014 were estimated using an appraisal obtained from a third party. The fair value measurements represent a Level 3 measurement as it is based on significant inputs not observable in the market. Additionally, the Company recorded impairment charges related to a Note Receivable. The fair value of the impaired note receivable, determined to be fully impaired, was estimated using a discounted cash flow analysis. The fair value measurements represent a Level 3 measurement.

During the fourth quarter of 2015, the Company recorded impairments totaling approximately $0.3 million to reduce the carrying value of certain property and equipment that the Company intended to sell to its estimated sales value, less estimated

16



costs to sell. The property and equipment were subsequently sold at auction. Proceeds from the sale of the impaired assets totaled approximately $0.6 million . No gain or loss was recognized on the sale of the property and equipment.

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

Note 8 - Commitments and Contingencies
Legal Proceedings

The Company is involved in certain legal actions, described below. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the claimants seek monetary damages and other penalties that could require significant expenditures. In accordance with U.S. GAAP, the Company records a liability in the Consolidated Financial Statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties or fines. ADES cannot predict, with any certainty, the final outcome of any legal proceedings as described in the paragraphs below, nor can it provide any assurance that the ultimate resolution of any such matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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

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

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

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

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

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


17



The Company has not recorded an expense related to losses in connection with this matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company cannot reasonably estimate the range of loss, if any, that may result from this matter.

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

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

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

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

On August 28, 2014, the Colorado state court approved a Stipulation and proposed Order Consolidating Actions, Appointing Co-Lead Plaintiffs and Co-Lead Counsel, and Staying Consolidated Action. Under that Order the consolidated derivative actions are stayed at least 30 days after a decision by the U.S. District Court on Defendants’ motion to dismiss the operative complaint in the securities class action described above. Any party has the right to move to lift the stay on 30-days’ written notice to the other parties.

The Company has not recorded an expense related to losses in connection with this matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company cannot reasonably estimate the range of loss, if any, that may result from this matter.
SEC Inquiry
On April 7, 2014, the SEC’s Division of Enforcement informed the Company that it had initiated an inquiry to determine if violations of the federal securities laws have occurred (the “SEC Inquiry”), and in September 2014 the SEC issued a formal order of investigation. The SEC Inquiry generally pertains to the restatement of the Company's financial statements and internal controls processes, as described in Note 2 to the Consolidated Financial Statements of the Company included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 . The Company is fully cooperating with the SEC and has provided information and documents to the SEC on an ongoing basis. To date, the SEC has not asserted any formal claims. While we cannot predict the duration or outcome of the SEC Inquiry, it could result in the payment of monetary penalties and other relief.
The Company has not recorded an expense related to losses in connection with this matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company cannot reasonably estimate the range of loss, if any, that may result from this matter.
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"). In August 2011 , the Company and Norit entered into a settlement agreement whereby the Company paid amounts related to the non-solicitation breach of contract claim and ADA was also required to pay additional damages related to certain future revenues generated from the equity method investment through Q2 2018 (the “Royalty Award”). Payments of amounts due under the Royalty Award for each quarter are payable three months after such quarter ends through the second quarter of 2018. In October 2011 , an arbitration panel endorsed and confirmed the terms of the settlement agreement.

18



Additionally, during November 2011, the Company entered into an Indemnity Settlement Agreement whereby the Company agreed to settle certain indemnity obligations asserted against the Company related to the Norit litigation and relinquished all of its equity interest in Carbon Solutions to Carbon Solutions and amended the Intellectual Property License Agreement dated October 1, 2008 between the Company and Carbon Solutions. In the event that the Company declares or otherwise issues a dividend to any or all of its stockholders prior to January 1, 2018, other than repurchases of common stock under employee stock plans, the Company must increase its letter of credit amounts, which support the payments which must be paid to Norit, equal to 50% of the aggregate fair market value of such dividends.
As of March 31, 2015 and December 31, 2014 , the Company has recorded the components of the Settlement and royalty indemnity obligation within the following line items in the Condensed Consolidated Balance Sheets :
As of
(in thousands)
March 31,
2015
December 31,
2014
Settlement and royalty indemnity obligation, short-term
$
4,068

$
3,749

Settlement and royalty indemnification, long-term
19,210

20,273

Total settlement and royalty indemnity
$
23,278

$
24,022

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.
CCS
The Company also has certain limited obligations contingent upon future events in connection with the activities of CCS. The Company, NexGen and two entities affiliated with NexGen have provided GSFS with limited guaranties (the “CCS 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 CCS Party Guaranty is entitled to receive contribution 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 CCS Party Guaranties.
Consultant obligation
On January 1, 2012 , the Company entered into a residual payment agreement with a former consultant who was involved in the development and deployment of RC technologies. Pursuant to the agreement, the Company was required to make annual payments based upon CCS RC production from January 1, 2012 through June 30, 2015 . These expenses are recorded within the Legal and professional fees line item in the Condensed Consolidated Statements of Operations and are recorded as RC production occurs. The following tables summarize the expenses under this agreement for the three months ended March 31, 2015 and 2014 , respectively:
Three Months Ended March 31,
(in thousands)
2015
2014
Consultant expense
$
67

