UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

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

For the transition period from _______________ to ________________

Commission File Number 001-38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware	81-4561945
(State of incorporation)	(IRS Employer Identification Number)

1233 W. Loop South, Suite 1400 Houston, TX	77027
(Address of principal executive offices)	(Zip Code)

(713) 235-9500

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A common stock, par value $0.01 per share	WTTR	New York Stock Exchange

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 every Interactive Data File required to be submitted 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 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” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑

As of ~~November~~May 4, ~~2019,~~2020, the registrant had ~~85,907,211~~86,852,110 shares of Class A common stock and ~~18,461,975~~16,221,101 shares of Class B common stock outstanding.

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SELECT ENERGY SERVICES, INC.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

●

the severity and duration of world health events, including the recent outbreak of the novel coronavirus (“COVID-19”) pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business;

●

the current significant surplus in the supply of oil and actions by the members of OPEC+ (as defined below) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;

●

operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;

●

the level of capital spending and access to capital markets by oil and gas ~~companies;~~companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand;

●

trends and volatility in oil and gas ~~prices;~~prices, and our ability to manage through such volatility;

●

demand for our services;

●

our customers’ ability to complete and produce new wells;

●

potential shut-ins of production by producers due to lack of downstream demand or storage capacity;

●

the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals and various environmental matters;

●

capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown or delay in the demand for our services in our core markets;

●

our ability to retain key management and employees;

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●

our ability to hire and retain skilled labor;

●

regional impacts to our business, including our key infrastructure assets within the Bakken and ~~northern~~Northern Delaware formation of the Permian Basin;

●

our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms;

●

our health, safety and environmental performance;

●

the impact of competition on our operations;

●

the degree to which our exploration and production (“E&P”) customers may elect to bring their water-management services in-house rather than source these services from companies like us;

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●

our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments;

●

delays or restrictions in obtaining permits by us or our customers;

●

constraints in supply or availability of equipment used in our business;

●

the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis;

●

changes in global political or economic conditions, generally, and in the markets we serve;

●

the ability to source certain raw materials globally from economically advantaged sources;

●

accidents, weather, seasonality or other events affecting our business; and

●

the other risks identified in our most recent Annual Report on Form 10-K, and under the headings “Part I―Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II―Item 1A. Risk Factors” in this Quarterly Report.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in this Quarterly ~~Report.~~Report on Form 10-Q. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(unaudited)				(unaudited)
Assets
Current assets
Cash and cash equivalents	$	42,999	$	17,237	$	114,142	$	79,268
Accounts receivable trade, net of allowance for doubtful accounts of $5,392 and $5,329, respectively		310,730		341,711
Accounts receivable trade, net of allowance for credit losses of $7,136 and $5,773, respectively						232,255		267,628
Accounts receivable, related parties		5,493		1,119		2,673		4,677
Inventories		39,613		44,992		38,502		37,542
Prepaid expenses and other current assets		26,233		27,093		20,268		26,486
Total current assets		425,068		432,152		407,840		415,601
Property and equipment		1,084,096		1,114,378		986,790		1,015,379
Accumulated depreciation		(617,740)		(611,530)		(560,340)		(562,986)
Property and equipment held-for-sale, net		890		—		—		885
Total property and equipment, net		467,246		502,848		426,450		453,278
Right-of-use assets		73,138		—
Right-of-use assets, net						65,234		70,635
Goodwill		266,934		273,801		—		266,934
Other intangible assets, net		139,969		148,377		124,878		136,952
Other assets		4,502		3,427
Other assets, net						2,506		4,220
Total assets	$	1,376,857	$	1,360,605	$	1,026,908	$	1,347,620
Liabilities and Equity
Current liabilities
Accounts payable	$	38,530	$	53,847	$	26,518	$	35,686
Accrued accounts payable		51,209		62,536		39,692		47,547
Accounts payable and accrued expenses, related parties		3,297		5,056		2,345		2,789
Accrued salaries and benefits		25,761		22,113		21,304		20,079
Accrued insurance		13,367		14,849		8,012		8,843
Sales tax payable		1,185		5,820		1,688		2,119
Accrued expenses and other current liabilities		12,784		14,560		14,894		15,375
Current operating lease liabilities		19,488		—		17,002		19,315
Current portion of finance lease obligations		248		938		84		128
Total current liabilities		165,869		179,719		131,539		151,881
Long-term operating lease liabilities		72,672		16,752		69,110		72,143
Other long-term liabilities		12,197		8,361		10,702		10,784
Long-term debt		—		45,000
Total liabilities		250,738		249,832		211,351		234,808
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized; 86,321,013 and 78,956,555 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		863		790
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of September 30, 2019 and December 31, 2018		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized; 18,461,975 and 26,026,843 shares issued and outstanding as of September 30, 2019 and December 31, 2018 respectively		185		260
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018		—		—
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 87,991,839 shares issued and outstanding as of March 31, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and outstanding as of December 31, 2019						880		879
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of March 31, 2020 and December 31, 2019						—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of March 31, 2020; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of December 31, 2019						162		162
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2020 and December 31, 2019						—		—
Additional paid-in capital		893,293		813,599		909,812		914,699
Retained earnings		31,367		18,653
Accumulated other comprehensive deficit		—		(368)
Accumulated (deficit) retained earnings						(224,425)		21,437
Total stockholders’ equity		925,708		832,934		686,429		937,177
Noncontrolling interests		200,411		277,839		129,128		175,635
Total equity		1,126,119		1,110,773		815,557		1,112,812
Total liabilities and equity	$	1,376,857	$	1,360,605	$	1,026,908	$	1,347,620

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three Months Ended September 30,				Nine months ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Revenue
Water services	$	196,782	$	233,503	$	619,388	$	685,687
Water infrastructure		63,953		65,878		169,279		175,662
Oilfield chemicals		67,932		63,985		197,762		192,422
Water Services									$	149,511	$	220,595
Water Infrastructure										57,762		53,616
Oilfield Chemicals										71,012		66,829
Other		301		33,604		29,072		112,841		—		21,606
Total revenue		328,968		396,970		1,015,501		1,166,612		278,285		362,646
Costs of revenue
Water services		153,741		177,643		472,013		518,844
Water infrastructure		46,748		42,324		126,634		120,304
Oilfield chemicals		57,357		56,473		170,935		172,057
Water Services										129,114		163,121
Water Infrastructure										47,813		41,430
Oilfield Chemicals										59,876		59,527
Other		1,865		29,280		30,365		98,153		4		21,053
Depreciation and amortization		28,263		31,853		88,624		93,180		26,182		31,518
Total costs of revenue		287,974		337,573		888,571		1,002,538		262,989		316,649
Gross profit		40,994		59,397		126,930		164,074		15,296		45,997
Operating expenses
Selling, general and administrative		27,280		25,110		86,953		77,662		25,289		32,376
Depreciation and amortization		952		984		2,858		2,332		685		1,000
Impairment of goodwill		—		—		4,396		—
Impairment of goodwill and trademark										276,016		4,396
Impairment of property and equipment		49		—		942		2,282		3,184		519
Impairment of cost-method investment		—		—		—		2,000
Lease abandonment costs		238		1,045		1,494		4,142		953		1,073
Total operating expenses		28,519		27,139		96,643		88,418		306,127		39,364
Income from operations		12,475		32,258		30,287		75,656
Other income (expense)
(Losses) gains on sales of property and equipment, net		(2,033)		1,458		(8,233)		2,959
(Loss) income from operations										(290,831)		6,633
Other expense
Losses on sales of property, equipment and divestitures, net										(435)		(4,491)
Interest expense, net		(438)		(1,322)		(2,370)		(3,815)		(331)		(1,093)
Foreign currency (loss) gain, net		(59)		248		268		(492)		(46)		260
Other (expense) income, net		(272)		40		(62)		140
Income before income tax expense		9,673		32,682		19,890		74,448
Income tax expense		(2,501)		(1,415)		(3,250)		(2,027)
Net income		7,172		31,267		16,640		72,421
Less: net income attributable to noncontrolling interests		(1,793)		(8,316)		(3,926)		(22,409)
Net income attributable to Select Energy Services, Inc.	$	5,379	$	22,951	$	12,714	$	50,012
Other income, net										259		269
(Loss) income before income tax benefit (expense)										(291,384)		1,578
Income tax benefit (expense)										164		(178)
Net (loss) income										(291,220)		1,400
Less: net loss (income) attributable to noncontrolling interests										45,358		(265)
Net (loss) income attributable to Select Energy Services, Inc.									$	(245,862)	$	1,135

