Document
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-K
______________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37822
 
 
Advanced Emissions Solutions, Inc.
(Name of registrant as specified in its charter)
 
 
Delaware
 
27-5472457
(State of incorporation)
 
(IRS Employer
Identification No.)
640 Plaza Drive, Suite 270, Highlands Ranch, CO, 80129
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code): (720) 598-3500
Securities registered under Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
NASDAQ Global Market
Securities registered under Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    ¨  Yes    x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller Reporting Company
x
 
 
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 Act.)    ¨  Yes    x  No
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $181.9 million based on the last reported bid price of the Common Stock on the NASDAQ Global Market on June 30, 2018.  The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of March 8, 2019 was 18,514,078.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
 
 
 
Documents Incorporated By Reference
Portions of Part III of this Form 10-K are incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant's fiscal year.


1


ADVANCED EMISSIONS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I
Item 1. Business
General
ADA-ES, Inc. (“ADA”), a Colorado corporation, was incorporated in 1997. Pursuant to an Agreement and Plan of Merger ("Reorganization"), effective July 1, 2013, Advanced Emissions Solutions, Inc. (“ADES”), a Delaware company incorporated in 2011, replaced ADA as the publicly-held corporation and ADA became a wholly-owned subsidiary of ADES. ADES’s common stock became listed on the NASDAQ Global Market under the symbol, "ADES." ADA’s stock ceased trading on the NASDAQ Capital Market on July 1, 2013. This Annual Report on Form 10-K is referred to as the "Form 10-K" or the "Report." As used in this Report, the terms the "Company," "we," "us" and "our" means ADES and its consolidated subsidiaries.
We provide environmental solutions to customers in coal-fired power generation, municipal water and other industries primarily through emissions and water purification control technologies of our subsidiaries and joint ventures. Our proprietary technologies and associated product offerings provide pollutant control solutions to enable coal-fired power generators, municipal water and industrials to meet applicable regulations.
As of December 31, 2018 and 2017, we held equity interests of 42.50% and 50.00% in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), respectively, and each of their operations significantly impacted our financial position and results of operations for the years ended December 31, 2018, 2017 and 2016. We account for Tinuum Group and Tinuum Services under the equity method of accounting.
We operate two segments: Refined Coal (“RC”) and Power Generation and Industrials (“PGI”) (f/k/a "Emissions Control" or "EC"). The segments are discussed in more detail later under this Item 1. Our products are currently used for the removal of mercury and other air pollutants and for the purification of water.
Carbon Solutions Acquisition
On December 7, 2018 (the "Acquisition Date"), ADES entered into the Purchase and Sale Agreement (the "Purchase Agreement") pursuant to which the Company agreed to purchase from Energy Capital Partners I, LP, Energy Capital Partners I-A, LP, Energy Capital Partners I-B IP, LP, Energy Capital Partners I (Crowfoot IP), LP, and Carbon Solutions Management, LLC 100% of the membership interests of ADA Carbon Solutions, LLC ("Carbon Solutions") for a total purchase price of $75.0 million (the "Carbon Solutions Acquisition") plus transaction fees of $4.5 million. The fair value of the purchase consideration ("Purchase Consideration") was $66.5 million and consisted of cash consideration of $65.8 million and an additional purchase adjustment amount payable to Carbon Solutions' secured lender of $0.7 million. The Company acquired Carbon Solutions to enter into the broader activated carbon market and to expand the Company's product offerings within the mercury control industry and other complementary activated carbon markets. Carbon Solutions owns and operates an activated carbon manufacturing and processing facility and owns an associated lignite mine, which supplies the raw material for the powdered activated carbon plant (“Five Forks Mine”).
The Company primarily funded the cash consideration in the Carbon Solutions Acquisition from a $70.0 million senior term loan facility, less original issue discount of $2.1 million (the "Senior Term Loan"), which is detailed below in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations ("Item 7").
Markets
Activated carbon ("AC") is a specialized sorbent material that is used widely in a host of industrial and consumer applications to remove impurities, contaminants or pollutants from gas, water and other product or waste streams. ACs are prepared by thermally and/or chemically treating carbonaceous raw materials, including wood, coal, nut shells, resins and petroleum pitch. They are engineered specifically to meet the end-use application. Properties, such as pore and surface features, can be modified to be highly selective to targeted contaminants. The form of the AC, whether as a powdered activated carbon ("PAC"), granular activated carbon ("GAC"), pellets, honeycombs, blocks or cloths, also is important for the application.
Key markets include removal of heavy metal pollutants from coal-burning electrical generation processes, treatment of drinking and waste waters, industrial acid gas and odor removal, automotive gasoline emission control, soil and ground water remediation and food and beverage process and product purifications.
The AC market has been and is expected to continue to be driven by environmental regulations, principally water and air purification, especially in the mature and more industrialized areas of the world. Additionally, we believe environmental issues will continue to be the predominant force in the AC markets of rapidly developing countries.

3


Power Generation and Industrials
We expect the share of coal-fired power generation as a percentage of U.S. electricity generation to be more stable compared to previous years when many coal-fired generating units were shut down in response to low gas prices and increasingly stringent environmental regulations. Further, we believe that coal-fired power generation will remain a significant component of the U.S. power generation mix for many years, given coal's abundance, affordability, reliability and availability as a domestic fuel source. In 2018, the Energy Information Administration ("EIA") estimates coal made up 28% of the U.S. electricity generation. In its Annual Energy Outlook for 2019, the EIA projects that coal will provide approximately 17% of U.S. electricity generation in 2050. The primary drivers for many of our products and services are environmental laws and regulations impacting the electric power generation industry and other coal users. These regulations include the Mercury and Air Toxics Standards ("MATS"), a U.S. federal regulation requiring all existing and any new coal-fired electricity generating units to control mercury emissions, acid gases, and particulate matter, as well as various state regulations and permitting requirements for coal-fired electricity generating units. In addition to the federal MATS rule, many states have their own mercury rules that are similar to, or more stringent than, MATS, and many coal-fired electricity generating units around the country have agreed to consent decrees, which require pollution controls that, in some cases, are more restrictive than the existing regulations. We continue to believe the MATS regulation as well as certain state regulations creates a market for our RC and PGI products.
In general, coal is a low cost, stable and reliable source of domestic energy that, unlike many other forms of energy, can be easily stored in large quantities. We believe coal is critical to ensuring the U.S. has a secure and stable source of energy. 
While the long-term future for coal as a fuel source for electricity generation is uncertain, and as coal assets continue to age, we expect a continued purchasing trend towards variable cost products and integrated solutions with low capital expenditure requirements and a move away from large capital equipment and other fixed cost solutions that are less likely to have costs recovered.
We believe it is likely that many U.S. coal mines, coal-fired electricity generating units, coal-centric large equipment providers and other coal-related businesses will have difficulty adapting to industry changes expected in the coming years. However, we see opportunities for companies that can offer their customers creative and cost-effective solutions that help U.S. coal-related businesses meet regulatory compliance, improve efficiency, lower costs and maintain reliability.
Water
AC, particularly PAC, has been used in the treatment of drinking water, wastewater, contaminated soil and groundwater to absorb compounds causing unpleasant taste and odor and other contaminants. Both industrial and municipal wastewater treatment plants consume AC in their processes.
Groundwater contamination has become a matter of increasing concern to federal and state governments as well as to the public, especially within the last 10 years. The U.S may see significant growth from water purification markets, especially if future regulations are passed controlling certain chemicals in drinking water. At present, individual states are primarily responsible for the protection of groundwater. Worldwide, water treatment accounts for 41% of the total consumption of AC, and continues to be the largest application for AC.
We see opportunities in the water market for our products that will provide cost-effective solutions to help industrial and municipal wastewater treatment plants meet water purification standards.
Segments
Refined Coal
Tinuum Group, an unconsolidated entity, provides reduction of mercury and nitrogen oxide ("NOX") emissions at select coal-fired power generators through the production and sale of Refined Coal ("RC") that qualifies for tax credits under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"). We benefit from Tinuum Group's production and sale of RC, which generates tax credits, as well as the revenue from selling or leasing RC facilities to tax equity investors. See the separately filed financial statements of Tinuum Group included in Item 15 - "Exhibits, Financial Statement Schedules" ("Item 15") of this Report.
Products
Our patented CyCleanTM ("CyClean") technology, a pre-combustion coal treatment process provides electric power generators the ability to enhance combustion and reduce emissions of nitrogen oxides ("NOX") and mercury from coals burned in cyclone boilers.
Our patented M-45TM and M-45-PCTM technologies (collectively, the "M-45 Technology") are proprietary pre-combustion coal treatment technologies used to control emissions from circulating fluidized bed boilers and pulverized coal boilers, respectively.

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Sales and Customers
Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to reduced emissions of both NOX and mercury from coal treated with our proprietary chemicals and burned at coal-fired electricity generating units. Our equity method investments in the RC segment include Tinuum Group, Tinuum Services and GWN Manager, LLC.
As of December 31, 2018, Tinuum Group has built and placed into service a total of 28 RC facilities designed to produce RC for sale to coal-fired electricity generating units. Coal-fired electricity generating units use RC as one of a portfolio of tools to help comply with MATS and other environmental regulations. These RC facilities produce and sell RC that qualifies for Section 45 tax credits, including meeting the "placed in service" requirements (referred to as "placed in service"). The IRS has issued guidance regarding emissions reductions in the production of electricity by coal-fired electric generating units, including measurement and certification criteria necessary to qualify for the Section 45 tax credits. The ability to produce and sell RC, which generates Section 45 tax credits, expires 10 years after each RC facility was placed in service, but not later than December 31, 2021. Two of Tinuum Group's RC facilities were placed in service in 2009 and related Section 45 tax credits for these facilities expire in December 2019. The Section 45 tax credits related to the remaining RC facilities expire in 2021.
Once an RC facility is in operation, Tinuum Group may lease or sell it to a tax equity investor, which we refer to as an "invested" RC facility. The tax equity investor subsequently operates the RC facility to produce and sell RC to a utility. It is financially advantageous for Tinuum Group to lease or sell an RC facility as the tax equity investor assumes the operating expenses for the RC facility and remits to Tinuum Group either payments to purchase or lease payments to lease the RC facility. We benefit from equity income and cash distributions through our investment in Tinuum Group. Tax equity investors may benefit from their investment in RC facilities through the realization of tax assets and credits from the production and sale of RC.
RC facilities that are producing and selling RC and have not been leased or sold, are referred to as "retained" RC facilities, whereby the RC is produced and sold by Tinuum Group and, as an owner, we benefit from the related Section 45 tax benefits. As of December 31, 2018 and 2017, respectively, the Section 45 tax credits were $7.03 and $6.91 per ton of RC produced and sold to a utility. The value of the Section 45 tax credits is adjusted annually based on inflation adjustment factors published in the Federal Register. As of December 31, 2018, we have received, but have not been able to fully utilize, substantial tax credits and benefits from certain retained RC facilities that previously produced and sold RC for the benefit of Tinuum Group. See Note 13 to our Consolidated Financial Statements included in Item 8 - "Financial Statements and Supplementary Data" ("Item 8") of this Report for additional information regarding our net operating losses, tax credits and other deferred tax assets.
As of December 31, 2018, Tinuum Group had 19 invested RC facilities producing RC at utility sites. The remaining 9 RC facilities, although placed in service, were either installed but not operating, awaiting site selection or in various other stages of contract negotiation or permanent installation.
Tinuum Services operates and maintains RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of RC facilities. Tinuum Group or the owners or lessees of the RC facilities pay Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus various fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements, which include the chemicals required for our CyClean, and M-45 Technologies that are necessary for the production of RC. The term of each chemical agency agreement runs concurrently with the respective RC facility's operating and maintenance agreement.
We also earn royalty revenues from the licensing of our M-45 Technology ("M-45 License") to Tinuum Group. License royalties are recognized based upon a percentage of the per-ton, pre-tax margin as defined in the M-45 License.
The following table provides summary information related to the Company's investment in Tinuum Group and the related RC facilities as of December 31, 2018 and tons of RC produced and sold for the year ended December 31, 2018:
 
 
 
 
 
 
Operating
 
 
# of RC Facilities
 
Not Operating
 
Invested
 
Retained
RC Facilities
 
28

 
9

 
19

(1)

RC tons produced and sold (000's)
 
 
 
 
 
59,737

 
2,302

(1) One RC facility is approximately 50% invested with an independent third party. The remaining approximate 50% is retained by Tinuum Group, the Company and another member of Tinuum Group.

5


Competition
We believe Chem-Mod, LLC ("Chem-Mod") and licensees of the Chem-Mod technology are Tinuum Group's principal competitors. Competition within the RC market is based primarily on price, the number of tons of coal burned at the coal-fired electric generating unit where the RC facilities are operating and the tax compliance facts associated with each RC facility. Additionally, competition for tax equity investors extends into other investment opportunities, including opportunities related to potential tax incentive transactions.
Raw Materials
The principal raw materials used in our RC products are comprised of non-bromine based halogens.
Operations
Tinuum RC facilities are located at coal-fired power plants in the U.S. As of December 31, 2018, Tinuum Group and Tinuum Services had operations in 13 and 11 states, respectively.
Power Generation and Industrials
Products
Our products provide mercury control and other air and water contaminants control to coal-fired power generators and other industrial companies. Most of the North American coal-fired power generators have installed equipment to control air pollutants, like mercury, over the last several years. However, many power generators need consumable products on a recurring basis to chemically and physically capture mercury and other contaminants. There are three primary consumable products, working in conjunction with the installed equipment, to control mercury: PAC, coal additives and scrubber additives. In many cases these three consumable products can be used together or in many circumstances substituted for each other. However, activated carbon is typically the most efficient and effective way to capture mercury and currently accounts for over 50% of the mercury control consumables North American market. We offer all three mercury control solutions and continually work with customers to implement the most effective and efficient consumables solutions that fit with their unique operating and pollutions control configuration.
Power generators must stay in compliance with the various regulatory emissions requirements. As such, we believe power generators’ top priority is to find a vendor that can consistently and reliably provide a consumables solution. However, as the market has matured since 2016 and coal-fired power continues to be under pricing pressure from natural gas, wind and solar, cost of compliance is also important. Our current products and services provide solutions across the entire spectrum of coal-fired power generators' needs.
Historically, our PGI segment included revenues and related expenses from the sale of activated carbon injection ("ACI") and dry sorbent injection ("DSI") equipment systems, consulting services and other sales related to the reduction of emissions in the coal-fired electricity generation process and the electric utility industry. Demand for ACI and DSI system contracts historically was driven by coal-fired power plants that needed to comply with MATS and Maximum Achievable Control Technology ("MACT") Standards. As the deadline for these standards has passed, and customers have now implemented ACI, DSI and other large equipment systems as a component of their strategies to comply with applicable regulations, we do not anticipate entering into future long-term fixed price contracts for ACI or DSI systems. However, we may continue to provide smaller scale equipment products or other consulting services that may be needed by coal-fired electricity generating units, industrial broiler or other power generation units as part of their ongoing operations.
Sales and Customers
Sales of AC and chemical technologies are made by the Company’s employees and through distributors and sales representatives to coal-fired utilities and industrials. Some of our sales of AC are made under annual requirements-based contracts or longer-term agreements.
Competition
Our primary competitors for PAC products include Cabot Norit America, Inc., a division of Cabot Corporation (CBT), Calgon Carbon, a subsidiary of Tokyo Stock Exchange listed Kuraray Co., Ltd., Nalco Holding Company, a subsidiary of Ecolab Inc. (ECL) and Midwest Energy Emissions Corp (MEEC).
Raw Materials
The principal raw material we use in the manufacturing of AC is lignite coal, which is, in general, readily available and we believe we have an adequate supply. We own a lignite mine, which is operated by Demery Resources Company, LLC, a subsidiary of the North American Coal Company, that supplies lignite to our AC plant.

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We purchase our proprietary chemicals through negotiated blending contracts that include confidentiality agreements with chemical suppliers. These arrangements attempt to assure continuous supply of our proprietary chemical blends. The manufacturing of our chemical products is dependent upon certain discrete chemicals that are subject to price fluctuations and supply constraints. In addition, the number of chemical suppliers who provide the necessary additives needed to manufacture our proprietary chemicals is limited. Supply agreements are generally renewed on an annual basis.
Operations
We own and operate an AC plant that is located in Louisiana. We also have sales, product development and administrative operations located in Colorado.
Revenue by Type
The following table shows the amount of total revenue by type:
 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
Revenues:
 
 
 
 
Consumables
 
$
8,733

 
$
4,246

License royalties, related party
 
15,140

 
9,672

Equipment sales
 
72

 
31,446

Total revenues
 
$
23,945

 
$
45,364

Legislation and Environmental Regulations
Our products and services, as well as Tinuum Group’s production and sale of RC, are for the reduction of pollutants and other contaminants in the coal-burning electrical generation and water treatment processes. To the extent that legislation and regulation limit the amount of pollutants and other contaminants permitted, the need for our products increases. Below is a summary of the primary legislation and regulation that affects the market for our products.
U.S. Federal Mercury and Air Toxic Standards (“MATS”) Affecting Electric Utility Steam Generating Units
On December 16, 2011, the U.S. Environmental Protection Agency ("EPA") issued the final "MATS Rule" that went into effect in April 2012. The EPA structured the MATS Rule as a MACT-based hazardous pollutant regulation applicable to coal and oil-fired Electric Utility Steam Generating Units (“EGU”), which generate electricity through steam turbines and have a capacity of 25 megawatts or greater, and provide for, among other provisions, control of mercury and particulate matter and control of acid gases such as hydrochloric acid ("HCl"), sulfuric acid ("H2SO4") and other Hazardous Air Pollutants ("HAPs"). Approximately 1,260 units were coal-fired EGUs. According to our estimates, the MATS Rule sets a limit that we believe requires the capture of up to 80-90% of the mercury in the coal burned in electric power generation boilers as measured at the exhaust stack outlet for most plants. The MACT standards are also known as National Emission Standards for Hazardous Air Pollutants ("NESHAP"). Plants generally had four years to comply with the MATS Rule, and we estimate that, based on data reported to the EPA and conversations with plant operators, most plants were required to comply by April 2016 and implementation of the MATS Rule is now largely complete. We estimate that 48% of the coal-fired EGUs that were operating in December 2011 when the MATS rule was finalized have been permanently shut down, leaving approximately 642 EGUs in operation at the end of 2018.
In April 2017, a review by the U.S. Court of Appeals for the D.C. Circuit of a 2016 “supplemental finding” associated with the cost benefit analysis of the MATS Rule conducted by the EPA was stayed at the request of the current Administration. The court case continues to be stayed indefinitely. In February 2019, the EPA published a reconsideration of its 2016 "supplemental finding" associated with the cost benefit analysis of the MATS Rule. This reconsideration proposes that it is not 'appropriate or necessary' to regulate HAPs emissions from coal- and oil-filed EGUs. However, the EPA expressly states that the reconsideration is not removing coal- and oil-fired EGUs from the list of sources that must comply with the MATS rule, but does, in the reconsideration, solicit comments on whether the EPA has the authority to remove coal- and oil-fired EGUs from the list of sources that must comply with the MATS Rule or whether it can rescind the MATS Rule.
State Mercury and Air Toxics Regulations Affecting EGUs
In addition, certain states have their own mercury rules that are similar to or more stringent than the MATS Rule, and coal-fired electricity generating units in the U.S are subject to consent decrees that require the control of acid gases and particulate matter, in addition to mercury emissions.

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Effluent Limitation Guidelines
On September 30, 2015, the EPA set the first federal limits on the levels of toxic metals in wastewater that can be discharged from power plants. The final rule requires, among other things, zero discharge for fly ash transport water, and limits on mercury, arsenic, selenium, and nitrate from flue gas desulfurization ("FGD") wastewater (also known as "legacy wastewater"). In April 2017 the EPA Administrator announced his decision to reconsider the Effluent Limitations Guidelines ("ELG") Rule, and the U.S. Court of Appeals Fifth Circuit granted the motion to reconsider and placed the case in abeyance, which delayed the earliest compliance date from November 2018 to November 2020. In September 2017, the EPA indicated that plants would not need to comply before November 2020, with a possible extension of up to five years with state approval. Although halogens are not directly regulated in the effluent guidelines, some halogens may impact the effectiveness of biological wastewater treatment systems that are often used for the removal of selenium. We are evaluating whether the potential market opportunity supports our development of new products to help plants comply with these rules, as well as how these rules may affect our current product offerings.
Additional U.S. Legislation and Regulations
On August 3, 2015, the EPA finalized rules to reduce greenhouse gases ("GHGs") in the form of the Clean Power Plan ("CPP"), which established guidelines for states to follow in developing plans to reduce GHG emissions. Under the CPP, states are required to prepare State Implementation Plans to meet state targets established based on emission reductions from affected sources. The CPP requires that the Best System of Emission Reduction ("BSER") be implemented and establishes three building blocks that include heat rate improvements at affected coal-fired electric generating units, substituting coal-fired generation with less carbon-intensive EGUs such as natural gas combined cycle plants, and substituting renewable generation. The CPP has been challenged by multiple states in the U.S. Court of Appeals for the District of Columbia Circuit ("DC Circuit"). The CPP is currently stayed by the Supreme Court, and a panel of 10 judges on the DC Circuit are reviewing the CPP following a hearing in September 2016. On October 10, 2017, the EPA announced a proposal to repeal the CPP. The DC Circuit has been holding CPP litigation in abeyance since April 28, 2017.
Anti-Dumping
Regulators in the U.S. have imposed an anti-dumping duty on Chinese steam activated carbon products. In 2018, this anti-dumping duty was extended for an additional five-years. The International Trade Administration, a part of the U.S. Commerce Department, reviews the amount of the anti-dumping duty on an annual basis.
International Regulations
There are various international regulations related to mercury control. In Canada, the Canada-Wide Standard ("CWS") was initially implemented in 2010, with increasingly stringent limits through 2020 and with varying mercury emissions caps for each province. China and Germany both have limits for mercury emissions that are less stringent than U.S. limits and are typically met using co-benefits from other installed air pollution control equipment designed to control other pollutants. In May 2017, the EU ratified the Minimata Convention on Mercury, triggering mercury control regulations with implementation starting in 2021. Specific emissions limits are currently being developed guided by the best available technologies reference ("BREF") document for limiting stack emissions and liquid effluents from industrial processes. The BREF conclusions for large coal-fired electricity generating units were adopted by the European Commission in July 2017.
Based upon the existing and potential regulations, we believe the international market for mercury control products may expand in the coming years, and we are positioning our patent portfolio and existing commercial products accordingly to be prepared if an international market for our products develops.
Patents
As of December 31, 2018, we held 53 U.S. patents and seven international patents that were issued or allowed, 27 additional U.S. provisional patents or applications that were pending, and seven international patent applications that were either pending or filed relating to different aspects of our technology. Our existing patents generally have terms of 20 years from the date of filing, with our next patents expiring beginning in 2021. We consider many of our patents and pending patents to be critical to the ongoing conduct of our business.
Seasonality of Activities
The sale of our consumable products and RC facility operation levels depends on the operations of the coal-fired electricity generating units to which the applicable consumables are provided and the location of the RC facilities, respectively. Power generation is weather dependent, with electricity and steam production varying in response to heating and cooling needs. Additionally, coal-fired electricity generating units routinely schedule maintenance outages in the spring and/or fall depending

8


upon the operation of the boilers. During the period in which an outage may occur, which may range from one week to over a month, no consumables are used or RC produced and sold, and our revenues may be correspondingly reduced.
The sale of our activated carbon products for water purification depends on demand from municipal water treatment facilities where these products are utilized. Depending on weather conditions and other environmental factors the summer months historically have the highest demand for powdered AC, as one of the major uses for powdered AC is for the treatment of taste and odor problems caused by increased degradation of organic contaminants and natural materials in water during the summer.
Safety, Health and Environment
Our operations are subject to numerous federal, state, and local laws, regulations, rules and ordinances relating to safety, health, and environmental matters (“SH&E Regulations”). These SH&E Regulations include requirements to maintain and comply with various environmental permits related to the operation of many of our facilities, including mine health and safety laws required for continued operation of the Five Forks Mine.
Dependence on Major Customers
We depend on our customer relationships with owners and operators of coal-fired power electricity generating units and industrial companies as well as general market demand for coal-fueled power generation. Additional information related to major customers is disclosed in Note 15 of the Consolidated Financial Statements included in Item 8 of this Report.
Through our investment in Tinuum Group, we depend on our relationships with owners and operators of coal-fired power generation facilities, including various electric utilities and tax equity investors. Tinuum Group is the exclusive licensee for purposes of producing RC using the CyClean and M-45 Technologies. Tinuum Group depends on tax equity investors, with significant concentration within affiliates of The Goldman Sachs Group, Inc. These investors could renegotiate or terminate their leases, or the utilities where the RC facilities are installed could materially reduce their use of RC.
Employees
As of December 31, 2018, we employed 128 full-time and part-time personnel; 45 employees were employed at our offices in Colorado and 83 employees were employed at our facilities in Louisiana.
Available Information
Our periodic and current reports are filed with the Securities and Exchange Commission ("SEC') pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are available free of charge within 24 hours after they are filed with, or furnished to, the SEC at the Company’s website at www.advancedemissionssolutions.com. The filings are also available through the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330. Alternatively, these reports can be accessed at the SEC’s website at www.sec.gov. The information contained on our web site shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act.
Copies of Corporate Governance Documents
The following Company corporate governance documents are available free of charge at our website at www.advancedemissionssolutions.com and such information is available in print to any stockholder who requests it by contacting the Secretary of the Company at 640 Plaza Drive, Suite 270, Highlands Ranch CO, 80129.
Certificate of Incorporation
Bylaws
Code of Ethics and Business Conduct
Insider Trading Policy
Whistleblower Protection Policy
Board of Directors Responsibilities
Audit Committee Charter
Compensation Committee Charter
Nominating and Governance Committee Charter

9


Forward-Looking Statements Found in this Report
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. In particular such forward-looking statements are found in this Part I and under the heading in Part II, Item 7 below. Words or phrases such as "anticipates," "believes," "expects," "intends," "plans," "estimates," "predicts," the negative expressions of such words, or similar expressions are used in this Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding:
(a)
the scope and impact of mercury and other regulations or pollution control requirements, including the impact of the final MATS;
(b)
the production and sale of RC that the RC facilities will qualify for Section 45 tax credits;
(c)
expected growth or contraction in and potential size of our target markets;
(d)
expected supply and demand for our products and services;
(e)
increasing competition in the emission control market;
(f)
future level of research and development activities;
(g)
the effectiveness of our technologies and the benefits they provide;
(h)
Tinuum Group’s ability to profitably sell and/or lease additional RC facilities and/or RC facilities that may be returned to Tinuum Group, or recognize the tax benefits from production and sale of RC on retained RC facilities;
(i)
probability of any loss occurring with respect to certain guarantees made by Tinuum Group ("Party Guarantees");
(j)
the timing of awards of, and work and related testing under, our contracts and agreements and their value;
(k)
the timing and amounts of or changes in future revenues, royalties earned, backlog, funding for our business and projects, margins, expenses, earnings, tax rate, cash flow, royalty payment obligations, working capital, liquidity and other financial and accounting measures;
(l)
the outcome of current and pending legal proceedings;
(m)
awards of patents designed to protect our proprietary technologies both in the U.S. and other countries; and
(n)
whether any legal challenges or EPA actions will have a material impact on the implementation of the MATS or other regulations and on our ongoing business.
Our expectations are based on certain assumptions, including without limitation, that:
(a)
coal will continue to be a major source of fuel for electrical generation in the U.S.;
(b)
the IRS will allow the production and sale of RC to qualify for Section 45 tax credits;
(c)
we will continue as a key supplier of consumables to the coal-fired power generation industry as it seeks to implement reduction of mercury emissions;
(d)
current environmental laws and regulations requiring reduction of mercury from coal-fired boiler flue gases will not be materially weakened or repealed by courts or legislation in the future;
(e)
we will be able to obtain adequate capital and personnel resources to meet our operating needs and to fund anticipated growth and our indemnity obligations;
(f)
we will be able to establish and retain key business relationships with current and other companies;
(g)
orders we anticipate receiving will be received;
(h)
we will be able to formulate new consumables that will be useful to, and accepted by, the power generation and industrial business;
(i)
we will be able to effectively compete against others;
(j)
we will be able to meet any technical requirements of projects we undertake;
(k)
Tinuum Group will be able to sell or lease additional RC facilities, including RC facilities that may be returned to Tinuum Group, to third party investors; and
(l)
we will be able to utilize our portion of the Section 45 tax credits generated by production and sale of RC from retained facilities.

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The forward-looking statements included in this Report involve risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including, but not limited to, timing of new and pending regulations and any legal challenges to or extensions of compliance dates of them; the U.S. government’s failure to promulgate regulations or appropriate funds that benefit our business; changes in laws and regulations, accounting rules, prices, economic conditions and market demand; impact of competition; availability, cost of and demand for alternative energy sources and other technologies; technical, start up and operational difficulties; failure of the RC facilities to produce RC; termination of or amendments to the contracts for sale or lease of RC facilities; decreases in the production of RC; our inability to commercialize our technologies on favorable terms; our inability to ramp up our operations to effectively address recent and expected growth in our business; loss of key personnel; potential claims from any terminated employees, customers or vendors; availability of materials and equipment for our businesses; intellectual property infringement claims from third parties; pending litigation; as well as other factors relating to our business, as described in our filings with the SEC, with particular emphasis on the risk factor disclosures contained in those filings and in Item 1A - "Risk Factors" of this Report. You are cautioned not to place undue reliance on the forward-looking statements made in this Report and to consult filings we have made and will make with the SEC for additional discussion concerning risks and uncertainties that may apply to our business and the ownership of our securities. The forward-looking statements contained in this Report are presented as of the date hereof, and we disclaim any duty to update such statements unless required by law to do so.

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Item 1A. Risk Factors
The following risks relate to us as of the date this Report is filed with the SEC. This list of risks is not intended to be exhaustive, but reflects what we believe are the material risks inherent in our business and the ownership of our securities as of the specified dates. A statement to the effect that the occurrence of a specified event may have a negative impact on our business, results of operations, profitability, financial condition, or the like, is intended to reflect the fact that such an event would be likely to have a negative impact on your investment in ADES, but should not imply the likelihood of the occurrence of such specified event. The order in which the following risk factors are presented is not intended as an indication of the relative seriousness of any given risk.
Risks relating to our business
Demand for our products and services depends significantly on environmental laws and regulations. Uncertainty as to the future of such laws and regulations, as well as changes to such laws and regulations, or granting of extensions of compliance deadlines has had, and will likely continue to have a material effect on our business.
A significant market driver for our existing products and services, and those planned in the future, are present and expected environmental laws and regulations, particularly those addressing the reduction of mercury and other emissions from coal-fired electricity generating units. If such laws and regulations are delayed, or are not enacted or are repealed or amended to be less strict, or include prolonged phase-in periods, or are not enforced, our business would be adversely affected by declining demand for such products and services. For example:
The implementation of environmental regulations regarding certain pollution control and permitting requirements has been delayed from time to time due to various lawsuits. The uncertainty created by litigation and reconsiderations of rule-making by the EPA has negatively impacted our business, results of operations and financial condition and will likely continue to do so.
To the extent federal, state, and local legislation mandating that electric power generating companies serving a state or region purchase a minimum amount of power from renewable energy sources such as wind, hydroelectric, solar and geothermal, and such amount lessens demand for electricity from coal-fired plants, the demand for our products and services would likely decrease.
Federal, state, and international laws or regulations addressing emissions from coal-fired electricity generating units, climate change or other actions to limit emissions, including public opposition to new coal-fired electricity generating units, has caused and could continue to cause electricity generators to transition from coal to other fuel and power sources, such as natural gas, nuclear, wind, hydroelectric and solar. The potential financial impact on us of future laws or regulations or public pressure will depend upon the degree to which electricity generators diminish their reliance on coal as a fuel source. That, in turn, will depend on a number of factors, including the specific requirements imposed by any such laws or regulations, the periods over which those laws or regulations are or will be phased in, the amount of public opposition, and the state and cost of commercial development of related technologies and processes. In addition, Public Utility Commissions ("PUCs") may not allow utilities to charge consumers for, and pass on the cost of, emissions control technologies without federal or state mandate. We cannot reasonably predict the impact that any such future laws or regulations or public opposition may have on our results of operations, financial condition or cash flows.
Action by the EPA related to MATS that decreases demand for our mercury removal products could have a material adverse effect on our PGI segment.
Growth in our PGI segment depends on stable demand for mercury removal related product, which is largely dependent on the amount of coal-based power generation used in the U.S. and the continued regulation of utilities under MATS. In August 2018, the EPA announced that it intends to reconsider the MATS rule and in September 2018 submitted its proposal to the White House Office of Management and Budget. In February 2019, the EPA published a reconsideration of its 2016 "supplemental finding" associated with the cost benefit analysis of the MATS Rule. This reconsideration proposes that it is not 'appropriate or necessary' to regulate HAPs emissions from coal- and oil-filed EGUs. However, the EPA expressly states that the reconsideration is not removing coal- and oil-fired EGUs from the list of sources that must comply with the MATS rule, but does, in the reconsideration, solicit comments on whether the EPA has the authority to remove coal- and oil-fired EGUs from the list of sources that must comply with the MATS Rule or whether it can rescind the MATS Rule. Any final action taken by the EPA related to MATS that decreases demand for our products for mercury removal will have a negative effect on the financial results of our PGI segment.

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The failure of tariffs placed on U.S. imports of Chinese activated carbon to adequately address the impact of low-priced imports from China could have a material adverse effect on the competitiveness and financial performance of our PGI segment.
Our PGI segment faces competition in the U.S. from low-priced imports of activated carbon products. If the amounts of these low-priced imports increase, especially if they are sold at less than fair value, our sales of competing products could decline, which could have an adverse effect on the earnings of our PGI segment. In addition, sales of these low-priced imports may negatively impact our pricing. To limit these activities, regulators in the U.S. have enacted an anti-dumping duty order on steam activated carbon products from China. In 2018, the order was extended for an additional five years. The amount of anti-dumping duties collected on imports of steam activated carbon from China is reviewed annually by the U.S. Department of Commerce. To the extent the anti-dumping margins do not adequately address the degree to which imports are unfairly traded, the anti-dumping order may be less effective in reducing the volume of these low-priced activated carbon imports in the U.S., which could negatively affect demand and/or pricing for our AC products.
The market for consumables and other products that provide pollutant reduction is highly competitive and some of our competitors are significantly larger and more established than we are, which could adversely impede our growth opportunities and financial results.
We operate in a highly competitive marketplace. Our ability to compete successfully depends in part upon our ability to maintain a cost of production advantage, competitive technological capabilities and to continue to identify, develop and commercialize new and innovative products for existing and future customers. Increased competition from existing or newly developed products offered by our competitors or companies whose products offer a similar functionality as our products and could be substituted for our products, may negatively affect demand for our products. In addition, market competition could negatively impact our ability to maintain or raise prices or maintain or grow our market position.
We compete against certain significantly larger and/or more established companies in the market for consumables and other products that provide mercury emissions reduction and water treatment.
Reduction of coal consumption by U.S. electricity power generators could result in less demand for our products and services. If utilities significantly reduce the number of coal-fired electricity generating units or the amount of coal burned, without a corresponding increase in the services required at the remaining units, this could reduce our revenues and materially and adversely affect our business, financial condition and results of operations.
The amount of coal consumed for U.S. electricity power generation is affected by, among other things, (1) the location, availability, quality and price of alternative energy sources for power generation, such as natural gas, fuel oil, nuclear, hydroelectric, wind, biomass and solar power; and (2) technological developments, including those related to competing alternative energy sources.
Natural gas-fueled generation has been displacing and may continue to displace coal-fueled generation, particularly from older, less efficient coal-powered generators. We expect that many of the new power plants needed to meet increasing demand for electricity generation will be fueled by natural gas because the price of natural gas has remained at relatively low levels after a period of sharp decline, and use of natural gas is perceived as having a lower environmental impact than burning coal. Natural gas-fired plants are cheaper to construct, and permits to construct these plants are easier to obtain, and ongoing costs of natural gas-fired plants associated with meeting environmental compliance are lower. Possible advances in technologies and incentives, such as tax credits, to enhance the economics of renewable energy sources could make those sources more competitive with coal. Any reduction in the amount of coal consumed by domestic electricity power generators, whether as a result of new power plants utilizing alternative energy sources or as a result of technological advances, could reduce the demand for our current products and services, thereby reducing our revenues and materially and adversely affecting our business and results of operations.
Additionally, long-term changes in environmental regulation that threaten or preclude the use of coal or other fossil fuels as a primary fuel source for electricity production, and result in the reduction or closure of a significant number of coal-fired electric generating units, may adversely affect our business, financial condition and results of operations.
We face operational risks inherent in mining operations and our mining operations have the potential to cause safety issues, including those that could result in significant personal injury.
We own a lignite coal mine located in Louisiana that is operated for us by Demery Resources Company, LLC. Mining operations by their nature involve a high level of uncertainty and are often affected by risks and hazards outside of our control.

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At our lignite mine, the risks are primarily operational risks associated with the maintenance and operation of the heavy equipment required to dig and haul the lignite, and risks relating to lower than expected lignite quality or recovery rates. The failure to adequately manage these risks could result in significant personal injury, loss of life, damage to mineral properties, production facilities or mining equipment, damage to the environment, delays in or reduced production, and potential legal liabilities.
Our operations and products are subject to extensive safety, health and environmental requirements that could increase our costs and/or impair our ability to manufacture and sell certain products.
Our ongoing operations are subject to extensive federal, state and local laws, regulations, rules and ordinances relating to safety, health and environmental matters, many of which provide for substantial monetary fines and criminal sanctions for violations. These include requirements to obtain and comply with various environmental-related permits for constructing any new facilities and operating all of our existing facilities. In addition, our AC manufacturing facility may become subject to greenhouse gas emission trading schemes under which we may be required to purchase emission credits if our emission levels exceed our allocations. Greenhouse gas regulatory programs that have been adopted, such as cap-and-trade programs, have not had a significant impact on our business to date. Costs of complying with regulations could increase as concerns related to greenhouse gases and climate change continue to emerge. The enactment of new environmental laws and regulations and/or the more aggressive interpretation of existing requirements could require us to incur significant costs for compliance or capital improvements or limit our current or planned operations, any of which could have a material adverse effect on our earnings or cash flow. We attempt to offset the effects of these compliance costs through price increases, productivity improvements and cost reduction efforts, and our success in offsetting any such increased regulatory costs is largely influenced by competitive and economic conditions and could vary significantly depending on the segment served. Such increases may not be accepted by our customers, may not be sufficient to compensate for increased regulatory costs or may decrease demand for our products and our volume of sales.

If we are unable to timely and successfully integrate the Carbon Solutions Acquisition, our future financial performance may suffer and we may fail to realize all of the anticipated benefits of the transaction.

We acquired Carbon Solutions primarily to expand our market share in the mercury emissions control market, as well as to gain access to the water treatment market through Carbon Solutions' specific products for this market. Our future growth may depend in part on our ability to successfully integrate Carbon Solutions into our business and we cannot guarantee that we will successfully integrate Carbon Solutions into our existing operations, or that we will achieve the desired profitability and anticipated results from the Carbon Solutions Acquisition. Failure to achieve such planned results could adversely affect our operations and cash available to make debt principal and interest payments, dividends and stock repurchases.
The Carbon Solutions Acquisition presents potential risks to us, including:
operating a significantly larger combined organization and integrating additional operations into ours;
difficulties in the assimilation of the assets and operations of Carbon Solutions;
the loss of customers or key employees from Carbon Solutions;
the diversion of management’s attention from other existing business concerns;
the failure to realize expected synergies and cost savings;
coordinating geographically disparate organizations, systems and facilities;
integrating personnel from diverse business backgrounds and organizational cultures; and
consolidating corporate and administrative functions.
We may make future acquisitions or form partnerships and joint ventures that may involve numerous risks that could impact our financial condition, results of operations and cash flows.
Our strategy may include expanding our scope of products and services organically or through selective acquisitions, investments or creating partnerships and joint ventures. We have acquired, and may selectively acquire, other businesses, product or service lines, assets or technologies that are complementary to our business. We may be unable to find or consummate future acquisitions at acceptable prices and terms, or we may be unable to integrate existing or future acquisitions effectively and efficiently and may need to divest those acquisitions. We continually evaluate potential acquisition opportunities in the ordinary course of business. Acquisitions involve numerous risks, including among others:

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our evaluation of the synergies and/or long-term benefits of an acquired business;
integration difficulties, including challenges and costs associated with implementing systems and processes to comply with requirements of being part of a publicly-traded company;
diverting management’s attention;
litigation arising from acquisition activity;
potential increased debt leverage;
potential issuance of dilutive equity securities;
entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
unanticipated costs and exposure to undisclosed or unforeseen liabilities or operating challenges;
potential goodwill or other intangible asset impairments;
potential loss of key employees and customers of the acquired businesses, product or service lines, assets or technologies;
our ability to properly establish and maintain effective internal controls over an acquired company; and
increasing demands on our operational and IT systems.
The success of acquisitions of businesses, new technologies and products, or arrangements with third parties is not always predictable and we may not be successful in realizing our objectives as anticipated. The Senior Term Loan and Line of Credit contain certain covenants that limit, or that may have the effect of limiting, among other things, the payment of dividends, acquisitions, capital expenditures, the sale of assets and the incurrence of additional indebtedness.
Information technology vulnerabilities and cyberattacks on our networks could have a material adverse impact on our business.
We rely upon information technology ("IT") to manage and conduct business, both internally and externally, with our customers, suppliers and other third parties. Internet transactions involve the transmission and storage of data including, in certain instances, customer and supplier business information. Therefore, maintaining the security of computers and other electronic devices, computer networks and data storage resources is a critical issue for us and our customers and suppliers because security breaches could result in reduced or lost ability to carry on our business and loss of and/or unauthorized access to confidential information. We have limited personnel and other resources to address information technology reliability and security of our computer networks and to respond to known security incidents to minimize potential adverse impact. Experienced hackers, cybercriminals and perpetrators of threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our information and networks or otherwise exploit any security vulnerabilities of our information and networks. Techniques used to obtain unauthorized access to or sabotage systems change frequently and often are not recognized until long after being launched against a target, and we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our IT systems and security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could materially adversely impact our business and results of operations and expose us to customer, supplier and other third-party liabilities.

Natural disasters could affect our operations and financial results.

We operate facilities that are exposed to natural hazards, such as floods, windstorms and hurricanes. Extreme weather events present physical risks that may become more frequent as a result of factors related to climate change. Such events could disrupt our supply of raw materials or otherwise affect production, transportation and delivery of our products or affect demand for our products.

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Risks relating to Refined Coal
The ability of Tinuum Group to generate revenues from the sale or lease of RC facilities to tax equity investors is not assured, and the inability to sell, lease or operate RC facilities to produce and sell RC and generate Section 45 production tax credits could adversely affect our future growth and profitability.
Tinuum Group is attempting to sell or lease its remaining RC facilities to third-party investors. The inability of Tinuum Group to successfully lease or sell additional RC facilities to third-party tax equity investors, who may receive the benefit of the Section 45 tax credits that are expected to be generated from those RC facilities, as well as RC facilities that may be returned to Tinuum Group over time, would likely have an adverse effect on our future growth and profitability.
Furthermore, if, in the future, electricity power generators decide to limit coal-fired generation for economic reasons and/or do not burn and use RC and instead switch to another power or fuel source, Tinuum Group would likely be unable to fully produce and sell the RC and the associated Section 45 production tax credits potentially available from RC facilities over the anticipated term of the Section 45 tax credit program.
The ability to generate Section 45 tax credits from existing operating RC facilities ends in 2021, which could eliminate the desire for investors to further lease RC facilities beyond this date, which would effectively eliminate Tinuum Group’s and Tinuum Services' operations and significantly impact our financial condition and results of operations beyond 2021.
A substantial amount of our earnings and cash flows in 2018 and 2017 are comprised of equity method earnings and license royalties generated from Tinuum Group’s invested RC facilities. For the year ended December 31, 2018, our RC segment generated segment operating income of $65.5 million. As of December 31, 2018, Tinuum Group has 19 invested facilities and zero retained facilities. Of the 19 invested facilities, one is currently generating Section 45 tax credits that will no longer generate Section 45 tax credits beyond 2019 and the remaining 18 are generating Section 45 tax credits that will no longer generate Section 45 tax credits beyond 2021.  As a result, we believe that substantially all of the invested RC facilities will be returned to Tinuum Group upon the expiration of the Section 45 tax credit program.  If Tinuum Group elects to continue operating these RC facilities, their earnings will be significantly reduced and accordingly, our pro rata share will also be substantially reduced. 
Additionally, our RC segment is the largest of our segments and the remainder of our business must grow substantially, either organically or acquisitively, in order to replace earnings from Tinuum Group that will substantially end during the 2020 to 2022-time frame. There can be no assurance that we will be able to increase our PGI segment earnings during this time frame to cover our current operating expenses or to provide a return to shareholders that is comparable to the return currently provided by our RC segment.  If we are not able to cover operating expenses, we could be forced to raise additional capital, significantly reduce our operating expenses or take other alternative actions.
The 2017 Tax Act introduced changes in income tax rates and other specific provisions that may make Section 45 production tax credits less attractive, which, in turn, could adversely affect our results of operations or financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) became law. The 2017 Tax Act, among other things, lowered the federal income tax rate on corporations from 35% to 21%, effective for the year beginning January 1, 2018 and created certain new tax provisions, including the Base Erosion and Anti-Abuse tax (“BEAT”). In December 2018, the U.S. Treasury Department released proposed regulations addressing BEAT. The regulations are proposed to apply retroactively to tax years beginning after December 31, 2017. The changes to previously higher tax rates and provisions such as BEAT could negatively impact tax capacity of current or potential tax equity investors and result in Section 45 production tax credits being less attractive.
Presently, a group of related tax equity investors accounts for a substantial portion of our earnings from Tinuum Group and any lease renegotiation or termination by these investors or any failure to continue to produce and sell RC at the related investors' RC facilities would have a material adverse effect on our business.
As of December 31, 2018, 11 of Tinuum Group’s 28 RC facilities are leased to various affiliated entities. Significant components of our total cash flows come from Tinuum Group's distributions relating to payments received under these leases. These leases have an initial fixed period and then automatically renew, unless terminated at the option of the lessee, for successive one-year terms through 2019 or 2021. If these affiliated entities renegotiate or terminate their leases, or if the utilities where the RC facilities are installed materially reduce their use of RC, these events would have a material adverse

16


effect on our business, results of operations or financial condition. Certain of these affiliated entities have amended their leases from time to time, with some of the amended leases including less favorable terms to Tinuum Group.
Our RC businesses are joint ventures and managed under operating agreements where we do not have sole control of the decision making process, and we cannot mandate decisions or ensure outcomes.
We oversee our joint ventures under the terms of their respective operating agreements by participating in the following activities: (1) representation on the respective governing boards of directors, (2) regular oversight of financial and operational performance and controls and establishing audit and reporting requirements, (3) hiring of management personnel, (4) technical support of RC facilities, and (5) other regular and routine involvement with our joint venture partners. Notwithstanding this regular participation and oversight, our joint venture partners also participate in the management of these businesses and they may have business or economic interests that divert their attention from the joint venture, or they may prefer to operate the business, make decisions or invest resources in a manner that is contrary to our preferences. Since material business decisions must be made jointly with our joint venture partners, we cannot mandate decisions or ensure outcomes.
The financial effects of Tinuum Group providing indemnification under performance guarantees of its RC facilities are largely unknown and could adversely affect our financial condition.
Tinuum Group indemnifies certain utilities and lessees of RC facilities for particular risks associated with the operations of those facilities. We have provided limited, joint and several guarantees of Tinuum Group’s obligations under those leases. Any substantial payments made under such guarantees could have a material adverse effect on our financial condition, results of operations and cash flows.
Risks related to intellectual property
Failure to protect our intellectual property or infringement of our intellectual property by a third party could have an adverse impact on our financial condition.
We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Such means of protecting our proprietary rights may not be adequate because they provide only limited protection or such protection may be prohibitively expensive to enforce. We also enter into confidentiality and non-disclosure agreements with our employees, consultants, and many of our customers and vendors, and generally control access to and distribution of our proprietary information. Notwithstanding these measures, a third party could copy or otherwise obtain and use our proprietary information without authorization. We cannot provide assurance that the steps we have taken will prevent misappropriation of our technology and intellectual property, which could negatively impact our business and financial condition. In addition, such actions by third parties could divert the attention of our management from the operation of our business.
We may be subject to intellectual property infringement claims from third parties that are costly to defend and that may limit our ability to use the disputed technologies.
If our technologies are alleged to infringe the intellectual property rights of others, we may be prevented from marketing and selling existing products or services and from pursuing research, development or commercialization of new or complimentary products or services. Further, we may be required to obtain licenses to third-party intellectual property, or be forced to develop or obtain alternative technologies. Our failure to obtain a license to a technology that we may require, or the need to develop or obtain alternative technologies, could significantly and negatively affect our business.
Indemnification of third-party licensees of our technologies against intellectual property infringement claims concerning our licensed technology and our products could be financially significant to us.
We have agreed to indemnify licensees of our technologies (including Tinuum Group) and purchasers of our products and we may enter into additional agreements with others under which we agree to indemnify and hold them harmless from losses they may incur as a result of the infringement of third-party rights caused by the use of our technologies and products. Infringement claims, which are expensive and time-consuming to defend, could have a material adverse effect on our business, operating results and financial condition, even if we are successful in defending ourselves (and the indemnified parties) against them.

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Our future success depends in part on our ongoing identification and development of intellectual property and our ability to invest in and deploy new products, services and technologies into the marketplace efficiently and cost effectively.
The process of identifying customer needs and developing and enhancing products, services and solutions for our business segments is complex, costly and uncertain. Any failure by us to identify and anticipate changing needs, emerging trends and new regulations could significantly harm our future market share and results of operations.
Risk related to tax matters
An “ownership change” could limit our ability to utilize tax loss and credit carryforwards to offset future taxable income.
We have certain general business credit tax credits (“Tax Attributes”). As of December 31, 2018, we had $104.6 million of Tax Attributes, equaling 87% of our total gross deferred tax assets. Our ability to use these Tax Attributes to offset future taxable income may be significantly limited if we experience an “ownership change” as discussed below. Under the Internal Revenue Code ("IRC') and regulations promulgated by the U.S. Treasury Department, we may carry forward or otherwise utilize the Tax Attributes in certain circumstances to offset any current and future taxable income and thus reduce our federal income tax liability, subject to certain requirements and restrictions. To the extent that the Tax Attributes do not otherwise become limited, we believe that we will have available a significant amount of Tax Attributes in future years, and therefore the Tax Attributes could be a substantial asset to us. However, if we experience an “ownership change,” as defined in Section 382 of the IRC, our ability to use the Tax Attributes may be substantially limited, and the timing of the usage of the Tax Attributes could be substantially delayed, which could therefore significantly impair the value of that asset.
In general, an “ownership change” under Section 382 occurs if the percentage of stock owned by an entity’s 5% stockholders (as defined for tax purposes) increases by more than 50 percentage points over a rolling three-year period. An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the IRS (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. The limitation on our ability to utilize the Tax Attributes arising from an ownership change under Section 382 of the IRC would depend on the value of our equity at the time of any ownership change.  If we were to experience an “ownership change,” it is possible that a significant portion of our tax loss and credit carryforwards could expire before we would be able to use them to offset future taxable income.
On May 5, 2017, our Board of Directors (the "Board") approved the Tax Asset Protection Plan (the “Protection Plan”) and declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of our common stock. The Protection Plan was adopted in an effort to protect stockholder value by attempting to diminish the risk that our ability to use the Tax Attributes to reduce potential future federal income tax obligations may become substantially limited.
On April 6, 2018, the Board approved the First Amendment to the Tax Asset Protection Plan (the "Amendment") that amends the Protection Plan dated May 5, 2017. The Amendment amends the definition of "Final Expiration Date" under the Protection Plan to extend its duration and makes associated changes in connection therewith. At the Company's 2018 annual meeting, the Company's stockholders approved the Amendment, thus the Final Expiration Date will be the close of business on December 31, 2019.
The Protection Plan, as amended, is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of our outstanding common stock without the approval of the Board. Stockholders who beneficially owned 4.99% or more of our outstanding common stock upon execution of the Plan will not trigger the Protection Plan so long as they do not acquire beneficial ownership of additional shares of our common stock. The Board may, in its sole discretion, also exempt any person from triggering the Protection Plan.
Risks relating to our common stock
Our stock price is subject to volatility.
The market price of our common stock has experienced substantial price volatility in the past and may continue to do so. The market price of our common stock may continue to be affected by numerous factors, including:
actual or anticipated fluctuations in our operating results and financial condition;
changes in laws or regulations and court rulings and trends in our industry;

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Tinuum Group’s ability to lease or sell RC facilities;
announcements of sales awards;
changes in supply and demand of components and materials;
adoption of new tax regulations or accounting standards affecting our industry;
changes in financial estimates by securities analysts;
perceptions of the value of corporate transactions;
our ability to continue to be able to pay cash dividends;
the number of shares of common stock repurchased under stock repurchase programs; and
the degree of trading liquidity in our common stock and general market conditions.
From January 1, 2017 to December 31, 2018, the closing price of our common stock ranged from $6.98 to $12.08 per share. In June 2017, we commenced a quarterly cash dividend program and have paid out cash dividends in each succeeding quarter through December 31, 2018. In 2017 and 2018, we executed stock repurchases in various forms that included a modified Dutch Auction tender offer in May 2017 and two stock repurchase programs in December 2017 and October 2018. During 2017 and 2018, we repurchased a total of 4,064,188 shares of our common stock for cash of $41.7 million.
Stock price volatility over a given period may cause the average price at which we repurchase shares of our common stock to exceed the stock’s price at a given point in time. We believe our stock price should reflect expectations of future growth and profitability. Future dividends are subject to declaration by the Board, and under our current stock repurchase program, we are not obligated to acquire any specific number of shares. If we fail to meet expectations related to future growth, profitability, dividends, stock repurchases or other market expectations, our stock price may decline significantly, which could have a material adverse impact on our ability to obtain additional capital, investor confidence and employee retention, and could reduce the liquidity of our common stock.
There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.
The Board first approved a $0.25 per share of common stock quarterly dividend in June 2017. During 2017 and 2018, we declared quarterly dividends in the aggregate amount of $36.1 million. We intend to continue to pay quarterly dividends subject to capital availability, compliance with debt covenants and periodic determinations by the Board that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us.
The payment of future dividends may also be affected by, among other factors, compliance with debt covenants, our views on potential future capital requirements for investments in acquisitions; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; changes to our business model; and our increased interest and principal payments required by the Senior Term Loan and any additional indebtedness that we may incur in the future.
Under covenants in the Senior Term Loan, annual collective dividends and repurchases of our common stock in the aggregate may not exceed $30 million, and shall be permitted so long as (a) no default or event of default exists under the Senior Term Loan and (b) expected future net cash flows from the refined coal business as of the end of the most recent fiscal quarter exceed $100 million. Based on our current forecasts, we anticipate that future net cash flows from the refined coal business will be below the $100 million minimum requirement as of the third fiscal quarter of 2020, which would preclude us from paying dividends or repurchasing our common stock at that time.
Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in our dividend payments could have a negative effect on our stock price.
Our certificate of incorporation and bylaws contain provisions that may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions that:
Limit the business at special meetings to the purpose stated in the notice of the meeting;

19


Authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that the Board can create and issue without prior stockholder approval;
Establish advance notice requirements for submitting nominations for election to the Board and for proposing matters that can be acted upon by stockholders at a meeting; and
Require the affirmative vote of the "disinterested" holders of a majority of our common stock to approve certain business combinations involving an "interested stockholder" or its affiliates, unless either minimum price criteria or procedural requirements are met, or the transaction is approved by a majority of our "continuing directors" (known as "fair price provisions").
These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock, or could limit the ability of our stockholders to approve transactions that they may deem to be in their best interest.
We may require additional funding for our growth plans, and such funding may require us to issue additional shares of our common stock, resulting in a dilution of your investment.
We estimate our funding requirements in order to implement our growth plans. If the funding requirements required to implement growth plans should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds to meet these funding requirements.
These additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain additional financing on terms that are acceptable to us, we will not be able to implement such plans fully. Such financing even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain corporate actions. Further, if we raise additional funds through the issuance of new shares of our common stock, any shareholders who are unable or unwilling to participate in such an additional round of fund raising may suffer dilution of their investment.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Offices and Facilities
We lease office space in Highlands Ranch, Colorado for our corporate headquarters. Also in Colorado, we lease additional office, warehouse and laboratory space. Total combined leased space for these facilities is approximately 32,000 square feet. We also lease or own manufacturing, storage and distribution facilities in Louisiana. The manufacturing plant sits on approximately 59 acres and the remaining facilities are comprised of a total of approximately 310,000 square feet.
Mining
As of December 31, 2018, we owned or controlled, primarily through long-term leases, approximately 1,750 acres of coal land for surface mining located in the Gulf Coast Lignite Region, in Natchitoches Parish, Louisiana ("Five Forks"). The majority of the Five Forks land is leased for mineral rights and right-of-use purposes that expire at varying dates over the next 30 years and contain options to renew. The remaining land is owned by us.
Under our current mining plans, substantially all leased reserves will be mined out within the period of existing leases or within the time period of assured lease renewals. Royalties are paid to lessors either as a fixed price per ton or as a percentage of the gross sales price of the mined coal. The majority of the significant leases are on a percentage royalty basis. In some cases, a payment is required, payable either at the time of execution of the lease or in annual installments. In most cases, the prepaid royalty amount is applied to reduce future production royalties.
On October 31, 2018, the SEC issued new rules for disclosures under this Item for mining registrants. These rules amend Item 102 of Regulation S-K under the Securities Act and the Exchange Act and rescind Industry Guide 7 to direct mining registrants, and create a new subpart of Regulation S-K, which contains all of the requirements for property disclosures by mining

20


registrants from and after January 1, 2021 (the "Mining Disclosures"). The Mining Disclosures became effective on February 25, 2019 and allow mining registrants a transition period through January 1, 2021 to comply. We have elected to adopt the Mining Disclosures effective February 25, 2019 and are subject to the requirements effective with this Report. Based on the materiality and the vertically-integrated company guidelines contained in the Mining Disclosures, we have concluded that no additional disclosures related to our mining operations are required under this Item.
Item 3. Legal Proceedings
From time to time, we are involved in various litigation matters arising in the ordinary course of our business. Information with respect to this item may be found in Note 8 “Commitments and Contingencies” to the consolidated financial statements included in Item 8 of this Report.

Item 4. Mine Safety Disclosures
The statement concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Report.



21


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Stock
As of December 31, 2018, our common stock was quoted on the NASDAQ Global Market under the symbol "ADES." The trading volume for our common stock is relatively limited. There is no assurance that an active trading market will provide adequate liquidity for our existing stockholders or for persons who may acquire our common stock in the future.
Dividends
In June 2017, we commenced a quarterly cash dividend program of $0.25 per common share. Our ability to pay dividends in the future will be dependent upon earnings, financial condition, compliance with loan covenants and other factors considered relevant by the Board and will be subject to limitations imposed under Delaware law.
We intend to continue to declare and pay a cash dividend on shares of our common stock on a quarterly basis. Whether we do, however, and the timing and amounts of dividends will be subject to approval and declaration by the Board and will depend on a variety of factors including, but not limited to, our financial results, cash requirements, financial condition, compliance with loan covenants and other contractual restrictions and other factors considered relevant by the Board.
Performance Graph
The following performance graph illustrates a five-year comparison of cumulative total return of our common stock, the Russell 3000 Index and a select industry peer group ("Peer Group") for the period beginning on December 31, 2013 and ending on December 31, 2018. The graph assumes an investment of $100 on December 31, 2013 and assumes the reinvestment of all dividends.
The performance graph is not intended to be indicative of future performance. The performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of the Company’s filings under the Securities Act or the Exchange Act.

22


Five Year Cumulative Total Shareholder Return Comparison
Advanced Emissions Solutions Return Relative to the Russell 3000 Index and Select Industry Peer Group
chart-2d0424ee23865fa8baf.jpg
The select industry Peer group includes the following: American Vanguard Corp., Calgon Carbon Corporation, CECO Environmental Corp., Clean Energy Fuels Corp., FutureFuel Corp., Fuel-Tech, Inc., Flotek Industries Inc., Hawkins Inc., KMG Chemicals Inc., Lydall Inc., Rentech, Inc., and TerraVia Holdings, Inc.
Holders
The number of holders of record of our common stock as of March 8, 2019 was approximately 700. The approximate number of beneficial stockholders is estimated at 4,600.
Purchases of Equity Securities by the Company and Affiliated Purchasers
In November 2018, the Board authorized a program for us to repurchase up to $20.0 million of shares of our common stock through open market transactions at prevailing market prices. This stock repurchase program will remain in effect until December 31, 2019 unless otherwise modified by the Board. The following table summarizes the common stock repurchase activity for the three months ended December 31, 2018:
Period
 
(a) Total number of shares (or units) purchased
 
(b) Average price paid per share (or unit)
 
(c) Total number of shares (or units) purchased as part of publicly announced programs
 
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (in thousands)
October 1 to 31, 2018
 

 
$

 

 
$

November 1 to 30, 2018
 
145,688

 
10.13

 
145,688

 

December 1 to 31, 2018
(1)
1,193,104

 
10.34

 
1,193,104

 
5,826

Total
 
1,338,792

 
 
 
1,338,792

 
$
5,826

(1) Included within this month, approximately 1,000,000 shares at a total price of $11.3 million were purchased in two blocks through privately negotiated transactions as part of this stock repurchase program.

23



Item 6. Selected Financial Data
Five-year Summary of Selected Financial Data

The following selected financial data are derived from the audited Consolidated Financial Statements for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 and should be read in conjunction with Item 1A, Item 7 and our Consolidated Financial Statements and the related notes included in Item 8 of this Report. 
 
 
Years Ended December 31,
(in thousands, except per share amounts)
 
2018
 
2017
 
2016
 
2015
 
2014
Statement of operations data:
 

 

 

 

 

Revenues (1)
 
$
23,945

 
$
45,364

 
$
56,747

 
$
73,381

 
$
23,333

Earnings from equity method investments
 
$
54,208

 
$
53,843

 
$
45,584

 
$
8,921

 
$
42,712

Income tax expense (benefit) (2)
 
$
10,423

 
$
24,152

 
$
(60,938
)
 
$
20

 
$
296

Net income (loss) (1) (3) (4)
 
$
35,454

 
$
27,873

 
$
97,678

 
$
(30,141
)
 
$
1,387

Net income (loss), per common share, basic
 
$
1.78

 
$
1.30

 
$
4.40

 
$
(1.37
)
 
$
0.06

Net income (loss), per common share, diluted (5)
 
$
1.76

 
$
1.29

 
$
4.34

 
$
(1.37
)
 
$
0.06

Dividends declared per common share
 
$
1.00

 
$
0.75

 
$

 
$

 
$

 
 
As of December 31,
(in thousands)
 
2018
 
2017
 
2016
 
2015
 
2014
Balance sheet data:
 

 

 

 

 

Total assets (1)
 
$
159,664

 
$
82,618

 
$
107,296

 
$
60,775

 
$
93,699

Total borrowings (6)
 
$
74,125

 
$

 
$

 
$
28,025

 
$
15,910

Stockholders’ equity (deficit) (1)
 
$
67,947

 
$
73,455

 
$
76,165

 
$
(24,978
)
 
$
(697
)
(1) On December 7, 2018, we completed the Carbon Solutions Acquisition. Carbon Solutions' operating results for the period from December 7 through December 31, 2018 are reflected in our operating results for the year ended December 31, 2018. Carbon Solutions revenues and net loss for this period were $5.6 million and $0.4 million, respectively. Carbon Solutions' total assets and net assets as of December 31, 2018 were $86.3 million and $66.1 million, respectively.
(2) During the year ended December 31, 2018, we increased the valuation allowance related to its deferred tax assets by $4.5 million, which contributed to total income tax expense during 2018 of $10.4 million. During 2017, we recorded income tax expense of $24.2 million, inclusive of the impact of the Tax Act, which increased income tax expense by $5.8 million. During the fourth quarter of 2016, we released $61.4 million of the valuation allowance related to the deferred tax assets, which resulted in an income tax benefit during 2016 of $60.9 million.
(3) During the years ended December 31, 2018, 2017, 2016 and 2015, we recorded restructuring charges of $3.1 million, zero, $1.6 million and $10.4 million, respectively. The restructuring charges were recorded in connection with a reduction in force, the departure of executive officers and management's further alignment of the business with strategic objectives.
(4) During the year ended December 31, 2017, we recognized certain Other income (expense) items, which included a gain of $3.5 million from a settlement agreement with a former third party service provider, a gain of $3.3 million from a settlement agreement of a royalty indemnity agreement, a charge of $1.0 million related to a Department of Labor investigation of our Profit Sharing Retirement Plan, and an impairment charge of $0.5 million of a cost method investment. During the year ended December 31, 2016, we recognized certain Other income (expense) items, which included a gain of $2.1 million from the sale of an equity method investment, a gain of $1.0 million from a settlement of a note payable and licensed technology and an impairment charge of $1.8 million of a cost method investment.
(5) For the year ended December 31, 2015, the computation of diluted net loss per common share was the same as basic net loss per common share as the inclusion of potentially dilutive securities for those years would have been anti-dilutive.
(6) On December 7, 2018, we entered into a senior term loan facility (the "Senior Term Loan") with a related party in the principal amount of $70.0 million, less original issue discount of $2.1 million. In addition, we also incurred debt issuance costs associated with the Senior Term Loan of $2.0 million. The Senior Term Loan was the primary funding source for the Carbon Solutions Acquisition.

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


24



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Form 10-K for the year ended December 31, 2018 is filed by Advanced Emissions Solutions, Inc. together with its consolidated subsidiaries (collectively, "ADES," the "Company," "we," "us," or "our" unless the context indicates otherwise).
We are a leader in emissions reductions technologies through consumables that utilize powdered activated carbon (“PAC”) and chemical based technologies, primarily serving the coal-fired power generation and industrial boiler industries. Our proprietary environmental technologies and specialty chemicals enable our customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and potential emissions control regulations. See further discussion of our business included in Item 1 - "Business" ("Item 1") of this Report. Discussion regarding segment information is included within the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and Note 14 of the Consolidated Financial Statements included in Item 8 of this Report.
On December 7, 2018 (the “Acquisition Date”), we acquired all of the outstanding equity interests (the "Carbon Solutions Acquisition”) of ADA Carbon Solutions, LLC (“CS” or “Carbon Solutions”). Carbon Solutions is an activated carbon company and the North American leader in mercury capture using powdered activated carbon for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions owns and operates an activated carbon (“AC”) manufacturing and processing facility. It also owns an associated lignite mine that supplies the raw material for the powdered activated carbon plant (“Five Forks Mine”). Our operating results for 2018 include the operating results of Carbon Solutions for the period from December 7, 2018 to December 31, 2018.
On December 7, 2018, ADES and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd. and Apollo A-N Credit Fund (Delaware) L.P. (collectively "Apollo”), affiliates of a beneficial owner of greater than five percent of the Company's common stock and related parties, entered into the Term Loan and Security Agreement (the "Senior Term Loan") in the principal amount of $70.0 million, less original issue discount of $2.1 million. Proceeds from the Senior Term Loan were used to fund the Carbon Solutions Acquisition.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.
Revenues and costs of revenue
Consumables
We sell PAC and proprietary chemical blends to coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory emissions standards. Additionally, we also sell PAC to water treatment plants to remove contaminants from the water. Revenue is generally recorded upon delivery of our product.
Certain customer contracts are comprised of evaluation tests ("Evaluation Tests") of the Company's chemicals' effectiveness and efficiency in reducing emissions and entail the delivery of products to the customer and the Company evaluating results of emissions reduction over the term of the contract. The Company generally recognizes revenue from Evaluation Tests over the duration of the contract based on the cost of product consumed by the customer.
License royalties, related party
We license our M-45TM and M-45-PCTM emission control technologies ("M-45 License") to Tinuum Group and realize royalty income based upon a percentage of the per-ton, pre-tax margin as defined in the M-45 License.
Equipment sales
Equipment sales represent the sale of activated carbon injection ("ACI") systems to control mercury, dry sorbent injection ("DSI") systems to control sulfur dioxide (SO2), sulfur trioxide (SO3), and hydrogen chloride (HCl) and electrostatic precipitator ("ESP") liquid flue gas conditioning systems. Revenue from extended equipment contracts was recorded using the completed contract method of accounting.
We also may enter into other non-extended equipment contracts for which we generally recognize revenues on a time and material basis as services to build equipment systems are performed or as equipment is delivered.

25


Other Operating Expenses
Payroll and benefits
Payroll and benefits costs include personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expenses. Payroll and benefits costs exclude direct labor included in Cost of revenue.
Rent and occupancy
Rent and occupancy costs include rent, insurance, and other occupancy-related expenses.
Legal and professional fees
Legal and professional costs include external legal, audit and consulting expenses.
General and administrative
General and administrative costs include director fees and expenses, bad debt expense, research and development expense and other general costs of conducting business. Research and development costs, net of reimbursements from cost-sharing arrangements, are charged to expense in the period incurred and are reported in the General and administrative line item in the Consolidated Statements of Operations.
Depreciation, amortization, depletion, and accretion
Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment and the amortization of long-lived intangibles. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of a mine reclamation liability.
Other Income (Expense), net
Earnings from equity method investments
Earnings from equity method investments relates to our share of earnings (losses) related to our equity method investments.
Our equity method earnings in Tinuum Group, LLC ("Tinuum Group"), a related party in which we own a 42.5% equity interest and a 50% voting interest, are positively impacted when Tinuum Group obtains an investor in a refined coal ("RC") facility and receives lease payments from the lessee, or purchase payments from the sale, of the RC facility. If Tinuum Group operates a retained RC facility, the Company's equity method earnings will be negatively impacted as operating retained RC facilities generate operating losses. However, we benefit on an after-tax basis if we are able to utilize tax credits associated with the production and sale of RC from operation of retained RC facilities by Tinuum Group. These benefits, if utilized, will increase our consolidated net income as a result of a reduction in income tax expense.
Tinuum Services, LLC ("Tinuum Services"), a related party in which we own both a 50% equity and voting interest, operates and maintains RC facilities under operating and maintenance agreements. Tinuum Group or the lessee/owner of the RC facilities pays Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus certain fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements necessary for the production of RC. Tinuum Services consolidates certain RC facilities leased or owned by tax equity investors that are deemed to be variable interest entities ("VIE's). All net income (loss) associated with these VIE's is allocated to the noncontrolling equity holders of Tinuum Services and therefore does not impact our equity earnings (loss) from Tinuum Services.
Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items. For 2017, miscellaneous items included an adjustment to a litigation loss accrual and changes in estimate related to royalty indemnity expense.
We record interest expense related to our Senior Term Loan and capital leases, as well as through our share of Tinuum Group's equity method earnings for RC facility leases or sales that are treated as installment sales for tax purposes. IRC Section 453A ("Section 453A") requires taxpayers using the installment method to pay an interest charge on the portion of the tax liability that is deferred under the installment method. We refer to this as "453A interest."
Results of Operations
For comparison purposes, the following tables set forth our results of operations for the years presented in the Consolidated Financial Statements included in Item 8 of this Report. The results for the year ended December 31, 2018 include the results of operations of Carbon Solutions from the Acquisition Date through December 31. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years.


26


Year ended December 31, 2018 Compared to Year ended December 31, 2017

Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended December 31, 2018 and 2017 is as follows:
 
 
Years Ended December 31,
 
Change
(Amounts in thousands except percentages)
 
2018
 
2017
 
($)
 
(%)
Revenues:
 
 
 
 
 
 
 
 
Consumables
 
$
8,733

 
$
4,246

 
$
4,487

 
106
 %
License royalties, related party
 
15,140

 
9,672

 
5,468

 
57
 %
Equipment sales
 
72

 
31,446

 
(31,374
)
 
(100
)%
Total revenues
 
$
23,945

 
$
45,364

 
$
(21,419
)
 
(47
)%
Operating expenses:
 
 
 
 
 
 
 
 
Consumables cost of revenue, exclusive of depreciation and amortization
 
$
6,606

 
$
3,434

 
$
3,172

 
92
 %
Equipment cost of revenue, exclusive of depreciation and amortization
 
$
(353
)
 
$
28,451

 
$
(28,804
)
 
(101
)%
Consumables and consumables cost of revenue
For the years ended December 31, 2018 and 2017, consumables revenue increased year over year primarily due to the Carbon Solutions Acquisition on December 7, 2018. Carbon Solutions contributed consumables revenue of $5.6 million of the total consumables revenue for the year ended December 31, 2018. Excluding Carbon Solutions' consumables revenues, consumables revenues decreased year over year primarily due to a significant decrease in sales to two customers, partially offset by increased sales to new customers in 2018. The total pounds of our chemicals sold decreased year over year and gross margins decreased year over year primarily due to ongoing price compression. During the year ended December 31, 2018, revenues from Evaluation Tests increased year over year primarily from two significant customer contracts that were completed in 2018. Cost of consumables revenue for Carbon Solutions for 2018 was $3.4 million and excluding this amount cost of consumables revenue increased year over year. This increase was primarily due to significant costs incurred that exceeded revenues by $0.5 million on one of the Evaluation Test contracts, which was the primary negative impact on our overall consumables gross margin for 2018.
Consumables cost of revenue will be negatively impacted in 2019 due to the amortization of a step-up in inventory fair value of approximately $5.0 million related to the Carbon Solutions Acquisition.
License royalties, related party
Royalty income increased in 2018 compared to 2017 primarily due to Tinuum Group obtaining tax equity investors for two incremental RC facilities during 2018 and to the full year of operations in 2018 of the four incremental RC facilities sold or leased to tax equity investors in 2017, all of which use our M-45 License. The total facilities that use our M-45 License increased from 10 facilities in 2017 to 12 facilities in 2018. The increase in facilities resulted in an increase in rental and sales payments to Tinuum Group and an increase in the related tons produced and sold subject to the M-45 License. During the years ended December 31, 2018 and 2017, there were 37.3 million tons and 22.6 million tons, respectively, of RC produced using the M-45 License.
Equipment sales and Equipment sales cost of revenue
During the years ended December 31, 2018 and 2017, we did not enter into any long-term (6 months or longer) fixed price contracts to supply ACI systems. As of December 31, 2017, all ACI system contracts were completed. During the year ended December 31, 2017, we completed four ACI systems, recognizing revenues of $3.4 million and cost of revenue of $2.4 million.
During the years ended December 31, 2018 and 2017, we did not enter into any long term (6 months or longer) fixed price contracts to supply DSI systems. During the year ended December 31, 2017, we completed five DSI systems, recognizing revenues of $27.8 million and cost of revenue of $26.0 million. As of January 1, 2018, all revenues and costs of revenues were recognized on the three DSI system uncompleted contracts as of December 31, 2017 upon the adoption of the new revenue accounting standard, ASC 606 - Revenue from Contracts with Customers.
The remaining changes were due to other equipment sales.
Demand for ACI and DSI system contracts historically was driven by coal-fired power plant utilities that need to comply with Federal Mercury and Air Toxics Standards ("MATS") and Maximum Achievable Control Technology Standards ("MACT"). As

27


the deadline for these standards has passed, we do not expect to enter into any future long-term fixed price contracts for ACI and DSI systems.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in Note 6 and Note 15 to the Consolidated Financial Statements included in Item 8 of this Report.

Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2018 and 2017 is as follows:
 
 
Years Ended December 31,
 
Change
(in thousands, except percentages)
 
2018
 
2017
 
($)
 
(%)
Operating expenses:
 
 
 
 
 
 
 
 
Payroll and benefits
 
$
10,639

 
$
7,669

 
$
2,970

 
39
 %
Rent and occupancy
 
1,141

 
795

 
346

 
44
 %
Legal and professional fees
 
8,230

 
4,354

 
3,876

 
89
 %
General and administrative
 
3,359

 
4,014

 
(655
)
 
(16
)%
Depreciation, amortization, depletion, and accretion
 
723

 
789

 
(66
)
 
(8
)%
 
 
$
24,092

 
$
17,621

 
$
6,471

 
37
 %
Payroll and benefits
Payroll and benefits expenses increased in 2018 compared to 2017 primarily due to restructuring expenses in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives during 2018, as well as the elimination of certain duplicative positions in connection with the Carbon Solutions Acquisition. During the year ended December 31, 2018, we recorded net restructuring charges of $3.1 million. As of December 31, 2018, $2.2 million of this expense remained accrued. Payment of accrued amounts is expected to occur during 2019 from cash on hand. There were no material restructuring expenses recorded in 2017. Additionally, payroll-related expenses increased due to the increase in headcount of personnel from the Carbon Solutions Acquisition, which resulted in an increase in average headcount of 10% for 2018 compared to 2017. We expect an increase in future recurring payroll-related expense due to the Carbon Solutions Acquisition.

Rent and occupancy
Rent and occupancy expenses increased in 2018 compared to 2017 primarily due to lower rent and occupancy expense in 2017 as a result of the relocation of our corporate headquarters in the first quarter of 2017 and the acceleration of deferred rent and tenant improvement allowances recorded in 2017 associated with the termination of the lease agreement of our former corporate headquarters.

Legal and professional fees
Legal and professional fees expenses increased in 2018 compared to 2017 as a result of costs incurred related to the Carbon Solutions Acquisition of approximately $4.5 million as well as an increase in consulting fees related to ongoing clarification of federal income tax reform of $0.5 million. These costs were partially offset by a decrease in costs related to outsourced shared service costs, including legal and audit fees.

General and administrative
General and administrative expenses decreased in 2018 compared to 2017 primarily due to a $0.4 million reserve on an asset related to a letter of credit drawn by a former customer that was recorded during the year ended December 31, 2017. Additional decreases included a reduction in general operating expenses of approximately $0.4 million, which included decreases in outsourced IT costs and outside director expenses. Offsetting these decreases was an increase in bad debt expense incurred of $0.2 million.

Depreciation, amortization, depletion, and accretion
Depreciation and amortization expense decreased in 2018 compared to 2017 primarily due to higher depreciation recorded in 2017 related to the acceleration of depreciation on certain fixed assets that were disposed of in connection with our corporate office relocation, which was completed in the first quarter of 2017. This decrease is offset by the addition of long-lived assets

28


acquired as part of the Carbon Solutions Acquisition, which contributed approximately $0.4 million of depreciation expense for the period between Acquisition Date and December 31, 2018.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31, 2018 and 2017 is as follows:
 
 
Years Ended December 31,
 
Change
(Amounts in thousands, except percentages)
 
2018
 
2017
 
($)
 
(%)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings from equity method investments
 
$
54,208

 
$
53,843

 
$
365

 
1
 %
Interest income
 
239

 
54

 
185

 
343
 %
Interest expense
 
(2,151
)
 
(3,024
)
 
873

 
(29
)%
Litigation settlement and royalty indemnity expense, net
 

 
3,269

 
(3,269
)
 
(100
)%
Other
 
(19
)
 
2,025

 
(2,044
)
 
(101
)%
Total other income
 
$
52,277

 
$
56,167

 
$
(3,890
)
 
(7
)%
Earnings in equity method investments
The following table presents the equity method earnings, by investee, for the years ended December 31, 2018 and 2017:
 
 
Years Ended December 31,
 
Change
(in thousands)
 
2018
 
2017
 
($)
 
(%)
Earnings from Tinuum Group
 
$
47,175

 
$
48,875

 
$
(1,700
)
 
(3
)%
Earnings from Tinuum Services
 
7,033

 
4,963

 
2,070

 
42
 %
Earnings from other
 

 
5

 
(5
)
 
(100
)%
Earnings from equity method investments
 
$
54,208

 
$
53,843

 
$
365

 
1
 %
Earnings from equity method investments, and changes related thereto, are impacted by our most significant equity method investees: Tinuum Group and Tinuum Services. Earnings from equity method investments increased during the year ended December 31, 2018 compared to 2017 primarily as a result of the addition of two invested facilities during 2018. However, cash distributions to us from Tinuum Group, and related equity earnings, during 2018 were negatively impacted as a result of $17.6 million of capital expenditures incurred by Tinuum Group related to the engineering and installation of RC facilities. See the discussion below regarding the accounting of earnings from Tinuum Group.
During the year ended December 31, 2018, we recognized $47.2 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $57.7 million for the year. During the year ended December 31, 2017, we recognized $48.9 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $46.6 million for the year. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on the Consolidated Statements of Operations relates to us receiving cumulative distributions in excess of the carrying value of the investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed in more detail below.
As a result of cash flows from invested RC facilities, Tinuum Group distributions to us during the year ended December 31, 2018 were $47.2 million, which resulted in us continuing to have cumulative cash distributions that exceeded our cumulative pro-rata share of Tinuum Group's net income as of December 31, 2018.

29


The following table for Tinuum Group presents our investment balance, equity earnings, cash distributions received and cash distributions in excess of the investment balance for the years ended December 31, 2018 and 2017 (in thousands):
Description
 
Date(s)
 
Investment balance
 
ADES equity earnings (loss)
 
Cash distributions
 
Memorandum Account: Cash distributions and equity loss in (excess) of investment balance
Beginning balance
 
12/31/2016
 
$

 
$

 
$

 
$
(9,894
)
ADES proportionate share of net income from Tinuum Group (1)
 
2017 activity
 
46,551

 
46,551

 

 

Recovery of cash distributions in excess of investment balance (prior to cash distributions)
 
2017 activity
 
(9,894
)
 
(9,894
)
 

 
9,894

Cash distributions from Tinuum Group
 
2017 activity
 
(48,875
)
 

 
48,875

 

Adjustment for current year cash distributions in excess of investment balance
 
2017 activity
 
12,218

 
12,218

 

 
(12,218
)
Total investment balance, equity earnings (loss) and cash distributions
 
12/31/2017
 

 
48,875

 
48,875

 
(12,218
)
ADES proportionate share of net income from Tinuum Group (1)
 
2018 activity
 
57,721

 
57,721

 

 

Recovery of cash distributions in excess of investment balance (prior to cash distributions)
 
2018 activity
 
(12,218
)
 
(12,218
)
 

 
12,218

Cash distributions from Tinuum Group
 
2018 activity
 
(47,175
)
 

 
47,175

 

Adjustment for current year cash distributions in excess of investment balance
 
2018 activity
 
1,672

 
1,672

 

 
(1,672
)
Total investment balance, equity earnings and cash distributions
 
12/31/2018
 
$

 
$
47,175

 
$
47,175

 
$
(1,672
)
(1) The amounts of our 42.5% proportionate share of net income as shown in the table above differ from mathematical calculations of the Company’s 42.5% equity interest in Tinuum Group multiplied by the amounts of Net Income available to Class A members as shown in the table above of Tinuum Group results of operations due to adjustments related to the Class B preferred return.
Tinuum Group plans to adopt Accounting Standard Update (“ASU”) No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASU 2014-09”) and ASU 2016-02 (Topic 842), Leases (“ASU 2016-02”) as of January 1, 2019. As a result of Tinuum Group’s adoption, we expect to record a cumulative adjustment of $37.2 million related to our portion of Tinuum Group's cumulative effect adjustment that will increase our Retained Earnings as of January 1, 2019. We expect that this adjustment will result in us no longer having cumulative cash distributions that exceed our cumulative pro-rata share of Tinuum Group's net income. Additionally, we expect that we will recognize equity earnings by recording our pro-rata share of Tinuum Group’s net income rather than based upon cash distributions on a go-forward basis. Upon adoption, we will assess the impact of the adjustment to our income tax position.
Tinuum Group's consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017 are included in Item 15 of this Report.
Equity earnings from our interest in Tinuum Services increased by $2.1 million in 2018 compared to 2017. As of December 31, 2018 and 2017, Tinuum Services provided operating and maintenance services to 18 and 16 RC facilities, respectively. Tinuum Services derives earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, depending upon the specific RC facility operating and maintenance agreement.
Additional information related to equity method investments can be found in Note 5 to the Consolidated Financial Statements included in Item 8 of this Report.

30


Tax Credits
We earned the following tax credits that may be available for future benefit related to the production of RC from the operation of retained RC facilities under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"):
 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
Section 45 tax credits earned
 
$
7,031

 
$
3,496

The increase in the Section 45 tax credits earned during the year ended December 31, 2018 compared to December 31, 2017 was due to our direct ownership and Tinuum Group's ownership in an RC facility that generated tax credits for the entirety of 2018 compared to a six-month period in 2017.
As discussed in Item 1 of this Report, Tinuum Group operates and leases or sells facilities used in the production and sale of RC to third party tax equity investors. All dispositions of such facilities are treated as installment sales for federal income tax purposes at Tinuum Group. The resulting gain from these sales is reported by Tinuum Group pursuant to the installment method under IRC Section 453. Under Section 453A taxpayers using the installment method for income tax purposes are required to pay 453A interest that is calculated on the portion of the tax liability that is deferred under the installment method. As of December 31, 2018, ADES’s allocable share of the gross deferred installment sale gain from Tinuum Group to be recognized in future years was approximately $170 million.
Due to the production and sale of RC from the operation of retained RC facilities, Tinuum Group has generated Section 45 tax credits ("GBC's"). These GBC's are allocated to the owners of Tinuum Group, including us, who may benefit to the extent that the GBC's are realized from the operation of retained RC facilities. As of December 31, 2018, we had approximately $104.6 million in GBC carryforwards.
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of the GBC's generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for GBC's. The results of a recent analysis indicated that we had not experienced an ownership change as of December 31, 2018, as defined by IRC Section 382. Such analysis for the period from January 1, 2019 through the date of this Report has not been completed. Therefore, it is possible that we experienced an ownership change between January 1, 2019 and the date of this filing, thus subjecting our GBC carryforwards to limitation. Should a limitation exist, however, we would likely be in a position to substantially increase the limitation amount by virtue of our approximately $170 million deferred installment sale gain at Tinuum Group.
Specifically, IRC Section 382 provides that a corporation with a net unrealized built-in gain ("NUBIG") immediately before an ownership change may increase its limitation by the amount of recognized built-in gain ("RBIG") arising from the sale of a built-in gain asset during a recognition period, which is generally the five-year period immediately following an ownership change. Built-in gain reported on the installment sale method that is attributable to assets sold by the corporation before or during the recognition period may increase the corporation’s limitation during and after the recognition period. Therefore, it is likely that any IRC Section 382 limitation imposed upon an ownership change may be increased by our share of RBIG from Tinuum Group’s installment sale gain attributable to RC facilities sold before or during the period in which the change in ownership occurred.
There are numerous assumptions, listed below, that must be considered in calculating the RBIG related to Tinuum Group and the increase to our IRC Section 383 limitation. Assuming these assumptions, we may be able to increase the total limitation by approximately $170 million over the duration of the installment sale. As of December 31, 2018, after increasing the total hypothetical limitation, we would likely not have been able to utilize approximately $43.0 million of tax credits.
The Tinuum Group RBIG is a result of the sale of RC facilities by Tinuum Group and its election to utilize the installment sale method for tax purposes;
Investors in RC facilities will not terminate existing contracts as completion of an installment sale transaction is necessary to realize RBIG;
We have no net unrealized built-in loss to offset the NUBIG from Tinuum Group;
Our RBIG is equal to the deferred gain allocated from Tinuum Group, which is approximately $170 million;
We will have a NUBIG immediately before a hypothetical ownership change such that the Tinuum Group RBIG is available to increase the IRC Section 382 limitation;
We will continue our historic business operations for at least two years following a hypothetical ownership change; and
A second ownership change does not occur.
The annual limitation will be increased by the amount of RBIG that is included in taxable income each year. 

31


Interest expense
453A interest expense decreased in 2018 compared to 2017 by $1.0 million. This reduction was driven by a lower tax rate of 21% in 2018 compared to 35% in 2017 as well as fewer principal payments remaining, partially offset by an increase in invested RC facilities in which Tinuum Group recognized as installment sales for tax purposes from 17 as of December 31, 2017 to 19 as of December 31, 2018.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate to calculate 453A interest:
 
 
As of December 31,
(in thousands)
 
2018
 
2017
Tax liability deferred on installment sales (1)
 
$
35,703

 
$
70,739

Interest rate
 
5.00
%
 
4.00
%
(1) Represents the approximate tax effected liability utilizing the federal tax rate in effect for the applicable years ended related to the deferred gain on installment sales (approximately $170 million as of December 31, 2018).
Based on the interest rate in effect as of the date of this filing, the 453A interest rate for the year ended December 31, 2019 is expected to be 6%.
Offsetting the decrease in 453A interest expense was an increase due to $0.5 million in interest related to the Senior Term Loan entered into on December 7, 2018 to fund the Carbon Solutions Acquisition.
Other
The components of Other income (expense) include the following significant items:
Indemnity Settlement Agreement
In December 2017, prior to the Carbon Solutions Acquisition, we, Carbon Solutions and the former parent company of Carbon Solutions agreed to terminate certain provisions of the Indemnity Settlement Agreement (the " Indemnity Termination Agreement"). Pursuant to an agreement executed concurrently with the Indemnity Termination Agreement, the Company, Norit International B.V. and one of its an affiliates (collectively referred to as “Norit”) agreed to a final payment in the amount of $3.3 million (the "Settlement Payment") to settle all outstanding royalty obligations (the "Royalty Award") owed under the terms of a settlement agreement executed in 2011 between the Company and Norit. We paid this amount on December 29, 2017.
Under the Indemnity Termination Agreement, and upon payment of the Settlement Payment, we were relieved of certain financial and indemnity obligations required by the terms of the settlement agreement with Norit, including the obligation to maintain LC's securing future royalty payment obligations. As of December 31, 2017, $3.5 million in LC's related to the Royalty Award were outstanding, but were canceled by all parties in January 2018, pursuant to the Indemnity Termination Agreement.
Settlement with service provider
In November 2017, we entered into a settlement agreement with a former third-party service provider and as part of the settlement we received cash in the amount of $3.5 million. Cash from this settlement was received in December 2017.
Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan
In 2016, the DOL opened an investigation into the Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan (the “401(k) Plan”), and we, as Plan Sponsor, cooperated with that investigation. In February 2018, as part of ongoing discussions, we and the DOL came to an agreement whereby we would make a restorative payment to the 401(k) Plan in the amount of $1.0 million as an estimate of lost earnings for 401(k) Plan participants as of January 1, 2015. Thereafter, the DOL would close the investigation with no further action against the 401(k) Plan or its fiduciaries, including any further investigation. We determined this contingency to be both probable and reasonably estimable and accrued $1.0 million as of December 31, 2017. The liability was recorded in the Other current liabilities line item on the Consolidated Balance Sheet. The expense recognized related to this accrual was included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2017. We made a payment of $1.0 million to the 401(k) Plan on June 1, 2018 and no liability existed as of December 31, 2018. On September 7, 2018, we received notification that the DOL had closed its investigation and no further action is required by us.

32


Impairment of cost method investment
In November 2014, we acquired an 8% ownership interest in the common stock of Highview ("Highview"), a London, England based development stage company specializing in power storage. We accounted for our investment in Highview (the "Highview Investment") in accordance with U.S. GAAP applicable to equity investments that do not qualify for the equity method of accounting. As of December 31, 2017, we recorded an impairment charge of $0.5 million for the Highview Investment based on an estimated fair value of £1.00 per share compared to the estimated carrying value prior to the impairment charge of £2.00 per share. The impairment charge was included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2017.
Income tax expense
On December 22, 2017 (the "Enactment Date"), the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act made broad and complex changes to the U.S. tax code and key provisions applicable to the Company, or certain of Tinuum Group's existing or potential customers, for 2018 included the following: (1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT); (3) a new limitation on deductible interest expense; (4) limitations on the deductibility of certain executive compensation; (5) limitations on the use of federal tax credits ("FTCs") to reduce the U.S. income tax liability; (6) limitations on net operating losses ("NOL’s") generated after December 31, 2017, to 80 percent of taxable income; and the introduction of the Base Erosion Anti-Abuse Tax (“BEAT”) for tax years beginning after December 31, 2017.
As a result of the reduction of the U.S. federal corporate rate from 35 percent to 21 percent, we recorded an adjustment to our recorded deferred tax assets and deferred tax liabilities as of the Enactment Date for those temporary differences expected to reverse after the Enactment Date. During 2018, we did not make any accounting adjustments related to the Tax Act.
For the year ended December 31, 2018, our reported income tax expense of $10.4 million differed from income tax expense computed by applying the U.S. statutory federal income tax rate (the "Federal Rate") of $9.6 million primarily due to a reduction in income tax expense from tax credits realized of $7.0 million, offset by increases in income tax expense from state income tax expense, net of federal benefit of $3.6 million and an increase in the valuation adjustment on our deferred tax assets of $4.5 million. For the year ended December 31, 2017, our reported income tax expense of $24.2 million differed from income tax expense computed using the Federal Rate of $18.2 million primarily due to increases in income tax expense from state income tax expense, net of federal benefit of $1.7 million and from a reduction in our net deferred tax assets of $5.8 million from the change in federal tax rates from 35% to 21%, offset by a decrease in income tax expense from tax credits realized of $1.9 million.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. 
We assess the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
As of December 31, 2018, we concluded it is more likely than not we will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize $32.5 million of our net deferred tax assets, and therefore, reversed $4.5 million of the valuation allowance. In reaching this conclusion, we most significantly considered: (1) forecasts of continued future taxable income and (2) impacts of additional RC invested facilities during 2018. As of December 31, 2018 and 2017, we had a valuation allowance recorded of $79.9 million and $75.4 million, respectively, against our deferred tax assets.
During 2019, due to the impact of Tinuum Group selling an additional RC facility during the three months ended March 31, 2019, as well as the impacts of Tinuum Group’s adoption of ASU 2014-09 and ASU 2016-02, we expect that we will record an adjustment to our valuation allowance against our net deferred tax assets.
The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets.
Our estimate of future taxable income is based on internal projections that consider historical performance, multiple internal scenarios and assumptions, as well as external data that we believe is reasonable. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, the analysis will be updated to determine if any

33


adjustments to the valuation allowance are required. If actual results differ negatively from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in further releases to the deferred tax valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in Note 13 of the Consolidated Financial Statements included in Item 8 of this Report.
Business Segments
As of December 31, 2018, we have two reportable segments: (1) Refined Coal ("RC'); and (2) Power Generation and Industrials ("PGI") (f/k/a "Emissions Control").
The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.
Segment revenues include equity method earnings and losses from our equity method investments.
Segment operating income (loss) includes segment revenues, 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.
RC segment operating income includes interest expense directly attributable to the RC segment.
The principal products and services of our segments are:
1.
RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NOX and mercury from the burning of RC. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services as well as other immaterial equity method investments. Segment revenues include equity method earnings (losses) from our equity method investments and royalty earnings from Tinuum Group. These earnings are included within the Earnings from equity method investments and License royalties, related party line items in the Consolidated Statements of Operations included in Item 8 of this Report. Key drivers to RC segment performance are the produced and sold RC from both operating and retained RC facilities, royalty-bearing tonnage, and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments.
2.
PGI - Our PGI segment includes revenues and related expenses from the sale of consumable products that utilize PAC and chemical technologies as well as historically the sale of ACI and DSI equipment systems. These options provide coal-powered utilities and industrial boilers with mercury control solutions working in conjunction with ACI and DSI systems and other pollution control equipment, generally without the requirement for significant ongoing capital outlays. These amounts are included within the respective revenue and cost of revenue line items in the Consolidated Statements of Operations included in Item 8 of this Report.

34


The following table presents our operating segment results for the years ended December 31, 2018 and 2017:
 
 
Years Ended December 31,
 
Change
(in thousands)
 
2018
 
2017
 
($)
Revenues:
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
Earnings in equity method investments
 
$
54,208

 
$
53,843

 
$
365

Royalties, related party
 
15,140

 
9,672

 
5,468

 
 
69,348

 
63,515

 
5,833

Power Generation and Industrials:
 
 
 
 
 
 
Equipment sales
 
72

 
31,446

 
(31,374
)
Consumables
 
8,628

 
4,246

 
4,382

 
 
8,700

 
35,692

 
(26,992
)
Total segment reporting revenues
 
78,048

 
99,207

 
(21,159
)
 
 
 
 
 
 
 
Adjustments to reconcile to reported revenues:
 
 
 
 
 
 
Earnings in equity method investments
 
(54,208
)
 
(53,843
)
 
(365
)
Corporate and other
 
105

 

 
105

Total reported revenues
 
$
23,945

 
$
45,364

 
$
(21,419
)
 
 
 
 
 
 
 
Segment operating income (loss)
 
 
 
 
 
 
Refined Coal (1)
 
$
65,454

 
$
59,908

 
$
5,546

Power Generation and Industrials (2)
 
(2,621
)
 
379

 
(3,000
)
Total segment operating income
 
$
62,833

 
$
60,287

 
$
2,546

(1) Included within the RC segment operating income for the years ended December 31, 2018 and 2017 is 453A interest expense of $1.6 million and $2.6 million, respectively. Also included within the RC segment operating income for the year ended December 31, 2018 was $0.4 million of severance expense.
(2) Included within the PGI segment operating income for the year ended December 31, 2018 was approximately $1.0 million of amortization related to a step up in basis of the fair value of inventory. Also included within the PGI segment operating income for the year ended December 31, 2018 was $1.0 million of severance expense.
A reconciliation of segment operating income to consolidated net income is included in Note 14 of the Consolidated Financial Statements included in Item 8 of this Report.
RC
The following table details the segment revenues of our respective equity method investments for the years ended December 31, 2018 and 2017:
 
 
Year ended December 31,
(in thousands)
 
2018
 
2017
Earnings from Tinuum Group
 
$
47,175

 
$
48,875

Earnings from Tinuum Services
 
7,033

 
4,963

Earnings from other
 

 
5

Earnings from equity method investments
 
$
54,208

 
$
53,843

RC earnings increased primarily due to increased equity earnings from Tinuum Services during the year ended December 31, 2018 compared to the year ended December 31, 2017, as presented above. Our equity earnings increased primarily due to an increase in Tinuum Services' earnings as a result of the addition of two invested facilities. Cash distributions decreased year over year as a result of incurred costs related to the engineering and installation phases of RC facilities, which have reduced distributions to Tinuum Group's equity members even though Tinuum Group did obtain two additional invested facilities. For the year ended December 31, 2018, Tinuum Group's consolidated earnings increased $26.0 million from the comparable December 31, 2017 period due to an increase in lease revenues driven by increased sales of facilities to third-party investors.

35


As discussed above and in Note 5 of the Consolidated Financial Statements included in Item 8 of this Report, our earnings in Tinuum Group may not equal our pro-rata share due to the accounting related to our equity method investment.
RC operating income in 2018 was also positively impacted for the following:
An increase in earnings from Tinuum Services, which was primarily due to an increase in the number of RC facilities operated by Tinuum Services during 2018;
An increase in M-45 royalties earned as a result of increased tonnage; and
A decrease in 453A interest expense as a result of the decreased federal tax rate and the declining deferred tax liability.
PGI
PGI segment operating income decreased during the year ended December 31, 2018 compared to 2017 primarily due to a decrease in revenues year over year, as discussed within the consolidated results. The decrease in PGI segment operating income was driven by a decrease in Equipment sales revenue, less equipment sales cost of revenue, as no further revenue from equipment sales is expected. Additionally, PGI operating income was positively impacted by incremental Carbon Solutions revenues of $5.6 million, offset by cost of revenues of $3.4 million, inclusive of $1.0 million related to the amortization of a step up in basis of acquired finished goods inventory related to Carbon Solutions Acquisition. The decrease in operating income is also due to an increase in restructuring expense of $0.9 million during the year ended December 31, 2018 compared to 2017.


36


Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During 2018, our liquidity position was positively affected primarily from distributions from Tinuum Group and Tinuum Services, royalty payments from Tinuum Group and borrowing availability under our bank ("Lender") line of credit (the "Line of Credit").
Our principal sources of liquidity currently include:
cash and cash equivalents on hand;
distributions from Tinuum Group and Tinuum Services;
royalty payments from Tinuum Group;
the Line of Credit; and
operations in the PGI segment.
Our principal uses of liquidity during the year ended December 31, 2018 included:
acquisition of Carbon Solutions
payment of dividends;
repurchases of shares of our common stock pursuant to a stock repurchase program by which we may repurchase up to $20.0 million of our outstanding common stock, from time to time;
our business operating expenses, including federal and state tax payments; and
delivering on our existing contracts and customer commitments.
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, as well as future expected dividend payments and potential future share repurchases, depends upon several factors, including executing on our contracts and initiatives, receiving royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, and increasing our share of the market for PGI consumables as well as expansion of our overall PAC business into additional adjacent markets. Increased distributions from Tinuum Group will likely be dependent upon both preserving existing contractual relationships and the securing of additional tax equity investors for those Tinuum Group facilities that are currently not operating.
Our use of liquidity for capital expenditures has not been significant for the periods presented. Due to the acquisition of Carbon Solutions, we expect that use of liquidity for capital expenditures will increase in future periods. Carbon Solutions has historically incurred costs for capital expenditures related to the PAC manufacturing facility under normal operations and planned outages and for mine development at the Five Forks. Certain of Carbon Solutions' recent historical planned capital expenditures were delayed due to the sales process. During due diligence and validated upon acquisition, we evaluated capital expenditure needs and anticipate additional material capital resources will be needed to maintain or improve capital assets.
Tinuum Group and Tinuum Services Distributions
The following table summarizes the cash distributions from our equity method investments, which most significantly affected our consolidated cash flow results, for the years ended December 31, 2018 and 2017:
 
 
Year ended December 31,
(in thousands)
 
2018
 
2017

 
 
 
 
Tinuum Group
 
$
47,175

 
$
48,875

Tinuum Services
 
5,500

 
4,638

Distributions from equity method investees
 
$
52,675

 
$
53,513

Future cash flows from Tinuum through 2021 are expected to range from $200 to $225 million, and key drivers in achieving these future cash flows are based on the following:
19 invested facilities as of December 31, 2018 and inclusive of all net Tinuum cash flows (distributions and license royalties), offset by estimated federal and state income tax payments and 453A interest payments.
Expected future cash flows from Tinuum Group are based on the following key assumptions:
Tinuum Group continues to not operate retained facilities;
Tinuum Group does not have material capital expenditures or unusual operating expenses;

37


Tax equity lease renewals on invested facilities are not terminated or repriced; and
Coal-fired power generation remains constant.
Future incremental invested RC facilities would positively impact our expectation of future cash flows.
Senior Term Loan
On December 7, 2018, we executed the Senior Term Loan with Apollo in the principal amount of $70.0 million, less original issue discount of $2.1 million. We also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan has a term of 36 months and bears interest at a rate equal to 3-month LIBOR (subject to a 1.5% floor) + 4.75% per annum, which is adjusted quarterly to the current 3-month LIBOR rate, and interest is payable quarterly in arrears. Quarterly principal payments of $6.0 million are required beginning in March 2019, and we may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of our assets, including the cash flows from Tinuum Group and Tinuum Services, but excluding our equity interests in those Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) Beginning December 31, 2018 and as of the end of each fiscal quarter thereafter, we must maintain a minimum cash balance of $5.0 million and shall not permit "expected future net cash flows from the refined coal business" (as defined in the Senior Term Loan) to be less than 1.75 times the outstanding principal amount of the Senior Term Loan; (2) Beginning in January 2019, annual collective dividends and buybacks of shares of our common stock in an aggregate amount, not to exceed $30.0 million, are permitted so long as (a) no default or event of default exists under the Senior Term Loan and (b) expected future net cash flows from the refined coal business as of the end of the most recent fiscal quarter exceed $100.0 million.
Stock Repurchases and Dividends
In November 2018, the Board authorized us to purchase up to $20.0 million of our outstanding common stock. This stock repurchase program will remain in effect until December 31, 2019 unless otherwise modified by the Board. Previously, in December 2017, the Board had authorized us to purchase up to $20.0 million of our outstanding common stock under a separate repurchase program that was in effect until July 31, 2018. During the year ended December 31, 2018, under these two stock repurchase programs, we purchased 2,350,422 shares of our common stock for cash of $25.3 million, inclusive of commissions and fees.
During the year ended December 31, 2018, we declared and paid quarterly cash dividends to stockholders of $20.2 million, which were paid on March 8, 2018, June 8, 2018, September 6, 2018 and December 6, 2018.
Line of Credit
As of December 31, 2018, there were no outstanding borrowings under the Line of Credit.
On September 30, 2018, ADA, as borrower, ADES, as guarantor, and the Lender entered into an amendment (the "Twelfth Amendment") to the Line of Credit. The Twelfth Amendment decreased the Line of Credit to $5.0 million due to decreased collateral requirements, extended the maturity date of the Line of Credit to September 30, 2020 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") up to $5.0 million related to equipment projects and certain other agreements. Under the Twelfth Amendment, there was no minimum cash balance requirement based on us meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization), as previously defined in the "Eleventh Amendment" to the Line of Credit, of $24.0 million.
On December 7, 2018, ADA, as borrower, ADES as guarantor, and the Lender entered into an amendment to the Line of Credit, which provided, among other things, for ADA to be able to enter into the Senior Term Loan as a guarantor so long as the principal amount of the Senior Term Loan does not exceed $70 million. Additionally, the financial covenants in the Line of Credit were amended and restated to be consistent with the aforementioned Senior Term Loan covenants, including maintaining a minimum cash balance of $5.0 million.

38


Sources and Uses of Cash
Cash, cash equivalents and restricted cash decreased from $30.7 million as of December 31, 2017 to $23.8 million as of December 31, 2018, a decrease of $6.9 million. The following table summarizes our cash flows for the years ended December 31, 2018 and 2017, respectively:
 
 
Years Ended December 31,
 
 
(in thousands)
 
2018
 
2017
 
Change
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(9,889
)
 
$
(11,748
)
 
$
1,859

Investing activities
 
(16,543
)
 
48,386

 
(64,929
)
Financing activities
 
19,511

 
(32,889
)
 
52,400

Net change in Cash and Cash Equivalents and Restricted Cash
 
$
(6,921
)
 
$
3,749

 
$
(10,670
)
Cash flows from operating activities
Cash flows from operating activities for the year ended December 31, 2018 increased by $1.9 million compared to the year ended December 31, 2017 and were positively impacted primarily by the following: (1) an increase in net income of $7.6 million; (2) a change in Legal settlements and accruals due to settlement of obligation results in cash outflow of $16.1 million in 2017; and (3) an increase in Distributions from equity method investees, return on investment of $0.9 million. Offsetting these increases to operating cash flows were primarily the following: (1) a decrease of $17.5 million due to the change in deferred tax assets as a result of utilization to offset taxable income in 2017 and changes to the valuation allowance in 2018; and (2) a net increase in working capital and other liabilities of $4.6 million, primarily due to an increase in receivables from Tinuum Group related to revenues from license royalties and an increase in receivables from customers as a result of the addition of new customers from the Carbons Solutions Acquisition.
Cash flows from investing activities
Distributions from equity method investees
Our cash flows from investing activities are significantly impacted by cash distributions from equity method investees that represent a return in excess of cumulative earnings, which decreased from $48.9 million in 2017 to $47.2 million in 2018. All of these cash distributions were received from Tinuum Group.
Acquisition of business, net of cash acquired
The Carbon Solutions Acquisition completed in 2018 resulted in total cash consideration paid of $65.8 million less cash acquired of $3.3 million. In addition, the total purchase consideration included $0.7 million payable to Carbon Solutions' previous debt holder, which was paid in March 2019. Also as part of the Carbon Solutions Acquisition, we also assumed capital leases and other contractual commitments of $11.8 million.
Purchase of and contribution to equity method investee
During the year ended December 31, 2018 we made a contribution to Tinuum Services of $0.8 million due to a capital call.
Cash flows from financing activities
Borrowings on long-term debt, related party and debt issuance costs paid
We funded the Carbon Solutions Acquisition through cash on hand and the proceeds of the Senior Term Loan in the principal amount of $70.0 million, net of original issue discount of $2.1 million. In addition, we paid debt issuance costs of $2.0 million.
Dividends Paid and Stock Repurchases
During the years ended December 31, 2018 and 2017, we made payments of $20.2 million and $15.7 million, respectively, related to dividends declared on our common stock.
Stock Repurchases
As described under this Item 7 and in Note 9 of the Consolidated Financial Statements, during the years ended December 31, 2018 and 2017, under stock repurchase programs authorized by the Board, we purchased 2,350,422 shares and 1,713,766 shares of our common stock for cash of $25.3 million and $16.4 million, respectively, inclusive of commissions and fees. The total shares of common stock repurchased for the year ended December 31, 2017 is inclusive of a dutch tender offer completed in June 2017 in which we acquired 1,370,891 shares of common stock for $13.0 million.

39


Equity Award Activity
During the years ended December 31, 2018 and 2017, we used cash of $0.8 million and $0.6 million, respectively, for the repurchase of shares to satisfy tax withholdings upon the vesting of equity-based awards.
Borrowings and repayments on Line of Credit
In March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million, which was funded by borrowing availability under the Line of Credit. We subsequently repaid this amount to the Lender as of March 31, 2017.


40


Contractual Obligations
Our contractual obligations as of December 31, 2018 are as follows:
 
 
Payment Due by Period
(in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
4-5 years
 
After 5 years
Senior Term Note
 
$
70,000

 
$
24,000

 
$
46,000

 
$

 
$

Capital lease obligations
 
9,642

 
1,749

 
3,509

 
1,902

 
2,482

Operating leases
 
8,055

 
3,619

 
3,905

 
531

 

 
 
$
87,697

 
$
29,368

 
$
53,414

 
$
2,433

 
$
2,482

We have not included obligations related to 453A interest payments due to uncertainty of amounts payable in future periods relating to matters impacting future obligations such as the deferred tax liability balance under the installment method at each future balance sheet date and changes in interest rates. If no additional RC facilities become invested in the future, the deferred liability balance would decrease and interest payments, assuming no changes in the applicable tax and interest rates, would also decrease throughout the periods in the table above.
Outstanding letters of credit were historically issued in connection with equipment sales agreements, collateral support for future obligations due under the Royalty Award and other items. There were no outstanding letters of credit as of December 31, 2018.
Off-Balance Sheet Arrangements
During 2018 and 2017, we did not engage in any off-balance sheet financing activities other than those included in the “Contractual Obligations” discussion above and those reflected in Note 8 to the Consolidated Financial Statements included in Item 8 of this Report.
Critical Accounting Policies and Estimates
Our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report. In presenting our financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP"), we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. Our estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates relate to the more significant areas involving management’s judgments and estimates.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The purchase price allocation process requires us to make significant estimates and assumptions with respect to property, plant and equipment, intangible assets and certain obligations. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
future expected cash flows from revenues;
historical and expected customer attrition rates and anticipated growth in revenues from acquired customers;
the acquired company’s developed technology as well as assumptions about the period of time the acquired developed technology will continue to be used in the combined company's product portfolio;
the expected use and useful lives of the acquired assets; and
valuation methods and discount rates used in estimating the values of the assets acquired and liabilities assumed.
Carrying value of long-lived assets;
We review and evaluate our long-lived assets for impairment at least annually, or more frequently when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured and recorded based on the estimated fair value of the long-lived assets being tested for impairment and their carrying amounts. Fair value is

41


typically determined through the use of an income approach utilizing estimates of discounted pre-tax future cash flows or a market approach utilizing recent transaction activity for comparable properties.
Stock-Based Compensation Expense
We grant certain executives stock options that generally vest based on performance measures and the grantee's continuous service with us. Compensation expense is recognized for these options on a straight-line basis over the estimated service period based on the estimated fair value at the date of grant using a Black-Scholes model. Different estimates of key inputs in the Black-Scholes model such as the expected term of an option and the expected volatility of our stock price, the estimate of dividends, as well as the estimate of the service period, could impact the share-based compensation expense we would recognize over the award period in our Consolidated Statements of Operations. Refer to Note 10 of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our stock option awards.
Asset Retirement Obligation
Reclamation costs are allocated to expense over the life of the related mine assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at the mine.
Remediation costs are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at the mine site. Such cost estimates may include ongoing care, maintenance and monitoring costs.
Accounting for reclamation and remediation obligations requires management to make estimates unique to the mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Any such changes in future costs, the timing of reclamation activities, scope, or the exclusion of certain costs not considered reclamation and remediation costs, could materially impact the amounts charged to earnings for reclamation and remediation. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required.
Income Taxes
We account for income taxes as required by U.S. GAAP, under which management judgment is required in determining income tax expense and the related balance sheet amounts. This judgment includes estimating and analyzing historical and projected future operating results, the reversal of taxable temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on our results of operations and financial condition.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.
We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2018 and 2017, we have established valuation allowances for our deferred tax assets that, in our judgment, will not be realized. In making this determination, we have considered the relative impact of all of the available positive and negative evidence regarding future sources of taxable income and tax planning strategies. However, there could be a material impact to our effective tax rate if there is a significant change in our estimates of future taxable income and tax planning strategies. If and when our estimates change, or there is a change in the gross balance of deferred tax assets or liabilities causing the need to reassess the realizability of deferred tax assets, then the valuation allowances are adjusted through the provision for income taxes in the period in which this determination is made. Refer to Note 13 of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our net deferred tax assets and related income tax expense (benefit).

Recently Issued Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements included in Item 8 of this Report for information regarding recently issued accounting standards.

42


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information under this Item is not required to be provided by smaller reporting companies.


43


Item 8. Financial Statements and Supplementary Data
Advanced Emissions Solutions, Inc.
Index to Financial Statements
Advanced Emissions Solutions, Inc.
 
Consolidated Financial Statements:
 


44



Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of
Advanced Emissions Solutions, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Advanced Emissions Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 18, 2019 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenues from contracts with customers in 2018 due to the adoption of Accounting Standards Codification (ASC) 606.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Moss Adams LLP
Denver, Colorado
March 18, 2019


We have served as the Company’s auditor since 2017.



45


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
As of December 31,
(in thousands, except share data)
 
2018
 
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
18,577

 
$
30,693

Receivables, net
 
9,554

 
1,113

Receivables, related party
 
4,284

 
3,247

Inventories
 
21,791

 
74

Prepaid expenses and other assets
 
5,570

 
1,761

Total current assets
 
59,776

 
36,888

Restricted cash, long-term
 
5,195

 

Property and equipment, net of accumulated depreciation of $1,499 and $1,486, respectively
 
42,697

 
410

Intangible assets, net
 
4,830

 
805

Equity method investments
 
6,634

 
4,351

Deferred tax assets
 
32,539

 
38,661

Other long-term assets
 
7,993

 
1,503

Total Assets
 
$
159,664

 
$
82,618

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
6,235

 
$
1,000

Accrued payroll and related liabilities
 
8,279

 
1,384

Current portion of borrowings
 
24,067

 

Other current liabilities
 
2,138

 
4,494

Total current liabilities
 
40,719

 
6,878

Long-term portion of borrowings
 
50,058

 

Other long-term liabilities
 
940

 
2,285

Total Liabilities
 
91,717

 
9,163

Commitments and contingencies (Notes 7 and 8)
 

 

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, 22,640,677 and 22,465,821 shares issued and 18,576,489 and 20,752,055 shares outstanding at December 31, 2018 and 2017, respectively
 
23

 
22

Treasury stock, at cost: 4,064,188 and 1,713,766 shares as of December 31, 2018 and 2017, respectively
 
(41,740
)
 
(16,397
)
Additional paid-in capital
 
96,750

 
105,308

Retained earnings (accumulated deficit)
 
12,914

 
(15,478
)
Total stockholders’ equity
 
67,947

 
73,455

Total Liabilities and Stockholders’ equity
 
$
159,664

 
$
82,618

See Notes to the Consolidated Financial Statements.

46


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
 
 
Years Ended December 31,
(in thousands, except per share data)
 
2018
 
2017
Revenues:
 
 
 
 
Consumables
 
$
8,733

 
$
4,246

License royalties, related party
 
15,140

 
9,672

Equipment sales
 
72

 
31,446

Total revenues
 
23,945

 
45,364

Operating expenses:
 
 
 
 
Consumables cost of revenue, exclusive of depreciation and amortization
 
6,606

 
3,434

Equipment cost of revenue, exclusive of depreciation and amortization
 
(353
)
 
28,451

Payroll and benefits
 
10,639

 
7,669

Rent and occupancy
 
1,141

 
795

Legal and professional fees
 
8,230

 
4,354

General and administrative
 
3,359

 
4,014

Depreciation, amortization, depletion, and accretion
 
723

 
789

Total operating expenses
 
30,345

 
49,506

Operating loss
 
(6,400
)
 
(4,142
)
Other income (expense):
 
 
 
 
Earnings from equity method investments
 
54,208

 
53,843

Interest income
 
239

 
54

Interest expense
 
(2,151
)
 
(3,024
)
Litigation settlement and royalty indemnity expense, net
 

 
3,269

Other
 
(19
)
 
2,025

Total other income
 
52,277

 
56,167

Income before income tax expense
 
45,877

 
52,025

Income tax expense
 
10,423

 
24,152

Net income
 
$
35,454

 
$
27,873

Earnings per common share (Note 1):
 
 
 
 
Basic
 
$
1.78

 
$
1.30

Diluted
 
$
1.76

 
$
1.29

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
19,901

 
21,367

Diluted
 
20,033

 
21,413

Cash dividends declared per common share outstanding:
 
$
1.00

 
$
0.75

See Notes to the Consolidated Financial Statements.



47


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity

 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
(in thousands, except share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings/(Accumulated Deficit)
 
Total Stockholders’
Equity (Deficit)
Balances, January 1, 2017
 
22,322,022

 
$
22

 

 
$

 
$
119,494

 
$
(43,351
)
 
$
76,165

Stock-based compensation
 
199,734

 

 

 

 
2,209

 

 
2,209

Repurchase of shares to satisfy tax withholdings
 
(55,935
)
 

 

 

 
(566
)
 

 
(566
)
Dividends declared on common stock
 

 

 

 

 
(15,829
)
 

 
(15,829
)
Repurchase of common shares
 

 

 
(1,713,766
)
 
(16,397
)
 

 

 
(16,397
)
Net income
 

 

 

 

 

 
27,873

 
27,873

Balances, December 31, 2017
 
22,465,821

 
$
22

 
(1,713,766
)
 
$
(16,397
)
 
$
105,308

 
$
(15,478
)
 
$
73,455

Cumulative effect of change in accounting principle (Note 6)
 

 

 

 

 

 
2,950

 
2,950

Stock-based compensation
 
217,174

 
1

 

 

 
2,489

 

 
2,490

Issuance of stock upon exercise of options, net
 
18,667

 

 

 

 

 

 

Repurchase of shares to satisfy tax withholdings
 
(60,985
)
 

 

 

 
(769
)
 

 
(769
)
Dividends declared on common stock
 

 

 

 

 
(10,278
)
 
(10,012
)
 
(20,290
)
Repurchase of common shares
 

 

 
(2,350,422
)
 
(25,343
)
 

 

 
(25,343
)
Net income
 

 

 

 

 

 
35,454

 
35,454

Balances, December 31, 2018
 
22,640,677

 
$
23

 
(4,064,188
)
 
$
(41,740
)
 
$
96,750

 
$
12,914

 
$
67,947

See Notes to the Consolidated Financial Statements.


48


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
Cash flows from operating activities
 
 
 
 
Net income
 
$
35,454

 
$
27,873

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Increase (decrease) in valuation allowance on deferred tax assets
 
4,462

 
(474
)
Depreciation, amortization, depletion, and accretion
 
723

 
789

Amortization of debt issuance costs
 
94

 
109

Provision for accounts receivable and other receivables
 
153

 
385

Share-based compensation expense, net
 
2,490

 
2,209

Earnings from equity method investments
 
(54,208
)
 
(53,843
)
Other non-cash items, net
 
136

 
508

Changes in operating assets and liabilities, net of effects of acquired businesses:
 
 
 
 
Receivables
 
(1,847
)
 
6,743

Related party receivables
 
(1,037
)
 
(1,313
)
Prepaid expenses and other assets
 
(757
)
 
(351
)
Costs incurred on uncompleted contracts
 
15,945

 
27,048

Inventories
 
237

 

Deferred tax asset, net
 
771

 
23,208

Other long-term assets
 
(753
)
 
41

Accounts payable
 
(197
)
 
(920
)
Accrued payroll and related liabilities
 
(59
)
 
(738
)
Other current liabilities
 
(869
)
 
(1,586
)
Billings on uncompleted contracts
 
(15,945
)
 
(30,140
)
Other long-term liabilities
 
(182
)
 
154

Legal settlements and accruals
 

 
(16,088
)
Distributions from equity method investees, return on investment
 
5,500

 
4,638

Net cash used in operating activities
 
(9,889
)
 
(11,748
)

49


 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
Cash flows from investing activities
 
 
 
 
Distributions from equity method investees in excess of cumulative earnings
 
$
47,175

 
$
48,875

Acquisition of business, net of cash acquired
 
(62,501
)
 

Acquisition of property, equipment, and intangible assets, net
 
(467
)
 
(428
)
Purchase of and contributions to equity method investee
 
(750
)
 
(61
)
Net cash (used in) provided by investing activities
 
(16,543
)
 
48,386

Cash flows from financing activities
 
 
 
 
Borrowings, net of debt discount - related party
 
67,900

 

Debt issuance costs paid
 
(2,036
)
 

Dividends paid
 
(20,165
)
 
(15,690
)
Repurchase of common shares
 
(25,343
)
 
(16,397
)
Repurchase of shares to satisfy tax withholdings
 
(769
)
 
(566
)
Borrowings on Line of Credit
 

 
808

Repayments on Line of Credit
 

 
(808
)
Short-term borrowing loan costs
 

 
(236
)
Other
 
(76
)
 

Net cash provided by (used in) financing activities
 
19,511

 
(32,889
)
Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
 
(6,921
)
 
3,749

Cash, Cash Equivalents and Restricted Cash, beginning of year
 
30,693

 
26,944

Cash, Cash Equivalents and Restricted Cash, end of year
 
$
23,772

 
$
30,693

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
1,400

 
$
3,644

Cash paid for income taxes, net of refunds received
 
$
7,460

 
$