$
250

Line of Credit
In September 2013, ADA, as borrower, and ADES, as guarantor, entered into a 2013 Loan and Security Agreement with a bank for an aggregate principal amount of $10 million that is secured by certain amounts due to the Company from certain CCS RC leases (the "Line of Credit"). As amended, the Line of Credit is available until May 31, 2016.
Covenants in the Line of Credit include a borrowing base limitation that is based on a percentage of the net present value of ADA’s portion of payments due to Clean Coal from the RC leases. The Line of Credit also contains other affirmative and negative covenants and customary indemnification obligations of ADA to the lender and provides for the issuance of Letters of Credit provided that the aggregate amount of the Letters of Credit plus all advances then outstanding does not exceed the calculated borrowing base. The Company guaranteed the obligations and agreements of ADA under the Line of Credit. Amounts outstanding under the line of credit bear interest payable monthly at a rate per annum equal to the higher of 5% or the “Prime Rate” (as defined in the agreement) plus 1% . There were no outstanding balances under this agreement at March 31, 2015 and December 31, 2014 , respectively. As a result of certain covenant violations, the Company has no borrowing availability under this facility.


19



The Line of Credit has been amended six times (December 2, 2013, April 3, 2014, September 20, 2014, December 15, 2014, May 29, 2015 and September 30, 2015), most notably to extend the maturity date. The lender has also provided seven waivers relating to various transactions and obligations to provide financial information to the lender.
Letters of Credit
The Company has letters of credit ("LOC") with two financial institutions related to equipment projects, the Royalty Award and certain other agreements. The following tables summarize the letters of credit outstanding, collateral, by type, and the related line items within the Condensed Consolidated Balance Sheets where the collateral related to the letters of credit is recorded:
As of March 31, 2015
(in thousands)
LOC Outstanding
Restricted Cash
Restricted cash, long-term
Investment securities, restricted, long-term
Contract performance - equipment systems
$
7,247

$
2,527

$
4,721

$

Royalty Award
5,250


5,250


Other
328



336

Total LOC outstanding
$
12,825

$
2,527

$
9,971

$
336

As of December 31, 2014
(in thousands)
LOC Outstanding
Restricted Cash
Restricted cash, long-term
Investment securities, restricted, long-term
Contract performance - equipment systems
$
7,247

$
2,527

$
4,721

$

Royalty Award
4,050


4,050


Other
328



336

Total LOC outstanding
$
11,625

$
2,527

$
8,771

$
336

Restricted balances may exceed the letters of credit outstanding due to interest income earned on the restricted balances.
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, availability of equipment and electric power usage. In the event the equipment fails to perform as specified during the testing period, the Company may have an obligation to correct or replace the equipment. In the event the level of mercury removal is not achieved, the Company may have a “make right” obligation within the contract limits. As of March 31, 2015 , the Company had not incurred a performance guarantee claim. Performance guarantee claims, if incurred, would be included within the Equipment sales cost of revenue line of the Condensed Consolidated Statements of Operations . However, during the third quarter of 2015, the Company began working to modify and correct two performance guarantee issues related to EC systems that were installed during 2015. Resolution of these performance guarantees is not expected to result in a material adverse effect on the Company’s operating performance or liquidity in 2015 or beyond.


20



Note 9 - Stock-Based Compensation

The Company grants equity based awards to employees and non-employee directors. Equity based awards include RSA's, Stock Options and PSU'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 months ended March 31, 2015 and 2014 was as follows:
Three Months Ended March 31,
(in thousands)
2015
2014
Restricted stock award expense
$
530

$
509

Stock option expense
46

13

PSU expense
378

382

Total stock-based compensation expense
$
954

$
904


The amount of unrecognized compensation cost as of March 31, 2015 , and the expected weighted average period over which the cost will be recognized is as follows:
As of March 31, 2015
( in thousands )
Unrecognized Compensation Cost
Expected Weighted Average Period of Recognition (in years)
Restricted stock award expense
$
2,907

.76

Stock option expense
814

.63

PSU expense
3,130

.61

Total unrecognized stock-based compensation expense
$
6,851

0.7

Restricted Stock Awards
Restricted stock is typically granted with vesting terms of three or five years. The fair value of restricted stock awards is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for restricted stock awards is recognized over the entire vesting period on a straight-line basis. A summary of restricted stock award activity under the Company's various stock compensation plans for the three months ended March 31, 2015 is presented below:
Non-vested at (in thousands, except for per share amounts)
Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at January 1, 2015
209,921

$
13.59

Granted
68,650

$
16.20

Vested
(50,863
)
$
20.37

Forfeited
(3,910
)
$
11.90

Non-vested at March 31, 2015
223,798

$
12.88

During the three months ended March 31, 2015 , the Company accelerated the terms of equity awards, including both RSA's and PSU's, granted to employees as part of the reduction in workforce. The Company recorded incremental expense of $0.1 million in the Payroll and benefits line item in the Consolidated Statement of Operations.