Net income per share attributable to common stockholders (Note 16):
Net (loss) income per share attributable to common stockholders (Note 16):
Class A—Basic	$	0.07	$	0.29	$	0.16	$	0.69	$	(2.86)	$	0.01
Class A-2—Basic	$	—	$	—	$	—	$	0.69
Class B—Basic	$	—	$	—	$	—	$	—	$	—	$	—

Net income per share attributable to common stockholders (Note 16):
Net (loss) income per share attributable to common stockholders (Note 16):
Class A—Diluted	$	0.07	$	0.29	$	0.16	$	0.69	$	(2.86)	$	0.01
Class A-2—Diluted	$	—	$	—	$	—	$	0.69
Class B—Diluted	$	—	$	—	$	—	$	—	$	—	$	—

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three Months Ended September 30,

Nine months ended September 30,


2019

2018

2019

2018
Net income

$
7,172

$
31,267

$
16,640

$
72,421
Other comprehensive income





Foreign currency translation adjustment, net of tax of $0

380

131

368

(319)
Comprehensive income

7,552

31,398

17,008

72,102
Less: comprehensive income attributable to noncontrolling interests

(1,888)

(8,351)

(4,013)

(22,310)
Comprehensive income attributable to Select Energy Services, Inc.

$
5,664

$
23,047

$
12,995

$
49,792


	Three Months Ended March 31,
	2020		2019
Net (loss) income	$	(291,220)	$	1,400
Other comprehensive (loss) income
Foreign currency translation adjustment, net of tax of $0		—		54
Net change in unrealized gain		—		54
Comprehensive (loss) income		(291,220)		1,454
Less: comprehensive loss (income) attributable to noncontrolling interests		45,358		(275)
Comprehensive (loss) income attributable to Select Energy Services, Inc.	$	(245,862)	$	1,179

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

(unaudited)

(in thousands, except share data)


	Class A			Class A-2			Class B			Preferred							Accumulated								Class A			Class B
	Stockholders			Stockholders			Stockholders			Stockholders							Other								Stockholders			Stockholders					Accumulated		Accumulated
		Class A			Class A-2			Class B					Additional				Comprehensive		Total							Class A			Class B		Additional		(Deficit)		Other		Total
		Common			Common			Common			Preferred		Paid-In		Retained		Income		Stockholders’		Noncontrolling					Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Earnings		(Deficit)		Equity		Interests		Total		Shares	Stock		Shares	Stock		Capital		Earnings		Income		Equity		Interests		Total
Balance as of December 31, 2018	78,956,555	$	790	—	$	—	26,026,843	$	260	—	$	—	$	813,599	$	18,653	$	(368)	$	832,934	$	277,839	$	1,110,773
Conversion of Class B to Class A	7,564,868		75	—		—	(7,564,868)		(75)	—		—		82,706		—		—		82,706		(82,706)		—
Balance as of December 31, 2019																									87,893,525	$	879	16,221,101	$	162	$	914,699	$	21,437	$	—	$	937,177	$	175,635	$	1,112,812
ESPP shares issued	8,746		—	—		—	—		—	—		—		79		—		—		79		1		80	4,443		—	—		—		30		—		—		30		(3)		27
Equity-based compensation	—		—	—		—	—		—	—		—		9,045		—		—		9,045		2,829		11,874	—		—	—		—		483		—		—		483		91		574
Issuance of restricted shares	1,391,479		14	—		—	—		—	—		—		3,590		—		—		3,604		(3,604)		—	1,271,706		13	—		—		2,158		—		—		2,171		(2,171)		—
Exercise of restricted stock units	1,250		—	—		—	—		—	—		—		4		—		—		4		(4)		—	625		—	—		—		1		—		—		1		(1)		—
Stock options exercised	5,282		—	—		—	—		—	—		—		84		—		—		84		(54)		30
Repurchase of common stock	(1,597,150)		(16)	—		—	—		—	—		—		(15,886)		—		—		(15,902)		2,501		(13,401)	(979,391)		(10)	—		—		(7,229)		—		—		(7,239)		603		(6,636)
Restricted shares forfeited	(10,017)		—	—		—	—		—	—		—		(36)		—		—		(36)		36		—	(199,069)		(2)	—		—		(338)		—		—		(340)		340		—
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—		—		—		—		—		(349)		(349)
NCI income tax adjustment	—		—	—		—	—		—	—		—		89		—		—		89		(89)		—	—		—	—		—		8		—		—		8		(8)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		19		—		368		387		85		472
Net income	—		—	—		—	—		—	—		—		—		12,714		—		12,714		3,926		16,640
Balance as of September 30, 2019	86,321,013	$	863	—	$	—	18,461,975	$	185	—	$	—	$	893,293	$	31,367	$	—	$	925,708	$	200,411	$	1,126,119
Net loss																									—		—	—		—		—		(245,862)		—		(245,862)		(45,358)		(291,220)
Balance as of March 31, 2020																									87,991,839	$	880	16,221,101	$	162	$	909,812	$	(224,425)	$	—	$	686,429	$	129,128	$	815,557


	Class A			Class A-2			Class B			Preferred							Accumulated								Class A			Class B
	Stockholders			Stockholders			Stockholders			Stockholders					Retained		Other								Stockholders			Stockholders							Accumulated
		Class A			Class A-2			Class B					Additional		Earnings		Comprehensive		Total							Class A			Class B		Additional				Other		Total
		Common			Common			Common			Preferred		Paid-In		(Accumulated		Income		Stockholders’		Noncontrolling					Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit)		(Deficit)		Equity		Interests		Total		Shares	Stock		Shares	Stock		Capital		Earnings		Loss		Equity		Interests		Total
Balance as of December 31, 2017	59,182,176	$	592	6,731,845	$	67	40,331,989	$	404	—	$	—	$	673,141	$	(17,859)	$	302	$	656,647	$	406,722	$	1,063,369
Conversion of Class A-2 to Class A	6,731,839		67	(6,731,839)		(67)	—		—	—		—		—		—		—		—		—		—
Conversion of Class B to Class A	14,305,146		144	—		—	(14,305,146)		(144)	—		—		146,865		—		—		146,865		(146,865)		—
Balance as of December 31, 2018																									78,956,555	$	790	26,026,843	$	260	$	813,599	$	18,653	$	(368)	$	832,934	$	277,839	$	1,110,773
ESPP shares issued	6,413		—	—		—	—		—	—		—		99		—		—		99		(13)		86	2,810		—	—		—		29		—		—		29		(2)		27
Equity-based compensation	—		—	—		—	—		—	—		—		5,543		—		—		5,543		2,487		8,030	—		—	—		—		3,154		—		—		3,154		1,025		4,179
Issuance of restricted shares	438,182		4	—		—	—		—	—		—		2,321		—		—		2,325		(2,325)		—	1,169,777		11	—		—		3,025		—		—		3,036		(3,036)		—
Exercise of restricted stock units	27,860		—	—		—	—		—	—		—		104		—		—		104		(104)		—	625		—	—		—		2		—		—		2		(2)		—
Stock options exercised	79,333		1	—		—	—		—	—		—		1,018		—		—		1,019		(374)		645
Repurchase of common stock	(62,777)		(1)	(6)		—	—		—	—		—		(803)		—		—		(804)		(73)		(877)	(125,786)		(1)	—		—		(1,244)		—		—		(1,245)		29		(1,216)
Restricted shares forfeited	(49,638)		—	—		—	—		—	—		—		(380)		—		—		(380)		379		(1)	(5,689)		—	—		—		(15)		—		—		(15)		15		—
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—		—		—		—		—		(506)		(506)	—		—	—		—		—		—		—		—		(121)		(121)
NCI income tax adjustment	—		—	—		—	—		—	—		—		229		—		—		229		(229)		—	—		—	—		—		6		—		—		6		(6)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		(319)		(319)		(176)		(495)	—		—	—		—		—		—		54		54		17		71
Net income	—		—	—		—	—		—	—		—		—		50,012		—		50,012		22,409		72,421	—		—	—		—		—		1,135		—		1,135		265		1,400
Balance as of September 30, 2018	80,658,534	$	807	—	$	—	26,026,843	$	260	—	$	—	$	828,137	$	32,153	$	(17)	$	861,340	$	281,332	$	1,142,672
Balance as of March 31, 2019																									79,998,292	$	800	26,026,843	$	260	$	818,556	$	19,788	$	(314)	$	839,090	$	276,023	$	1,115,113

The accompanying notes to consolidated financial statements are an integral part of these financial statements

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SELECT ENERGY SERVICES, INC.

~~CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY~~

~~For the three months ended September 30, 2019 and 2018~~

~~(unaudited)~~

~~(in thousands, except share data)~~

Class A

Class A-2

Class B

Preferred

Accumulated

Stockholders

Stockholders

Stockholders

Stockholders

Other

Class A

Class A-2

Class B

Additional

Comprehensive

Total

Common

Common

Common

Preferred

Paid-In

Retained

Income

Stockholders’

Noncontrolling


Shares

Stock

Shares

Stock

Shares

Stock

Shares

Stock

Capital

Earnings

(Deficit)

Equity

Interests

Total
Balance as of June 30, 2019

80,176,078

$
802

—

$
—

26,026,843

$
260

—

$
—

$
821,968

$
25,988

$
(380)

$
848,638

$
278,210

$
1,126,848
Conversion of Class B to Class A

7,564,868

75

—

—

(7,564,868)

(75)

—

—

82,706

—

—

82,706

(82,706)

—
ESPP shares issued

3,079

—

—

—

—

—

—

—

21

—

—

21

3

24
Equity-based compensation

—

—

—

—

—

—

—

—

2,774

—

—

2,774

792

3,566
Issuance of restricted shares

17,549

—

—

—

—

—

—

—

41

—

—

41

(41)

—
Exercise of restricted stock units

—

—

—

—

—

—

—

—

—

—

—

—

—

—
Stock options exercised

5,282

—

—

—

—

—

—

—

84

—

—

84

(54)

30
Repurchase of common stock

(1,444,648)

(14)

—

—

—

—

—

—

(14,347)

—

—

(14,361)

2,476

(11,885)
Restricted shares forfeited

(1,195)

—

—

—

—

—

—

—

(13)

—

—

(13)

13

—
Distributions to noncontrolling interests, net

—

—

—

—

—

—

—

—

—

—

—

—

(124)

(124)
NCI income tax adjustment

—

—

—

—

—

—

—

—

40

—

—

40

(40)

—
Foreign currency translation adjustment

—

—

—

—

—

—

—

—

19

—

380

399

89

488
Net income

—

—

—

—

—

—

—

—

—

5,379

—

5,379

1,793

7,172
Balance as of September 30, 2019

86,321,013

$
863

—

$
—

18,461,975

$
185

—

$
—

$
893,293

$
31,367

$
—

$
925,708

$
200,411

$
1,126,119

Class A

Class A-2

Class B

Preferred

Accumulated

Stockholders

Stockholders

Stockholders

Stockholders

Other

Class A

Class A-2

Class B

Additional

Comprehensive

Total

Common

Common

Common

Preferred

Paid-In

Retained

Income

Stockholders’

Noncontrolling


Shares

Stock

Shares

Stock

Shares

Stock

Shares

Stock

Capital

Earnings

(Deficit)

Equity

Interests

Total
Balance as of June 30, 2018

77,298,660

$
773

—

$
—

29,383,320

$
294

—

$
—

$
790,699

$
9,202

$
(148)

$
800,820

$
307,991

$
1,108,811
Conversion of Class B to Class A

3,356,477

34

—

—

(3,356,477)

(34)

—

—

35,062

—

—

35,062

(35,062)

—
ESPP shares issued

2,427

—

—

—

—

—

—

—

49

—

—

49

(17)

32
Equity-based compensation

—

—

—

—

—

—

—

—

1,926

—

—

1,926

639

2,565
Issuance of restricted shares

7,587

—

—

—

—

—

—

—

60

—

—

60

(60)

—
Stock options exercised

42,124

—

—

—

—

—

—

—

642

—

—

643

(375)

268
Repurchase of common stock

(17,743)

—

—

—

—

—

—

—

(220)

—

—

(221)

1

(220)
Restricted shares forfeited

(30,998)

—

—

—

—

—

—

—

(310)

—

—

(310)

309

(1)
Distributions to noncontrolling interests, net

—

—

—

—

—

—

—

—

—

—

—

—

(226)

(226)
NCI income tax adjustment

—

—

—

—

—

—

—

—

229

—

—

229

(229)

—
Foreign currency translation adjustment

—

—

—

—

—

—

—

—

—

—

131

131

45

176
Net income

—

—

—

—

—

—

—

—

—

22,951

—

22,951

8,316

31,267
Balance as of September 30, 2018

80,658,534

$
807

—

$
—

26,026,843

$
260

—

$
—

$
828,137

$
32,153

$
(17)

$
861,340

$
281,332

$
1,142,672

~~The accompanying notes to consolidated financial statements are an integral part of these financial statements.~~

~~Table of Contents~~

~~SELECT ENERGY SERVICES, INC.~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine months ended September 30,				Three months ended March 31,
	2019		2018		2020		2019
Cash flows from operating activities
Net income	$	16,640	$	72,421
Adjustments to reconcile net income to net cash provided by operating activities
Net (loss) income					$	(291,220)	$	1,400
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization		91,482		95,512		26,867		32,518
Net loss (gain) on disposal of property and equipment		4,971		(2,959)		435		(223)
Bad debt expense		1,764		1,430		2,385		732
Amortization of debt issuance costs		516		516		172		172
Inventory write-down		228		430
Inventory write-downs						48		75
Equity-based compensation		11,874		8,030		574		4,179
Impairment of goodwill		4,396		—
Impairment of goodwill and trademark						276,016		4,396
Impairment of property and equipment		942		2,282		3,184		519
Impairment of cost-method investment		—		2,000
Loss on divestitures		3,262		—		—		4,714
Other operating items, net		259		971		(47)		(270)
Changes in operating assets and liabilities
Accounts receivable		14,835		(46,010)		34,992		(17,390)
Prepaid expenses and other assets		9,774		(7,950)		6,633		1,706
Accounts payable and accrued liabilities		(18,727)		(2,043)		(13,328)		4,059
Net cash provided by operating activities		142,216		124,630		46,711		36,587
Cash flows from investing activities
Working capital settlement		691		—		—		691
Proceeds received from divestitures		24,927		—		85		15,957
Purchase of property and equipment		(86,374)		(109,500)		(11,338)		(36,510)
Acquisitions, net of cash received		(10,400)		(1,953)
Proceeds received from sales of property and equipment		13,958		9,363		5,768		3,209
Net cash used in investing activities		(57,198)		(102,090)		(5,485)		(16,653)
Cash flows from financing activities
Borrowings from revolving line of credit		5,000		45,000		—		5,000
Payments on long-term debt		(50,000)		(55,000)		—		(25,000)
Payments of finance lease obligations		(743)		(1,517)		(65)		(285)
Proceeds from share issuance		110		731		27		27
Distributions to noncontrolling interests, net		(349)		(506)
Contributions from (distributions to) noncontrolling interests						383		(121)
Repurchase of common stock		(13,401)		(877)		(6,636)		(1,216)
Net cash used in financing activities		(59,383)		(12,169)		(6,291)		(21,595)
Effect of exchange rate changes on cash		127		(95)		(61)		107
Net increase in cash and cash equivalents		25,762		10,276
Net increase (decrease) in cash and cash equivalents						34,874		(1,554)
Cash and cash equivalents, beginning of period		17,237		2,774		79,268		17,237
Cash and cash equivalents, end of period	$	42,999	$	13,050	$	114,142	$	15,683
Supplemental cash flow disclosure:
Cash paid for interest	$	2,421	$	3,356	$	386	$	1,283
Cash paid (refunds received) for income taxes	$	1,675	$	(1,750)
Cash refunds received for income taxes, net					$	(156)	$	(365)
Supplemental disclosure of noncash investing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	13,442	$	23,689	$	6,184	$	13,044

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

109

Table of Contents

SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings” ~~or the “Predecessor”~~).

We are a leading provider of comprehensive water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production operations. ~~Within~~Through a combination of organic growth and acquisitions over the ~~major shale plays~~last decade, we have developed a leading position in the ~~U.S., we believe we are a market leader in~~relatively new water sourcing, water transfer (both by permanent pipeline and temporary hose) and temporary water containment prior to its use in drilling and completion activities associated with hydraulic fracture stimulation or “fracking,” which we refer to collectively as “pre-frac water services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water-related services that support oil and gas well completion and production activities, including water network automation, treatment, hauling, water recycling and disposal. We also manufacture a full suite of specialty chemicals used in the fracturing and water recycling process, and we provide chemicals needed by our customers to help increase oil and gas production and lower costs over the life of a well.solutions industry. We believe we are the only company in the oilfield services industry that combines ~~full life cycle~~comprehensive water-management services with ~~the ability to develop and provide~~ related chemical products. Furthermore, we believe we are one of the few large oilfield services companies whose primary focus is on the management and treatment of water and water resources in the oil and gas production industry. Accordingly, the importance of responsibly managing water resources through our operations to help conserve fresh water and protect the environment is paramount to our continued success.

Select 144A Offering and Initial Public Offering. On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A-1 common stock, par value $0.01 per share, which were converted into shares of Class A common stock, par value $0.01 per share (“Class A Common Stock”) following the Company’s initial public offering (“IPO”). SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc., and Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or 1 share for each SES Holdings LLC Unit held by Legacy Owner Holdco. On April 26, 2017, the Company completed its IPO of 8,700,000 shares of Class A Common Stock. Shareholders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters, subject to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Inc. based on their ownership of Class B Common Stock.

Tax Receivable Agreements: In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into 2 tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the then-holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder,” and together, the “TRA Holders”). On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 13—Related Party Transactions for further discussion.

Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), Legacy Owner Holdco and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class

~~Table of Contents~~

A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B Common Stock will be cancelled. During the ~~Current Quarter and Current Period (each as defined below), 7,564,868~~year ended December 31, 2019, a total of 9,805,742 SES Holdings LLC Units were exchanged for ~~7,564,868~~9,805,742 shares of Class A

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Common Stock, and ~~7,564,868~~9,805,742 shares of Class B Common Stock were cancelled.

~~2017 Business Combinations:~~ ~~The Company completed 3 business combinations~~ There were 0 exchanges during ~~2017 that significantly increased its size. On March 10, 2017,~~ the Company completed the acquisition of Gregory Rockhouse Ranch, Inc. (the “GRR Acquisition”) and certain other affiliated entities and assets (collectively, the “GRR Entities”) for consideration of $59.6 million. On September 15, 2017, the Company completed the acquisition (the “Resource Water Acquisition”) of Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”) for $9.0 million. Additionally, on November 1, 2017, the Company completed its merger (the “Rockwater Merger”) with Rockwater Energy Solutions, Inc. (“Rockwater”) in which the Company combined with Rockwater for total consideration of $620.2 million.Current Quarter (as defined below).

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the ~~United States~~U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.

This Form 10-Q relates to the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 (the “Current Quarter” ~~and the “Current Period”, respectively)~~) and the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 (the “Prior Quarter” ~~and the “Prior Period”, respectively)~~). The Company’s annual report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”) filed with the SEC on ~~March 1, 2019,~~February 25, 2020 includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter ~~and Current Period~~ are not ~~necessarily~~ indicative of the results to be expected for the full ~~year.~~year, in part due to the recent coronavirus (“COVID-19”) outbreak.

The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities for which the Company does not have significant control or influence are accounted for using the cost method. As of ~~September 30, 2019,~~March 31, 2020, the Company had 1 cost-method investee. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings.

Segment reporting: The Company has 3 ~~operating and~~ reportable segments. ~~Operating~~Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals, following its decision in the first quarter of 2019 to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its subsidiary Affirm Oilfield Services, LLC (“Affirm”), its sand hauling operations and Canadian operations.Chemicals.

The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, ~~containment,~~ water ~~treatment~~containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals ~~business, which were previously a part of the former Wellsite Services segment.~~ business.

~~Table of Contents~~

The Water Infrastructure segment consists of the Company’s infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and ~~pipelines,~~pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and salt water disposal wells, primarily serving E&P companies.

The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, and well completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed by our customers to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily pressure pumpers, ~~along with~~but also include major integrated and independent oil and gas producers.

The results of ~~our divested~~ service lines ~~that were previously a part of the former Wellsite Services segment,~~divested during 2019, including the operations of our Affirm Oilfield Services, LLC subsidiary (“Affirm”), our sand hauling operations and our Canadian operations, are combined in the “Other” category.

~~The unaudited interim consolidated financial statements in this report reflect our new segment structure, and the statements~~11

Table of ~~operations, statements of comprehensive income and statements of cash flows for the three and nine months ended September 30, 2018 have been restated to reflect our new segment structure.~~Contents

~~Substantially complete liquidation:~~ During the Current Quarter, the Company substantially completed liquidating our Canadian subsidiary and transferred $0.4 million from cumulative translation adjustment to (losses)/gains on sales of property and equipment, net.

Reclassifications: Certain reclassifications have been made to the Company’s prior period consolidated financial information in order to conform to the current period presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.

~~Table of Contents~~

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, ~~2018,~~2019, included in the Company’s most recent Annual Report on Form 10-K. With the exception of the adoption of the new lease standard discussed in Note 5, there have been no significant changes in such policies or the application of such policies during the Current Quarter.

Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Allowance for credit losses: The Company’s allowance for credit losses relate to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt incurred has been with cases where a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy.

The following table presents the changes to the allowance for the Current Quarter:


	Three months ended March 31, 2020
	(in thousands)
Balance at beginning of year	$	5,773
Increase to allowance based on a percent of Current Quarter revenue		556
Adjustment based on aged receivable analysis		1,829
Charge-offs		(1,022)
Balance at March 31, 2020	$	7,136

Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 16 disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current ~~Period:~~Quarter:

Nine months ended September 30, 2019

(in thousands)
Balance at beginning of Current Period

$
1,898
Accretion expense, included in depreciation and amortization expense

86
Change in estimate

—
Divestitures

(210)
Balance at end of Current Period

$
1,774

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	Three months ended March 31, 2020
	(in thousands)
Balance at beginning of year	$	1,527
Accretion expense, included in depreciation and amortization expense		31
Disposals		(219)
Payments		(64)
Balance at March 31, 2020	$	1,275

We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Lessor Income: As of March 31, 2020, the Company had 3 facility leases and 13 facility subleases that are accounted for as follows:


		Three Months Ended March 31,
		2020		2019
		(in thousands)
Category	Classification
Lessor income	Cost of sales	$	116	$	111
Sublease income	Lease abandonment costs and Cost of sales		401		373

The Company also generates short-term equipment rental revenue. See Note 5—Revenue for a discussion of revenue recognition for the accommodations and rentals business.

Defined Contribution Plan: During the Current Quarter, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) Plan and incurred no match expense. During the Prior Quarter, the Company incurred $1.3 million of match expense.

Recent accounting pronouncements: In ~~February~~June 2016, ~~the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02,~~ ~~Leases~~, which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. Based on the original guidance in ASU 2016-02, lessees and lessors would have been required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients. In July 2018, the FASB issued ASU No. 2018-11, ~~Leases (ASC 842): Targeted Improvements,~~ which provides entities with an option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of 2019. The Company elected to recognize its lease assets and liabilities on a prospective basis, beginning on January 1, 2019, using the modified retrospective transition method. Additionally, the Company elected practical expedients to (i) exclude right-of-use assets and lease liabilities for short-term leases, (ii) elected to treat lease and non-lease components as a single lease component, (iii) grandfathered its current accounting for land easements that commenced before January 1, 2019, and (iv) used the package of practical expedients to retain prior lease classification, prior treatment of initial direct costs and prior determination of whether a contract constituted a lease. See Note 5—Leases for additional information.

~~Table of Contents~~

~~In June 2016,~~ the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends ~~U.S.~~ GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019 ~~although it may be adopted one year earlier,~~ and requires a modified retrospective transition approach. After reviewing the new standard and reexamining current and prior year bad debt expense from trade receivables, as well as updating future expectations, the adoption of the new standard isin the first quarter of 2020 did not ~~expected to~~ have a material impact to the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently reviewing the provisions of this new pronouncement.

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NOTE 3—~~ACQUISITIONS~~IMPAIRMENTS AND ~~DIVESTITURES~~

~~Business combinations~~

~~Well Chemical Services Acquisition~~

On September 30, 2019, the Company acquired a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, for $10.4 million, funded with cash on hand (the “WCS Acquisition”). WCS provides advanced water treatment solutions, specialized stimulation flow assurance and integrity additives and post-treatment monitoring service in the U.S. This acquisition expands the Company’s service offerings in oilfield water treatment across the full life-cycle of water, from pre-frac treatment through re-use and recycling.

The WCS Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. The assets acquired and liabilities assumed are included in the Company’s Oilfield Chemicals segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:OTHER COSTS

Preliminary purchase price allocation

Amount
Consideration transferred

(in thousands)
Cash paid

$
10,400
Total consideration transferred

10,400
Less: identifiable assets acquired and liabilities assumed

Inventory

6,287
Property and equipment

3,713
Intangible assets

500
Current liabilities

(100)
Total identifiable net assets acquired

10,400
Fair value allocated to net assets acquired

$
10,400

Significant challenges that emerged during the Current Quarter, and which are expected to continue into the foreseeable future, have had and will continue to have a negative impact on our results of operations. The COVID-19 outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in global oil demand as well as international and U.S. economies and financial markets. Additionally, the failure of Saudi Arabia and Russia to reach a decision to cut production of oil and gas along with the Organization of the Petroleum Exporting Countries (“OPEC”), and Saudi Arabia’s subsequent decision to reduce the prices at which it sells oil and increase production, combined with the continued outbreak of COVID-19, contributed to a sharp drop in prices for oil in the Current Quarter. While an agreement to cut production was reached in April 2020, oil prices have remained low, with storage capacity rapidly being reached, and global oil demand is expected to remain challenged at least until the COVID-19 outbreak can be contained. As a result of these market disruptions, oil prices have declined significantly and our Current Quarter results have been negatively impacted. With the significant recent drop in oil prices, the activity levels of our customers and the demand for our services will certainly decrease materially in the near-term; however, at this time, we believe it is too soon to determine the depth or magnitude of the declines.

~~Pro Well Acquisition~~

~~On November 20, 2018,~~We believe the ~~Company acquired Pro Well Testing~~ongoing effects of COVID-19 on our operations have had, and ~~Wireline, Inc. (“Pro Well”) with an initial payment~~will continue to have, a material negative impact on our financial results, and such negative impact may continue well beyond the containment of ~~$12.4 million, funded with cash on hand (the “Pro Well Acquisition”). During March 2019, upon final settlement,~~such outbreak until oil demand and prices, recover. We cannot assure you that our assumptions used to estimate our future financial results will be correct given the ~~purchase price was revised to $11.8 million.~~

This acquisition expanded the Company’s flowback footprint into New Mexico and added new strategic customers. The Pro Well Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that total consideration paid exceeded the fair valueunpredictable nature of the current market environment after the rapid decline in the demand for oil and demand for our services. As a consequence, our ability to accurately forecast our activity and profitability is uncertain.

The magnitude and duration of the COVID-19 pandemic is also uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty, but at this time, we expect a net ~~assets acquired~~loss for 2020. We are taking further actions to maintain our liquidity, including decreasing operating expenses by ~~$1.1 million,~~reducing headcount, reducing salaries, closing yard locations, reducing third party expenses and streamlining operations, as well as reducing capital expenditures. We are also deferring employer payroll tax payments for the remainder of 2020, in accordance with the excess recorded as goodwill. The goodwill recognized was primarily attributable to expanding the Company’s flowback footprint into New Mexico and adding new strategic customers. The assets acquired, liabilities assumed and the results of operationsprovisions of the ~~acquired business are included~~Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and may take advantage of future legislation passed by the United States Congress in response to COVID-19.

As a result of the above mentioned economic conditions, we recorded impairment expenses in the ~~Company’s Water Services segment. The~~first quarter related to goodwill, ~~acquired~~property and equipment and other intangible assets and there is ~~deductible~~no assurance that we will not have additional impairments in subsequent quarters.

A summary of impairment, severance, yard closure and lease abandonment costs for ~~tax purposes. The following table summarizes~~ the Current Quarter and Prior Quarter were as follows:


	Three Months Ended March 31,
	2020		2019
	(in thousands)

Impairment of goodwill and trademark
Water Services	$	186,468	$	—
Water Infrastructure		80,466		—
Oilfield Chemicals		9,082		—
Other		—		4,396
Total impairment of goodwill and trademark	$	276,016	$	4,396

For a discussion of the impairments to goodwill and trademark, See Note 8—Goodwill and Other Intangible Assets.

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	Three Months Ended March 31,
	2020		2019
	(in thousands)

Impairment of property and equipment
Water Services	$	2,498	$	—
Water Infrastructure		686		—
Other		—		519
Total impairment of property and equipment	$	3,184	$	519

During the Current Quarter, the Company determined that certain equipment was obsolete, and recorded a $3.2 million impairment of property and equipment. During the Prior Quarter, the Company recorded an impairment of $0.5 million of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds at that time.


	Three Months Ended March 31,
	2020		2019
	(in thousands)

Severance
Water Services	$	1,823	$	—
Water Infrastructure		288		—
Oilfield Chemicals		120		—
Other		1,271		1,680
Total severance expense	$	3,502	$	1,680

Yard closure costs
Water Services	$	1,950	$	—
Total yard closure costs	$	1,950	$	—

Lease abandonment costs
Water Services	$	935	$	229
Water Infrastructure		51		—
Other		(33)		844
Total lease abandonment costs	$	953	$	1,073

During the Current Quarter, the Company recorded exit-disposal costs including $3.5 million of severance costs, with $2.9 million of accrued severance at March 31, 2020, $2.0 million in accrued yard closure costs, recognized within costs of revenue on the accompanying consolidated statements of operations, and $1.0 million of lease abandonment costs. Severance costs of $1.8 million and $1.7 million are recognized within costs of revenue and selling, general and administrative expenses, respectively, on the accompanying consolidated statements of operations. During the Prior Quarter, the Company recorded exit-disposal costs including $1.7 million of severance, recognized within selling, general and administrative expenses on the accompanying consolidated statements of operations, and $1.1 million of lease abandonment costs, both of which related to the Company’s divested service lines.

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NOTE 4—Acquisitions

Business combinations

Well Chemical Services Acquisition

On September 30, 2019, the Company acquired a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, for $10.0 million, funded with cash on hand (the “WCS Acquisition”). WCS provides advanced water treatment solutions, specialized stimulation flow assurance and integrity additives and post-treatment monitoring service in the U.S. This acquisition expands the Company’s service offerings in oilfield water treatment across the full life-cycle of water, from pre-fracturing treatment through reuse and recycling.

The WCS Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions and valuation of the inventory and property and equipment acquired, customer relationships, and current liabilities were finalized as of December 31, 2019. The assets acquired and liabilities assumed are included in the Company’s Oilfield Chemicals segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:


Purchase price allocation	Amount		Amount
Consideration transferred	(in thousands)		(in thousands)
Cash paid	$	11,754	$	10,000
Total consideration transferred		11,754		10,000
Less: identifiable assets acquired and liabilities assumed
Working capital		1,051
Inventory				5,221
Property and equipment		6,588		4,473
Customer relationship intangible assets		3,000
Customer relationships				476
Current liabilities				(170)
Total identifiable net assets acquired		10,639		10,000
Goodwill		1,115
Fair value allocated to net assets acquired	$	11,754	$	10,000

~~Divestitures~~

~~Affirm and Canadian Operations Divestitures~~

During the Current Period, the Company closed on 4 sale transactions and wound down the remaining Affirm and Canadian operations. The Company sold property and equipment with a combined net book value of $18.6 million and assigned contracts to the buyers. Additionally, 2 of the 4 transactions included the assignment of working capital. The following table summarizes sales details for each of the 4 transactions:

Date of Divestiture

Entity

Initial Net Proceeds

Working Capital True Up

Adjusted Net Proceeds

Working Capital Status at
September 30, 2019

(Gain)/loss for the nine months ended September 30, 2019

(in thousands)
February 26, 2019

Affirm

$
10,982

$
92

$
To be determined

Not Final

$
(92)
June 28, 2019

Affirm

6,968

—

6,968

Final

(1,646)
March 19, 2019

Canada

4,975

(189)

4,786

Final

4,900
April 1, 2019

Canada

2,242

—

2,242

Final

101

In connection with the Affirm crane operation divestiture in the first quarter of 2019, 0 gain or loss was initially recognized and goodwill was reduced by $2.6 million. Additionally, during the first quarter of 2019, the Company recorded an impairment of the remaining Affirm goodwill of $4.4 million (see Note 8).

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NOTE 4—5—REVENUE

~~Effective for the year ended December 31, 2018, the~~

The Company ~~adopted~~follows ASU 2014-09, Revenue from Contracts with Customers~~(Topic~~ (Topic 606), ~~using the modified retrospective adoption method. There was no impact on the consolidated financial statements and no cumulative effect adjustment was recognized. Although~~for most revenue recognition, ~~is governed by the new standard, the accommodations and rentals revenue continued to be guided by ASC 842 -~~ ~~Leases~~~~, discussed further below. The core principle of Topic 606 is that revenue is recognized when goods or services are transferred to customers in an amount that reflects consideration for~~ which ~~entitlement is expected in exchange for those goods or services.~~

~~ASU 2014-09~~ provides a five-step model for determining revenue recognition for arrangements that are within the scope of the standard: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that we will collect the consideration the Company is entitled to in exchange for the goods or services the Company transfers to the customer.

The Company elected practical expedients (i) not to access whether immaterial promised goods or services are performance obligations, (ii) not to provide disclosures on remaining performance obligations for contracts that have an original expected duration of one year or lessaccommodations and ~~(iii) to exclude transaction price taxes assessed~~rentals revenue is guided by ~~governmental authorities as revenue.~~ASC 842 – Leases.

The following factors are applicable to all ~~three~~3 of the Company’s segments for the first ~~nine~~three months of ~~2019~~2020 and ~~2018,~~2019, respectively:

●

The vast majority of customer agreements are short-term, lasting less than one year.

●

Contracts are seldom combined together as virtually all of our customer agreements constitute separate performance obligations. Each job is typically distinct, thereby not interdependent or interrelated with other customer agreements.

●

Most contracts allow either party to terminate at any time without substantive penalties. If the customer terminates the contract, the Company is unconditionally entitled to the payments for the products delivered to date.

●

Contract terminations before the end of the agreement are rare.

●

Sales returns are rare and no sales return assets have been recognized on the balance sheet.

●

There are minimal volume discounts.

●

There are no service-type warranties.

●

There is no long-term customer financing.

In the Water Services and Water Infrastructure segments, performance obligations arise in connection with services provided to customers in accordance with contractual terms, in an amount the Company expects to collect. Services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenues are generated by services rendered and measured based on output generated, which is usually simultaneously received and consumed by customers at their job sites. As a multi-job site organization, contract terms, including pricing for the Company’s services, are negotiated on a job site level on a per-job basis. Most jobs are completed in a short period of time, usually between one day and one month. Revenue is recognized as performance obligations are completed on a daily, hourly or per unit basis with unconditional rights to consideration for services

~~Table of Contents~~

rendered reflected as accounts receivable trade, net of allowance for ~~doubtful accounts.~~credit losses. In cases where a prepayment is received before the Company satisfies its performance obligations, a contract liability is recorded in accrued expenses and other current liabilities. Final billings generally occur once all of the proper approvals are obtained. No revenue is associated with mobilization or demobilization of personnel and equipment. Rather, mobilization and demobilization are factored into pricing for services. Billings and costs related to mobilization and demobilization is not material for customer agreements that start in one period and end in another. As of ~~September 30, 2019,~~March 31, 2020, the Company had ~~four~~five contracts in place for these segments lasting over a year.

In the Oilfield Chemicals segment, the typical performance obligation is to provide a specific quantity of chemicals to customers in accordance with the customer agreement in an amount the Company expects to collect.

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Products and services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenue is recognized as the customer takes title to chemical products in accordance with the agreement. Products may be provided to customers in packaging or delivered to the customers’ containers through a hose. In some cases, the customer takes title to the chemicals upon consumption from storage containers on their property, where the chemicals are considered inventory until customer usage. In cases where the Company delivers products and recognizes revenue before collecting payment, the Company usually has an unconditional right to payment reflected in accounts receivable trade, net of allowance for ~~doubtful accounts.~~credit losses. Customer returns are rare and immaterial and there were no in-process customer agreements for this segment as of ~~September 30, 2019~~March 31, 2020, lasting greater than one year.

The Company accounts for accommodations and rentals agreements as an operating lease. The Company recognizes revenue from renting equipment on a straight-line basis. Accommodations and rental contract periods are generally daily, weekly or monthly. The average lease term is less than three months and as of ~~September 30, 2019,~~March 31, 2020, no rental agreements lasted more than a year.

The following table sets forth certain financial information with respect to the Company’s disaggregation of revenues by geographic location:


	Three Months Ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2019		2018		2019		2018		2020		2019
	(in thousands)
Geographic Region
Permian Basin	$	158,609	$	166,330	$	469,391	$	449,113	$	137,998	$	162,665
Eagle Ford										35,664		38,726
MidCon		45,522		58,275		152,500		187,300		24,873		58,463
Eagle Ford		44,694		46,895		124,453		135,923
Bakken		20,052		41,673		66,195		120,934		22,560		25,782
Marcellus/Utica		21,330		37,110		79,781		106,129		19,839		30,159
Haynesville/E. Texas										19,015		17,282
Rockies		21,045		23,228		64,981		85,908		18,869		22,442
Haynesville/E. Texas		18,322		13,319		53,918		43,328
All other/eliminations		(606)		10,140		4,282		37,977		(533)		7,127
Total	$	328,968	$	396,970	$	1,015,501	$	1,166,612	$	278,285	$	362,646

In the Water Services segment, the top 3 revenue producing regions are the Permian Basin, ~~MidCon~~Eagle Ford and ~~Eagle Ford,~~Marcellus/Utica, which collectively comprised ~~75%, 73%, 75%~~74% and 71% of segment revenue for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. In the Water Infrastructure segment, the top 2 revenue producing regions are the Permian Basin and Bakken, which collectively comprised ~~84%, 85%, 83%~~87% and ~~84%~~82% of segment revenue for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. In the Oilfield Chemicals segment, the top 2 revenue producing regions are the Permian Basin and MidCon, which collectively comprised ~~79%, 81%, 77%~~70% and 76% of segment revenue for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively.

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~~NOTE 5—LEASES~~

As of September 30, 2019, the Company was the lessee for approximately 576 operating leases with durations greater than a year, approximately 16 subleases, approximately 41 finance leases, and is the lessor for 3 owned properties. Most of the operating leases either have renewal options of between one and five years or convert to month-to-month agreements at the end of the specified lease term. In addition to normal lease activity, the four Affirm and Canadian divestitures occurring in the Current Period included the assignment of leases to the buyers. The assigned leases impacted expenses during the Current Period, but were not included in the September 30, 2019 consolidated balance sheet.

The Company’s operating leases are primarily for (i) housing personnel for operations, (ii) operational yards for storing and staging equipment, (iii) equipment used in operations, (iv) facilities used for back-office functions and (v) equipment used for back office functions. The Company has determined that it is reasonably certain to exercise future renewal options for 1 facility lease for the corporate office building in Gainesville, Texas. ~~The majority of the Company’s long-term lease expenses are at fixed prices.~~

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases including month-to-month agreements that continue in perpetuity until the lessor or the Company terminates the lease agreement. Due to the volatility of the price of a barrel of oil and the short-term nature of the Company’s contracts with customers, the Company has determined that no short-term leases with indefinite renewals are reasonably certain to last more than a year into the future. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company estimates the incremental borrowing rate based on what it would pay to borrow on a collateralized basis, over a similar term based on information available at lease commencement.

~~The Company’s variable lease costs are comprised of variable royalties, variable common area maintenance, and variable reimbursement of lessor insurance and property taxes. Variable lease costs were~~ ~~$0.3 million and $1.1~~ ~~million during the Current Quarter and Current Period, respectively.~~

The Company previously had an $18.8 million lease obligation associated with certain exit and disposal activities in connection with approximately 17 abandoned facility leases as of December 31, 2018. Upon adopting the new lease standard, the former exit-disposal cease use liability was reclassified and factored into the initial right-of-use (“ROU”) asset impairment calculation.

