UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(MARK ONE)

For the quarterly period ended SeptemberFOR THE QUARTERLY PERIOD ENDED JUNE 30, 20172020

or

FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission File Number 001-36260

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

(Exact name of Registrant as specified in its charter)

(Registrant’s telephone number, including area code:code) (918) 748-3900

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

Large accelerated filer ☐Accelerated filer ☐ Non-accelerated filer ☐Smaller reporting company ☒ Emerging growth company ☒

(Do not check if a smaller reporting company)☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of NovemberAugust 7, 2017,2020, the registrant had 11,889,95812,209,281 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:None.

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Table of Contents

NAMES OF ENTITIES

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Cypress EnergyEnvironmental Partners, L.P.,” “our partnership,the “Partnership,” “we,” “our,” “us,” or like terms, refer to Cypress EnergyEnvironmental Partners, L.P. and its subsidiaries.

References to:

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-lookingforward looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-lookingforward- looking statements are reasonable, they do involve certain assumptions, risks, and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 20162019 and in our Quarterly Report on Form 10-Q/A for the period ended March 31, 2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2020 and May 12, 2020, respectively, and in this report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

PART I. FINANCIAL INFORMATION

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Balance Sheets

As of SeptemberJune 30, 20172020 and December 31, 20162019

 (in thousands, except unit data) (in thousands)

See accompanying notes.

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Operations

For the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

 (in(in thousands, except unit and per unit data)

See accompanying notes.

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

 (in(in thousands)

See accompanying notes.

CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Owners’ Equity

For the Six Months Ended June 30, 2020 and 2019

(in thousands)

See accompanying notes.

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Cash Flows

For the NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

 (in(in thousands)

See accompanying notes.

 CYPRESS ENERGY PARTNERS, L.P.

 Unaudited Condensed Consolidated Statement of Owners’ Equity

 For the Nine Months Ended September 30, 2017

 (in thousands)

See accompanying notes.

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Organization and Operations

Cypress EnergyEnvironmental Partners, L.P. (the(“we”, “us”, “our”, or the “Partnership”) is a Delaware limited partnership formed in 2013 to2013. We offer essential services that help protect the environment and ensure sustainability. We provide independent pipeline inspection and integrity services to producers, public utility companies, and pipeline companies and to provide salt water disposal (“SWD”) and other water anda wide range of environmental services to U.S. onshore oilincluding independent inspection, integrity, and natural gas producerssupport services for pipeline and trucking companies.energy infrastructure owners and operators and public utilities. We also provide water pipelines, hydrocarbon recovery, disposal, and water treatment services. Trading of our common units began January 15, 2014 on the New York Stock Exchange under the symbol “CELP”.

Our business is organized into the Pipeline Inspection Services (“PIS”Pipeline Inspection”), IntegrityPipeline & Process Services (“IS”Pipeline & Process Services”), and Water and Environmental Services (“W&ES”Environmental Services”) segments. PIS provides pipeline

The Pipeline Inspection segment generates revenue by providing essential environmental services including inspection and otherintegrity services to energy exploration and production (“E&P”) companies, public utility companies, and midstream companies and their vendors throughout the United States and Canada. The inspectors of PIS performon a variety of inspection services oninfrastructure assets including midstream pipelines, gathering systems, and distribution systems, includingsystems. Services include nondestructive examination, in-line inspection support, pig tracking, survey, data gathering, and supervision of third-party construction,contractors. Our results in this segment are driven primarily by the number of inspectors that perform services for our customers and the fees that we charge for those services, which depend on the type, skills, technology, equipment, and number of inspectors used on a particular project, the nature of the project, and the duration of the project. The number of inspectors engaged on projects is driven by the type of project, prevailing market rates, the age and condition of customers’ assets including pipelines, gas plants, compression stations, storage facilities, and gathering and distribution systems including the legal and regulatory requirements relating to the inspection and maintenance of those assets. We also bill our customers for per diem charges, mileage, and repair projects. IS provides independent integrityother reimbursement items. Revenue and costs in this segment may be subject to seasonal variations and interim activity may not be indicative of yearly activity considering that many of our customers develop yearly operating budgets and enter into contracts with us during the winter season for work to be performed during the remainder of the year. Additionally, inspection work throughout the United States during the winter months (especially in the northern states) may be hampered or delayed due to inclement weather.