Stock Options
Stock options generally vest over three years and have a contractual limit of five years from the date of grant to exercise. The fair value of stock options granted pursuant to one of the Company’s plans 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. The Company did not grant any stock options during the three months ended March 31, 2015 .

21



A summary of option activity for the three months ended March 31, 2015 is presented below:
(in thousands, except for per share amounts)
Number of
Options
Outstanding and
Exercisable
Weighted
Average
Exercise
Price
Aggregate Intrinsic Value
Weighted
Average
Remaining
Contractual
Term (in years)
Options outstanding, January 1, 2015
74,200

$
13.76

Options granted

$

Options exercised

$

Options expired / forfeited

$

Options outstanding, March 31, 2015
74,200

$
13.76

$

2.0
Options exercisable as of March 31, 2015
37,532

$
8.75

$
314

1.46

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. The fair value of the Company's PSU's granted during the three months ended March 31, 2015 were estimated at the date of grant with the following weighted-average assumptions:
Three Months Ended March 31, 2015
PSUs granted:
Risk-free interest rate
1.0
%
Dividend yield
%
Volatility
64.3
%
Performance period (in years)
3.0

A summary of PSU activity under the Plans for the three months ended March 31, 2015 is presented below:
(in thousands except per share amounts)
Units
Weighted
Average
Grant Date
Fair Value
Non-vested at January 1, 2015
142,357

$
30.65

Granted (1)
68,650

20.16

Vested / Settled (1)
(13,763
)
30.52

Forfeited / Canceled (1)


Non-vested at March 31, 2015
197,244

$
27.01

(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 PSUs that were settled by issuing the Company's common stock relative to a broad stock index and a peer group performance index. There were no PSUs settled during the three months ended March 31, 2014 .
Year of Grant
Net Number of Issued Shares upon Vesting
Shares Withheld to Settle Tax Withholding Obligations
TSR Multiple Range
Russell 3000 Multiple
Low
High
Low
High
Three Months Ended March 31, 2015
2013
8,768

3,954

1.75

1.75

2.00

2.00

2014
2,506

1,145

0.63

0.75


0.75


22



Note 10 - Income Taxes
For the three months ended March 31, 2015 and 2014 , the Company's income tax expense and effective tax rates on forecasted pretax losses were:
Three Months Ended March 31,
(in thousands, except for rate)
2015
2014
Income tax expense
$
44

$
13

Effective tax rate
(1
)%
(2
)%
The effective tax rates for the three months ended March 31, 2015 and 2014 were different from the statutory rate primarily due to an increase in the Company's valuation allowances against federal and state net operating losses and federal tax credits, which was partially offset by estimated state tax expense.

The Company projects that its deferred tax assets will exceed its deferred tax liabilities as of December 31, 2015 . As a result, the Company determined that it is not more likely than not that it would be able to realize the value of its federal and state net operating loss carryforwards, tax credits and other deferred tax assets and has recorded a full valuation allowance against the excess deferred tax assets. This valuation allowance is expected to increase over time as the Company's deferred tax assets increase.
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 March 31, 2015 , the Company's CODM was the Company's CEO. The Company's operating and reportable segments are organized by products and services provided. Segments have been reorganized from prior periods due to changes within the Company's management structure and the manner in which the Company is operating the business. All prior periods have been conformed to the current year presentation.
The Company had four reportable segments during the periods presented: (1) Refined Coal ("RC"); (2) Emissions Control - Engineering and Technology Services ("EC - ETS"); (3) Emissions Control - Manufacturing ("EC - Manufacturing"); and (4) Research and Development ("R&D").
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 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 CCS.
Segment operating income (loss) includes the Company's equity method earnings and losses from the Company's equity method investments and royalty earnings from CCS (including depreciation and amortization expense). 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.
Segment revenue includes Research and Development reimbursements.
All items not included in operating income are excluded from the segments reporting.

23



As of March 31, 2015 and December 31, 2014 all 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 months ended March 31, 2015 and 2014 :
Three Months Ended March 31,
(in thousands)
2015
2014
Revenues:
Refined Coal:
Earnings in equity method investments
$
314

$
6,625

Consulting services
21

231

Royalties
2,194

1,132

2,529

7,988

Emissions Control - Engineering Technology and Services:
Equipment sales
21,047

18

Consulting services
343

275

Chemical and other
274

31

21,664

324

Emissions Control - Manufacturing: