Commitments and Contingencies

Legal Proceedings

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

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

A class action lawsuit against ADES and certain of its current and former officers was filed in May 2014 in the federal court in Denver, Colorado alleging that ADES and other defendants misrepresented to the investing public the Company’s financial condition and its financial controls to artificially inflate and maintain the market price of ADES’s common stock. In May 2016, the parties reached an agreement in principle to settle this litigation, and on June 30, 2016, the parties entered into a Stipulation and Agreement of Settlement to resolve the action in its entirety. On February 10, 2017, we received an order and final judgment that the lawsuit was settled, and the entire case has been dismissed with prejudice.

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

As of December 31, 2016, the Company had a recorded liability of $4.0 million in connection with the Denver Settlement as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. As of December 31, 2016, the Company also had a recorded receivable of $4.0 million in connection with the Denver Settlement as the Company's insurance carriers funded the full settlement but final judgment was not receive as December 31, 2016.

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

In June and July 2014, stockholder derivative actions were filed in the Douglas County District Court and in the Colorado District Court for the City and County of Denver against certain of the Company’s current and former officers and directors, along with the Company as a "nominal defendant." In May 2016, the parties reached an agreement in principle to settle this stockholder derivative action, and on September 30, 2016, the parties entered into a Stipulation and Agreement of Settlement to resolve the action in its entirety. The Stockholder Derivative Settlement was approved and the case was closed on January 4, 2017.

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

As of December 31, 2016, the Company had a recorded liability of $0.6 million in connection with the Derivative Settlement as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. As of December 31, 2016, the Company also had a recorded receivable in connection with the Derivative Settlement of $0.6 million, which was originally recorded as of June 30, 2016, as the Company's insurance carriers subsequently funded the fee award in January 2017.

SEC Inquiry

On April 7, 2014, the SEC Staff informed the Company that it had initiated the SEC Inquiry to determine if violations of the federal securities laws had occurred, and in September 2014 the SEC issued a formal order of investigation. The SEC Inquiry generally pertains to the restatement of the Company’s financial statements and internal controls processes, as described in Note 2 to the Consolidated Financial Statements of the Company included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The Company cooperated with the SEC by providing information and documents to the SEC on an ongoing basis. In July 2016, the SEC Staff communicated to the Company that it would recommend to the SEC that it authorize a settlement with the Company on terms that include payment of a civil monetary penalty of $0.5 million. This penalty will not be funded by the Company’s insurance carriers. The SEC must approve the SEC Staff recommendation and any final settlement or relief.

As a result of the communication from the SEC Staff, the Company recorded a liability as of June 30, 2016 for the payment of monetary penalties in connection with the SEC Inquiry in the amount of $0.5 million as the losses in connection with this matter were both probable and reasonably estimable under U.S. GAAP. The recorded liability was based on an agreement in principle with SEC Staff subject to approval by the SEC. The liability was recorded in the Legal settlements and accruals line item on the Consolidated Balance Sheets. 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, 2016.

Settlement and Royalty Indemnity

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

Additionally, during November 2011, the Company entered into an Indemnity Settlement Agreement whereby the Company agreed to settle certain indemnity obligations asserted against the Company related to the Norit litigation and relinquished all of its equity interest in Carbon Solutions and amended the Intellectual Property License Agreement dated October 1, 2008 between the Company and Carbon Solutions. In the event that the Company declares or otherwise issues a dividend to any or all of its stockholders prior to January 1, 2018, other than repurchases of common stock under employee stock plans, the Company must increase its letter of credit amounts as collateral for payments due to Norit, equal to 50% of the aggregate fair market value of such dividends. Additionally, the first time that the Company achieves earnings in excess of $20.0 million for a fiscal year ended prior to January 1, 2018, the Company must also increase its letter of credit amounts as collateral by $5.0 million for payments due to Norit. However, the maximum total letter of credit increase related to the combination of dividends or earnings is $7.5 million. As such, upon the filing of this Report, the Company will increase its letter of credit by $5.0 million.

During the fourth quarter of 2016, the Company revised its estimate for future Royalty Award payments based in part on an updated forecast provided to the Company from Carbon Solutions. This forecast included a material reduction in estimated future revenues generated at the Red River Plant. Based primarily on the updated forecast, the Company recorded a $4.0 million reduction to its Royalty Award accrual as of December 31, 2016.

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



	As of December 31,
(in thousands)	2016		2015
Settlement and Royalty Indemnification	$	5,656	$	6,502
Legal settlements	5,050		—
Legal settlements and accruals, current	10,706		6,502
Settlement and Royalty Indemnification, long-term	5,382		13,797
Total legal settlements and accruals	$	16,088	$	20,299

Future amounts to be paid related to the Royalty Award may differ from current estimates due to future adjusted sales of activated carbon from the Red River Plant.

The receivables related to the Denver Settlement and the Stockholder Derivative Action are shown with the Receivables, net line item in the Consolidated Balance Sheets in the same amounts as the respective liabilities.

Other Commitments and Contingencies

Tinuum Group

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

Consultant Obligation

On January 1, 2012, the Company entered into a residual payment agreement with a former consultant who was involved in the development and deployment of RC technologies. Pursuant to the agreement, the Company was required to make annual payments based upon Tinuum Group's RC production and sale from January 1, 2012 through June 30, 2015. These expenses were recorded within the Legal and professional fees line item in the Consolidated Statements of Operations and were recorded as RC production occurred. During the years ended December 31, 2015 and 2014, the Company recorded expenses under this agreement of $0.3 million and $1.4 million, respectively. In January 2016, the Company made the final payment of approximately $0.3 million related to this obligation.

Line of Credit

In September 2013, ADA, as borrower, and the Company, as guarantor, entered into the 2013 Loan and Security Agreement with a bank (the "Lender") for an aggregate principal amount of $10 million that was secured by certain amounts due to the Company from certain Tinuum Group RC leases (the "Line of Credit"). The Line of Credit was amended nine times from the period from December 2, 2013 through November 25, 2016, most notably to extend the maturity date with each amendment. In addition, during this period, the Lender also granted 10 waivers related to various transactions and obligations to provide financial information to the Lender. Covenants in the Line of Credit included a borrowing base limitation that was based on a percentage of the net present value of ADA’s portion of payments due to Tinuum Group from the RC leases. The Line of Credit also contained other affirmative and negative covenants and customary indemnification obligations of ADA to the Lender and provided for the issuance of letters of credit provided that the aggregate amount of the letters of credit plus all advances then outstanding did not exceed the calculated borrowing base. The Company guarantees the obligations and agreements of ADA under the Line of Credit. Amounts outstanding under the Line of Credit bear interest payable monthly at a rate per annum equal to the higher of 5% or the “Prime Rate” (as defined in the Line of Credit) plus 1%. As a result of various covenant violations, the Company had no borrowing availability under the Line of Credit from inception through November 29, 2016.

On November 30, 2016, ADA, as borrower, the Company, as guarantor, and the Lender entered into the Tenth Amendment of 2013 Loan and Security Agreement (the "Tenth Amendment"). The Tenth Amendment increases the Line of Credit to $15 million from $10 million, extends the maturity date of the Line of Credit to September 30, 2017, permits the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit related to equipment projects, the Royalty Award and certain other agreements, additionally secures the Line of Credit with amounts due to the Company from an additional existing Refined Coal facility lease, which amounts also now factor into the borrowing base limitation, and amends certain financial covenants. Pursuant to the Tenth Amendment, the Company was required to, among other things, pay a new origination fee of $0.1 million and associated legal preparation fees of the Lender, maintain a deposit account with the Lender with a minimum balance of $6.0 million initially and $3.0 million after certain conditions are met, and maintain minimum trailing twelve month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Tenth Amendment) of $24.0 million. As of December 31, 2016, there were no outstanding amounts under the Tenth Amendment, nor were any amounts drawn during 2016. However, due to outstanding letters of credits offsetting the line, the Company's borrowing availability has been reduced to $13.2 million as of December 31, 2016.

Letters of Credit

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



	As of December 31, 2016
(in thousands)	LOC Outstanding		Utilization of LOC Availability		Restricted Cash		Restricted cash, long-term		Investment securities, restricted, long-term
Contract performance - equipment systems	$	1,855	$	1,776	$	86	$	—	$	—
Royalty award	7,150		—		7,150		—		—
Other	6,500		—		6,500		—		—
Total LOC outstanding	$	15,505	$	1,776	$	13,736	$	—	$	—



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

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

The following tables summarizes the expiration periods of the letters of credit based on the ultimate maturity date of the letters of credit as of December 31, 2016:



	Expiration of Letters of Credit as of December 31, 2016
(in thousands)	Less than 1 year		1-3 years		4-5 years		After 5 years
Letters of credit	$	10,855	$	4,650	$	—	$	—

Performance Guarantee on Equipment Systems

In the normal course of business related to ACI and DSI systems, the Company may guarantee certain performance thresholds during a discrete performance testing period that do not extend beyond six months from the initial test date, the commencement of which is determined by the customer. Performance thresholds include such matters as the achievement of a certain level of mercury removal and other emissions based upon the injection of a specified quantity of a qualified activated carbon or other chemical at a specified rate given other plant operating conditions, and availability of equipment and electric power usage. In the event the equipment fails to perform as specified during the testing period, the Company may have an obligation to correct or replace the equipment. In the event the level of mercury removal is not achieved, the Company may have a “make right” obligation within the contract limits. During 2015, the Company began working to modify and correct two performance guarantee issues related to EC systems that were installed during 2015. No revenue was recognized on these two contracts until the performance guarantees were resolved and contract obligations were substantially complete. During the third quarter of 2016, the Company passed performance testing on both systems and revenues on both systems were recognized. As a result of the resolution of the performance guarantees, the Company incurred approximately $0.9 million of costs on the ACI systems to pass the performance guarantees. Additional performance guarantee claims, if incurred, would be included within the Equipment sales cost of revenue line of the Consolidated Statements of Operations.

Purchase Obligations

The Company does not have any future purchase obligations as of December 31, 2016.

DOE Audits

Certain of the Company's completed and current contracts awarded by the DOE and related industry participants remain subject to adjustments as a result of future government audits. The Company's historical experience with these audits has not resulted in significant adverse adjustments to amounts previously received; however the audits for the years 2010 and later have not been finalized.

Operating Lease Obligations

The Company leases office, warehouse and laboratory space in Highlands Ranch, Colorado under operating leases. As of December 31, 2016, the Company leased approximately 52,869 square feet under approximately 3 leases. Original lease terms ranged from 4 to 7 years. Certain of these leases have options permitting renewals for additional periods. In addition to minimum fixed payments, a number of leases contain annual escalation clauses which are related to increases in the inflation index.

In December 2016, the Company entered into a lease termination related to its leased office spaced, in which the Company paid a $0.3 million lease termination fee. The lease termination is effective February 2017.

Also in December 2016, the Company entered into a new office lease in Highlands Ranch, Colorado effective February 2017.

Annual minimum commitments under the leases as of December 31, 2016 are as follows:



Years Ending December 31,	Operating Lease Commitments (in thousands)
2017	$	290
2018	268
2019	174
2020	55
Thereafter	—
Total	$	787

Rent expense incurred for the years ended are as follows:



	Years Ended December 31,
(in thousands)	2016		2015		2014
Rent expense	$	847	$	1,838	$	1,531