The Pipeline & Process Services segment generates revenue primarily by providing essential environmental services including hydrostatic testing services and chemical cleaning to major natural gas and petroleum pipelineenergy companies and to pipeline construction companies located throughout the United States. Field personnelof newly-constructed and existing pipelines and related infrastructure. We generally charge our customers in this segment on a fixed-bid basis, depending on the size and length of the pipeline being tested, the complexity of services provided, and the utilization of our work force and equipment. Our results in this segment are driven primarily by the number of field personnel that perform hydrostatic testingservices for our customers and the fees that we charge for those services, which depend on newly-constructedthe type and existing natural gasnumber of field personnel used on a particular project, the type of equipment used and petroleum pipelines. W&ES provides servicesthe fees charged for the utilization of that equipment, and the nature and duration of the project. Revenue and costs in this segment may be subject to oilseasonal variations and natural gas producersinterim activity may not be indicative of yearly activity, considering that many of our customers develop yearly operating budgets and trucking companies through its ownershipenter into contracts with us for work to be performed during the remainder of the year. Additionally, field work during the winter months may be hampered or delayed due to inclement weather.

The Environmental Services segment owns and operation of eight commercial SWDoperates nine (9) water treatment facilities with ten (10) EPA Class II injection wells in the Bakken Shaleshale region of the Williston Basin in North DakotaDakota. We wholly-own eight of these facilities and two SWD facilitieswe own a 25% interest in the Permian Basinremaining facility. These water treatment facilities are connected to twelve (12) pipeline gathering systems, including two (2) that we developed and own. We specialize in Texas.the treatment, recovery, separation, and disposal of waste byproducts generated during the lifecycle of an oil and natural gas well to protect the environment and our drinking water. All of the water treatment facilities utilize specialized equipment and remote monitoring to minimize the facilities’ downtime and increase the facilities’ efficiency for peak utilization. These facilitiesRevenue is generated on a fixed-fee per barrel basis for receiving, separating, filtering, recovering, processing, and injecting produced and flowback water. We also containsell recovered oil, skimming processes that remove oilreceive fees for pipeline transportation of water, and receive fees from a partially owned water delivered to the sites. In addition to these SWD facilities, we providetreatment facility for management and staffing services for an SWD facility pursuant to a management agreement (see Note 7)6).

The volumes of water processed at our water treatment facilities are driven by water volumes generated from existing oil and natural gas wells during their useful lives and development drilling. Producers’ willingness to engage in new drilling is determined by a number of factors, the most important of which are the current and projected prices of oil, natural gas, and natural gas liquids; the cost to drill and operate a well; the availability and cost of capital; and environmental and governmental regulations. We generally expect the level of drilling to correlate with long-term trends in prices of oil, natural gas, and natural gas liquids.

We also owngenerate revenues from the sale of residual oil recovered during the water treatment process. Our ability to recover residual oil is dependent upon the residual oil content in the saltwater we treat, which is, among other things, a 25% member interestfunction of water type, chemistry, source, and temperature. Generally, where outside temperatures are lower, there is less residual oil content and separation is more difficult. Thus, our residual oil recovery during the winter is usually lower than our recovery during the summer. Additionally, residual oil content can decrease based on the following factors, among others: an increase in this managed SWD facility.pipeline water as operators control the flow of pipeline water and an increase in residual oil recovered in saltwater by producers prior to delivering the saltwater to us for treatment.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements as of SeptemberJune 30, 20172020 and for the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019 include our accounts and those of our controlled subsidiaries. Investments over which we exercise significant influence, but do not control, are accounted for using the equity method of accounting. All significant intercompany transactions and account balances have been eliminated in consolidation. The Unaudited Condensed Consolidated Balance Sheet at December 31, 20162019 is derived from our audited financial statements.

CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission.Commission (the “SEC”). The Unaudited Condensed Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP for complete consolidated financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 20162019 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

Use of Estimates in the Preparation of Financial Statements

The preparation of the Partnership’sour Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

The COVID-19 pandemic and the significant decline in the price of crude oil have created and may continue to create significant uncertainty in macroeconomic conditions, which may continue to cause decreased demand for our services and adversely impact our results of operations. We consider these changing economic conditions as we develop accounting estimates, such as our annual effective tax rate, allowance for bad debts, and long-lived asset impairment assessments. We expect our accounting estimates to continue to evolve depending on the duration and degree of the impact of the COVID-19 pandemic and the significant decline in the price of crude oil. Our accounting estimates may change as new events and circumstances arise.

Significant Accounting Policies

Our significant accounting policies are consistent with those disclosed in Note 2 to our audited financial statements as of and for the year ended December 31, 20162019 included in our Form 10-K.

CYPRESS ENERGY PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

Accounts Receivable10-K, except for Accounting Standards Update (“ASU”) 2018-15 – Intangibles—Goodwill and AllowanceOther— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Bad Debts

We grant unsecured credit to customers under normal industry standards and terms, and have established policies and procedures that allow for an evaluation of each customer’s creditworthiness. The Partnership determines allowances for bad debts based on management’s assessment of the creditworthiness of our customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. In the first quarter of 2017, we received $0.3 million on accounts receivable previously reserved,Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract which we recorded as a reductionimplemented on January 1, 2020. The effects of implementing ASU 2018-15 were immaterial togeneral and administrative expense in our Unaudited Consolidated Statements of Operations.

Income Taxes

As a limited partnership, we generally are not subject to federal, state, or local income taxes. The tax on our net income is generally borne by the individual partners. Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) of the partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to us.

The income of Tulsa Inspection Resources – Canada, ULC, our Canadian subsidiary, is taxable in Canada. Tulsa Inspection Resources – PUC, LLC, a subsidiary of our PIS segment that performs pipeline inspection services for utility customers, and Brown Integrity – PUC, LLC, a 51% owned subsidiary, have elected to be taxed as corporations for U.S. federal income tax purposes, and therefore, these subsidiaries are subject to U.S. federal and state income tax. The amounts recognized as income tax expense (benefit), income taxes payable, and deferred tax liabilities in our Unaudited Condensed Consolidated Financial Statements represent the Canadian and U.S. taxes referred to above, as well as partnership-level taxes levied by various states, most notably franchise taxes assessed by the state of Texas.Statements.

As a publicly-traded partnership, we are subject to a statutory requirement that 90% of our total gross income classify as “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements), determined on a calendar-year basis. If our qualifying income does not meet this statutory requirement, we could be taxed as a corporation for federal and state income tax purposes. Our income has met the statutory qualifying income requirement for each year since our IPO.

Goodwill

Noncontrolling Interest

We own a 51% interest in Brown Integrity, LLC (“Brown”) and a 49% interest in CF Inspection Management, LLC (“CF Inspection”). The accountshave $50.3 million of these subsidiaries are included in our Unaudited Condensed Consolidated Financial Statements. The portion of the net income (loss) of these entities that is attributable to outside owners is reported in net income (loss) attributable to noncontrolling interests in our Unaudited Condensed Consolidated Statements of Operations, and the portion of the net assets of these entities that is attributable to outside owners is reported in noncontrolling interests ingoodwill on our Unaudited Condensed Consolidated Balance Sheets.

Property and Equipment

Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and related equipment, computer and office equipment, and vehicles. We record property and equipmentSheet at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. We depreciate property and equipment on a straight-line basis over the estimated useful lives of the assets. Upon retirement or disposition of an asset, we remove the cost and related accumulated depreciation from the balance sheet and report the resulting gain or loss, if any, in the Unaudited Condensed Consolidated Statement of Operations.

CYPRESS ENERGY PARTNERS, L.P.

NotesJune 30, 2020. Of this amount, $40.2 million relates to the Unaudited Condensed Consolidated Financial Statements

Identifiable Intangible Assets

Our intangible assets consist primarily of customer relationships, trade names,Pipeline Inspection segment and our database of inspectors. We recorded these intangible assets as part of our accounting for$10.1 million relates to the acquisitions of businesses, and we amortize these assets on a straight-line basis over their estimated useful lives, which typically range from 5 – 20 years.

We review our intangible assets for impairment whenever events or circumstances indicate that the asset group to which they relate may be impaired. To perform an impairment assessment, we first determine whether the cash flows expected to be generated from the asset group exceed the carrying value of the asset group. If such estimated cash flows do not exceed the carrying value of the asset group, we reduce the carrying values of the assets to their fair values and record a corresponding impairment loss.

Goodwill

Environmental Services segment. Goodwill is not amortized, but is subject to an annual review for impairmentassessments on November 1 (or at other dates if events or changes in circumstances indicate that the carrying value of goodwill may be impaired) for impairment at a reporting unit level. The reporting units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed or operated. We have determined that our PIS, IS,Pipeline Inspection and W&ESEnvironmental Services operating segments are the appropriate reporting units for testing goodwill impairment.

To perform a goodwill impairment assessment, we perform an analysisfirst evaluate qualitative factors to assessdetermine whether it is more likely than not that the fair value of thea reporting unit exceeds its carrying value. If we determinethis assessment reveals that it is more likely than not that the carrying value of thea reporting unit exceeds its fair value, we reducethen determine the estimated fair market value of the reporting unit. If the carrying amount exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value of the reporting unit’s goodwill).

Crude oil prices have decreased significantly in 2020, due in part to decreased demand as a result of the worldwide COVID-19 outbreak, and due in part to the oil price war started by Russia and Saudi Arabia with a focus on slowing down U.S. oil production. This decline in oil prices has led many of our customers to change their budgets and plans, which has resulted in reduced spending on drilling, completions, and exploration. This has had an adverse effect on construction of new pipelines, gathering systems, and related energy infrastructure. Lower exploration and production activity has also adversely effected the midstream industry and has led to delays and cancellations of projects. It is also possible that our customers may elect to defer maintenance activities on their infrastructure. Such developments would reduce our opportunities to generate revenues. It is impossible at this time to determine what may occur, as customer plans will evolve over time. It is possible that the cumulative nature of these events could have a material adverse effect on our results of operations and financial position.

For our Pipeline Inspection segment, we performed a qualitative goodwill impairment analysis at June 30, 2020 and recordconcluded that the fair value of the reporting unit was more likely than not greater than its carrying value. Our evaluation included various qualitative factors, including current and projected earnings, current customer relationships and projects, and the impact of commodity prices on our earnings. The qualitative assessment on this reporting unit indicated that there was no need to conduct further quantitative testing for goodwill impairment. The use of different assumptions and estimates from those we used in our qualitative analysis could have resulted in the requirement to perform a correspondingquantitative goodwill impairment expense.analysis.

CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

ImpairmentsFor our Environmental Services segment, we considered the decline in the price of Long-Lived Assetscrude oil to be a potential indicator of impairment and therefore performed a quantitative goodwill impairment analysis at June 30, 2020. We estimated the fair value of the reporting unit utilizing the income approach (discounted cash flows) valuation method, which is a Level 3 input as defined in ASC 820, Fair Value Measurement. Significant inputs in the valuation included projections of future revenues, anticipated operating costs, and appropriate discount rates. Since the volume of water we receive at our facilities is heavily influenced by the extent of exploration and production in the areas near our facilities, and since exploration and production is in turn heavily influenced by crude oil prices, we estimated future revenues by reference to crude prices in the forward markets. We used a forward price curve that reflects a gradual increase in the West Texas Intermediate ("WTI") crude price each month, with the price remaining around $40 per barrel through January 2021 and reaching $50 per barrel in September 2028. We estimated future operating costs by reference to historical per-barrel costs and estimated future volumes. We estimated revenues and costs for a period of ten years and estimated a terminal value calculated as a multiple of the cash flows in the preceding year. We discounted these estimated future cash flows at a rate of 13.5%. We assumed that a hypothetical buyer would be a partnership that is not subject to income taxes and that could obtain modest savings in general and administrative expenses through synergies with its other operations. Based on this quantitative analysis, we concluded that the goodwill of the Environmental Services segment was not impaired. The use of different assumptions and estimates from those we used in our analysis could have resulted in the need to record a goodwill impairment.

Our estimates of fair value are sensitive to changes in a number of variables, many of which relate to broader macroeconomic conditions outside our control. As a result, actual performance could be different from our expectations and assumptions. Estimates and assumptions used in determining fair value of the reporting units that are outside the control of management include commodity prices, interest rates, and cost of capital. Our water treatment facilities are concentrated in one basin, and changes in oil and gas production in that basin could have a significant impact on the profitability of the Environmental Services segment. While we believe we have made reasonable estimates and assumptions to estimate the fair values of our reporting units, it is reasonably possible that changes could occur that would require a goodwill impairment charge in the future. Such changes could include, among others, a slower recovery in demand for petroleum products than assumed in our projections, an increase in supply from other areas (or other factors) that result in reduced production in North Dakota, and increased pessimism among market participants, which could increase the discount rate on (and therefore decrease the value of) estimated future cash flows.

Property and Equipment

We assess property and equipment for possible impairment whenever events or changes in circumstances indicate, in the judgment of management, that the carrying value of the assets may not be recoverable. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, changes in regulatory and political environments, and historical and future cash flow and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices the effects of inflation on operating expenses, and the outlook for national or regional market supply and demand for the services we provide. In the Environmental Services segment, Property and Equipment is grouped for impairment testing purposes at each water treatment facility, as these asset groups represent the lowest level at which cash flows are separately identifiable.

For our Environmental Services segment, we used the same forward crude oil price curve for our June 30, 2020 property and equipment impairment analysis that we used for our goodwill impairment analysis. Based on this analysis, we concluded that the property and equipment was not impaired. The use of different assumptions and estimates from those we used in our analysis could have resulted in the need to record an impairment. While we believe we have made reasonable estimates and assumptions to estimate the future undiscounted cash flows expected from the assets, it is reasonably possible that changes could occur that would require an impairment charge in the future. Location-specific market considerations could also lead us to record an impairment to the property, plant, and equipment of one or more individual facilities in the future.

Accounts Receivable and Allowance for Bad Debts

We grant unsecured credit to customers under normal industry standards and terms and have established policies and procedures that allow for an evaluation of the creditworthiness of each of our customers. We typically receive payment from our customers 45 to 90 days after the services have been performed. We determine allowances for bad debts based on management’s assessment of the creditworthiness of our customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. As of both June 30, 2020 and December 31, 2019, we had an allowance for doubtful accounts of $0.2 million.

A former customer of our Pipeline Inspection segment, Sanchez Energy Corporation and certain of its affiliates (collectively, “Sanchez”), filed for bankruptcy protection in August 2019. As of June 30, 2020 and December 31, 2019, our Unaudited Condensed Consolidated Balance Sheets included $0.5 million of pre-petition accounts receivable from Sanchez. We have recorded an allowance of less than $0.1 million at both June 30, 2020 and December 31, 2019 against the accounts receivable from Sanchez. We do not believe it is probable that we will be unable to collect the remaining $0.4 million balance of the pre-petition receivables. However, we cannot make assurances regarding the ultimate collection of these receivables nor can we make assurances regarding the timing of any such collections. 

CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

Accrued Payroll and Other

Accrued payroll and otheron our Unaudited Condensed Consolidated Balance Sheets includes the following:

Foreign Currency TranslationRevenue Recognition

In the second quarter of 2020, we recognized $0.3 million of revenue within our Pipeline Inspection segment on services performed in previous years. We had constrained recognition of this revenue until the expiration of a contract provision that had given the customer the opportunity to reopen negotiation of the fee paid for the services. As of June 30, 2020 and December 31, 2019, we recognized refund liabilities of $0.5 million and $0.7 million, respectively, for revenue associated with such variable consideration. These liabilities are reported within accrued payroll and other on our Unaudited Condensed Consolidated Balance Sheets.

Foreign Currency Translation

Our Unaudited Condensed Consolidated Financial Statements are reported in U.S. dollars. We translate our Canadian-dollar-denominated assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translate our Canadian-dollar-denominated revenues and expenses into U.S. dollars at the average exchange rate in effect during the period.

CYPRESS ENERGY PARTNERS, L.P.

Notes toperiod in which the Unaudited Condensed Consolidated Financial Statementsapplicable revenues and expenses were recorded.

Our Unaudited Condensed Consolidated Balance Sheet at SeptemberJune 30, 20172020 includes $2.7$2.4 million of accumulated other comprehensive lossassociated with accumulated currency translation adjustments, all of which relate to our Canadian operations. If at some point in the future we were to sell or substantially liquidate our Canadian operations, we would reclassify the balance in accumulated other comprehensive lossto other accounts within Partners’partners’ capital, which would be reported in the Unaudited Condensed Consolidated Statement of Operations as a reduction to net (loss) income.

Our Canadian subsidiary has certain payables to our U.S.-based subsidiaries. These intercompany payables and receivables among our consolidated subsidiaries are eliminated inon our Unaudited Condensed Consolidated Balance Sheets. Beginning April 1, 2017, weWe report currency translation adjustments on these intercompany payables and receivables within foreign currency gains in our Unaudited Condensed Consolidated Statements of Operations, with offsetting amounts reported within other comprehensive income (loss)(losses) in our Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss).Operations.

New Accounting Standards

Subordination

With the payment of the 2016 fourth quarter distribution and the fulfillment of other requirements associated with the termination of the subordination period, the Partnership emerged from subordination effective February 14, 2017, and the 5,913,000 subordinated units converted into common units on a one-for-one basis.

New Accounting Standards

In 2017, the Partnership2020, we adopted the following new accounting standardsstandard issued by the Financial Accounting Standards Board (“FASB”):

The FASB issued ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting Standards Update (“ASU”) 2016-09 – Compensation – Stock Compensationfor Implementation Costs Incurred in March 2016.a Cloud Computing Arrangement That Is a Service Contract in August 2018. This guidance requires a customer in a cloud computing arrangement to follow the internal use software guidance in ASC 350-40 to determine which costs should be capitalized as assets or expensed as incurred. The amendments in this ASU gives entities the option to accountare effective for forfeitures of share-based awards when the forfeitures occur (previously, entities were required to estimate future forfeitures and reduce their share-based compensation expense accordingly).fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this new standard on Januaryguidance prospectively from the date of adoption (January 1, 20172020) and elected to account for forfeitures as they occur. The adoption of this ASUguidance has not had no significanta material effect on our Unaudited Condensed Consolidated Financial Statements.

The FASB issued ASU 2017-04 – Intangibles – Goodwill and Other in January 2017. The objective of this guidance is to simplify how an entity is required to calculate the amounts of goodwill impairments. We adopted this new standard effective January 1, 2017 in order to simplify the measurement process of any future impairments of goodwill. Under the new standard, we perform a goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value of the reporting unit’s goodwill).

Other accounting guidance proposed by the FASB that may impact our Unaudited Condensed Consolidated Financial Statements, which we have not yet adopted, include:

The FASB issued ASU 2016-022016-13 – LeasesFinancial Instruments – Credit Losses in February 2016.June 2016, which replaces the current “incurred loss” methodology for recognizing credit losses with an “expected loss” methodology. This guidance attempts to increase transparency and comparability among organizations by recognizing certain leaseaffects trade receivables, financial assets and lease liabilities oncertain other instruments that are not measured at fair value through net income. In November 2019, the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP andFASB issued final guidance to delay the implementation of this new guidance is the recognition on the balance sheet of certain lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this ASU are effective forsmaller reporting companies until fiscal years beginning after December 15, 2018,2022, including interim periods within those fiscal years. Early adoption is permitted. We are currently examining the guidance provided in the ASU and determiningevaluating the impact this guidanceASU will have on our Unaudited Condensed Consolidated Financial Statements.

The FASB issued ASU 2014-09 – Revenue from Contracts with Customers in May 2014. ASU 2014-09 is intended to clarify the principles for recognizing revenue and to develop a common standard for recognizing revenue for GAAP and International Financial Reporting Standards that is applicable to all organizations. We will be required to adopt this standard in 2018 and to apply its provisions either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application (modified retrospective method). Although we continue to evaluate the financial impact of this ASU on the Partnership, we currently plan to adopt this standard utilizing the modified retrospective method and do not anticipate that the adoption of this ASU will materially impact our financial position, results of operations or cash flows.

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

In the first quarter of 2017, the largest customer of TIR-Canada, the Canadian subsidiary of our PIS segment, completed a bid process and selected different service providers for its inspection projects. During the nine months ended September 30, 2017, pipeline inspection services to this customer accounted for approximately $18.8 million of revenue and $1.3 million of gross margin, which represented approximately 84% of the revenues and 89% of the gross margin of our Canadian operations (and approximately 9% of our consolidated revenues and 5% of our consolidated gross margin for the nine months ended September 30, 2017). In consideration of the loss of this contract, we recorded impairments to the carrying values of certain intangible assets of $1.3 million in the first quarter of 2017. Of this amount, $1.1 million related to customer relationships and $0.2 million related to trade names. Based on discounted cash flow calculations, which represent Level 3 non-recurring fair value adjustments, we concluded the fair value of the customer relationships and trade names was zero, and thus, have written off the full amounts. We continue to perform inspection and integrity work for customers in Canada (including integrity work for the customer referred to above).3. Debt

In the first quarter of 2017,On May 29, 2018, we recordedentered into an impairment of $0.7 million to the property, plantamended and equipment at one of our SWD facilities. We have temporarily shut down the operations at this facility because of low volumes due to competition in the area and due to low levels of exploration and production activity near the facility. Because of the decline in revenues and the temporary shutdown of the facility, we performed a discounted cash flow calculation, which represents a Level 3 non-recurring fair value adjustment, concluding that the fair value of the facility was limited to the fair value of the land. As such, we recorded an impairment to reduce the carrying value of the facility to $0.1 million in the first quarter of 2017, all of which is attributable to land.

In the first quarter of 2017, we recorded an impairment of $1.6 million to the goodwill of our Integrity Services segment. Revenues of this segment were lower than we had expected for the first quarter of 2017. In addition, for this segment, the level of bidding activity for work is typically high in March and April, once customers have finalized their budgets for the upcoming year. While we won bids on a number of projects, and our backlog began to improve, the improvement in the backlog was slower than we had originally anticipated and we revised downward our expectations of the near-term operating results of the segment. For our goodwill impairment assessment, we calculated an estimated fair value of the Integrity Services segment using a discounted cash flow analysis. We prepared two calculations of cash flows for the next twelve months, one of which represented our estimate of the high end of the range of probable cash flows and the other of which represented our estimate of the low range of probable cash flows. We estimated cash flows for the following four years assuming a 2% increase in each succeeding year, to account for estimated inflation, and calculated a terminal value using a Gordon Growth model. We then discounted the future cash flows at a discount rate of 18%. The mid-point of the estimated fair values produced by these two calculations indicated that a full impairment of the value of the goodwill of the Integrity Services segment was warranted. These calculations represent Level 3 non-recurring fair value measurements. If anticipated operating results in this segment do not meet expectations, it is possible that finite-lived intangibles may also become impaired in the future.

In January 2017, a lightning strike at our Orla SWD facility initiated a fire that effectively destroyed the surface equipment at the facility. As a result, we wrote off the net book value of the surface equipment ($1.3 million) of the facility. In May 2017, we received $1.6 million of insurance proceeds. We recorded a gain of $0.3 million in losses on asset disposals, net on our Unaudited Condensed Consolidated Statement of Operations in the second quarter of 2017 for the difference between the proceeds received and the net book value of the property that was destroyed. During the nine months ended September 30, 2017, we incurred approximately $0.2 million of temporary setup and other costs associated with this incident that are not recoverable through insurance. These expenses are reported within losses on asset disposals, net in our Unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017.

In July 2017, a lightning strike at our Grassy Butte SWD facility initiated a fire that effectively destroyed the surface equipment at the facility. As a result of previously-recorded impairments, the net book value of the property, plant and equipment at this facility was $0 at the time of the fire. During the three months ended September 30, 2017, we recorded $0.2 million of expense associated with cleanup costs that are not recoverable from insurance, which is reported within losses on asset disposals, net in our Unaudited Condensed Consolidated Statements of Operations. At September 30, 2017, we recorded a receivable of $0.1 million for expected insurance recoveries, which is reported within prepaid expenses and other on our Unaudited Condensed Consolidated Balance Sheet.  In November 2017, we reached agreement with an insurer under which we expect to receive $0.7 million of insurance proceeds during the three months ending December 31, 2017 as partial payment for our property damage and property cleanup claims associated with this incident. We expect to record a $0.6 million gain upon receipt of these proceeds.

CYPRESS ENERGY PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

We are party to arestated credit agreement (as amended and restated, the “Credit Agreement”) that provides up to $200.0$110.0 million inof borrowing capacity, subject to certain limitations. The Credit Agreement includes a working capital revolving credit facility (“Working Capital Facility”), which provides up to $75.0 million in borrowing capacity to fund working capital needs, and an acquisition revolving credit facility (“Acquisition Facility”), which provides up to $125.0 million in borrowing capacity to fund acquisitions and expansion projects. In addition, the Credit Agreement provides for an accordion feature that allows us to increase the availability under the facilities by an additional $125.0 million if lenders agree to increase their commitments. Thethree-year Credit Agreement matures December 24, 2018.

Outstanding borrowings at September 30, 2017 and December 31, 2016May 28, 2021. The obligations under the Credit Agreement were as follows:are secured by a first priority lien on substantially all of our assets.