~~The financial impact of leases is listed in the tables below:~~

Balance Sheet

Classification

As of September 30, 2019

(in thousands)
Assets

ROU Assets⁽¹⁾

Long-term right-of-use assets

$
73,138
Finance lease assets⁽²⁾

Property and equipment

386
Liabilities

Operating lease liabilities ― ST

Current operating lease liabilities

$
19,488
Operating lease liabilities ― LT⁽³⁾

Long-term operating lease liabilities

72,672
Finance lease liabilities ― ST

Current portion of finance lease obligations

248
Finance lease liabilities ― LT

Other long term liabilities

108

~~(1)~~

~~Net of impairment of $16.9 million.~~

~~(2)~~

~~Net of accumulated amortization of $1.5 million.~~

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~~(3)~~

~~The $16.8 million on the consolidated balance sheet as of December 31, 2018 represented long-term lease liabilities in connection with the exit-disposal rules prior to adopting the new lease standard.~~

Three Months Ended

Nine months ended
Statements of Operations and Cash Flows

Classification

September 30, 2019

September 30, 2019

(in thousands)
Operating lease cost:

Operating lease cost ― fixed

Cost of revenue and Selling, general and administrative

$
6,242

$
21,392
Lease abandonment costs

Lease abandonment costs

238

1,494

Short-term agreements:

Cost of revenue

$
25,611

$
73,423

Finance lease cost:

Amortization of leased assets

Depreciation and amortization

$
54

$
791
Interest on lease liabilities

Interest expense, net

14

21

Lessor income:

Sublease income

Cost of sales and lease abandonment costs

$
393

$
1,155
Lessor income

Cost of sales

184

364

Statement of cash flows

Cash paid for operating leases

Operating cash flows

$
7,689

$
23,646
Cash paid for finance leases lease interest

Operating cash flows

14

21
Cash paid for finance leases

Financing cash flows

194

743


~~Long Term and Discount Rate~~	~~As of September 30, 2019~~
~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	~~7.9~~
~~Finance leases~~	~~1.4~~
~~Weighted-average discount rate~~
~~Operating leases~~	~~5.3~~	%
~~Finance leases~~	~~5.2~~	%

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~~The Company has the following operating and finance lease commitments as of September 30, 2019:~~

Period

Operating Leases^{(1) (2)}

Finance Leases

Total

(in thousands)
October 2019 through December 2019

$
7,197

$
144

$
7,341
2020

22,079

135

22,214
2021

15,371

89

15,460
2022

12,039

—

12,039
2023

10,141

—

10,141
Thereafter

48,287

—

48,287
Total minimum lease payments

$
115,114

$
368

$
115,482

Less reconciling items to reconcile undiscounted cash flows to lease liabilities:

Short-term leases excluded from balance sheet

694

—

694
Imputed interest

22,260

12

22,272
Total reconciling items

22,954

12

22,966
Total liabilities per balance sheet

92,160

356

92,516

~~(1)~~

~~This table excludes sublease and lessor income of $0.5 million from October 2019 to December 2019, $1.4 million during 2020, $0.4 million during 2021 and $0.1 million during 2022.~~

~~(2)~~

This table excludes 2 leases signed by the Company with commencement dates anticipated being established in calendar year 2020, for which the Company expects to pay approximately $9.6 million in total lease costs over ten years.

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NOTE 6—INVENTORIES

Inventories, which are comprised of chemicals and materials available for resale and parts and consumables used in operations, are valued at the lower of cost and net realizable value, with cost determined under the weighted-average method. The significant components of inventory are as follows:



	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(in thousands)				(in thousands)
Raw materials	$	12,873	$	15,219	$	14,070	$	12,365
Finished goods		26,280		28,540		23,988		24,724
Materials and supplies		460		1,233		444		453
	$	39,613	$	44,992	$	38,502	$	37,542

During the Current Quarter ~~the Company added $6.3 million of finished goods inventory from the purchase of WCS (see Note 3). During the Current Quarter,~~and Prior Quarter, ~~Current Period and Prior Period,~~ the Company recorded charges to the reserve for excess and obsolete inventory for ~~less than~~immaterial amounts of $0.1 million ~~$0.4 million, $0.2 million and $0.4 million,~~or less, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The Company’s inventory reserve was $3.9 million and $4.1 million as of March 31, 2020 and December 31, 2019, respectively. The reserve for excess and obsolete inventories is determined based on the Company’s historical usage of inventory on hand, as well as future expectations and the amount necessary to reduce the cost of the inventory to its estimated net realizable value.

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NOTE 7—PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:



	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(in thousands)				(in thousands)
Land	$	16,030	$	17,799	$	14,213	$	16,030
Buildings and leasehold improvements		107,894		106,626		98,815		97,426
Vehicles and equipment		57,774		83,435		47,809		53,819
Vehicles and equipment - finance lease		1,526		1,833		1,120		1,291
Machinery and equipment		732,184		758,528		643,551		659,835
Machinery and equipment - finance lease		48		532		162		162
Pipelines						71,821		69,327
Computer equipment and software		18,777		15,775		5,960		8,051
Computer equipment and software - finance lease		356		356		356		356
Office furniture and equipment		4,650		4,612		1,139		1,157
Disposal wells		64,962		64,038		60,960		64,149
Other		497		497		497		497
Construction in progress		79,398		60,347		40,387		43,279
		1,084,096		1,114,378		986,790		1,015,379
Less accumulated depreciation⁽¹⁾		(617,740)		(611,530)		(560,340)		(562,986)
Property and equipment held-for-sale		890		—
Property and equipment held-for-sale, net						—		885
Total property and equipment, net	$	467,246	$	502,848	$	426,450	$	453,278

(1)

Includes $1.5 million and ~~$1.3~~$1.6 million of accumulated depreciation related to finance leases as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

Total depreciation and amortization expense related to property and equipment and finance leases presented in the table above, as well as amortization of intangible assets presented in Note 8 is as follows:


	Three Months Ended September 30,				Nine months ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(in thousands)								(in thousands)
Category
Depreciation expense from property and equipment	$	26,163	$	29,505	$	81,698	$	84,181	$	23,985	$	29,307
Amortization expense from finance leases		54		293		791		1,037		77		214
Amortization expense from intangible assets		2,998		3,039		8,993		10,294		2,993		2,969
Accretion expense from asset retirement obligations										(188)		28
Total depreciation and amortization	$	29,215	$	32,837	$	91,482	$	95,512	$	26,867	$	32,518

~~Table of Contents~~

~~Property and Equipment Held-for-Sale and Impairments~~

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ~~During the first quarter~~See Note 3 for impairment of 2019, the Company made the decision to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its Affirm subsidiary, its sand hauling operations and its Canadian operations. This decision led us to classify the property and equipment ~~of these business as held-for-sale. All operations have been wound down, with $0.9 million remaining in held-for-sale as of September 30, 2019. The table below shows~~during the ~~property~~Current Quarter and ~~equipment sold and divested as follows:~~

Net Book Value of Property and
Type of sale event

Business

Equipment Sold or Divested

(in thousands)
Business divestitures

Affirm subsidiary

$
11,275
Property and equipment sales

Affirm subsidiary

1,339
Business divestitures

Canadian operations

7,372
Property and equipment sales

Canadian operations

388
Property and equipment sales

Sand hauling operations

3,030
Total property and equipment sold and divested

$
23,404

Prior Quarter.

During the Current ~~Period,~~Quarter, the Company ~~recorded an impairment~~sold the remaining Canadian assets that were previously designated as held for sale at a loss of ~~$0.9~~$0.1 million ~~of Canadian property and equipment to write down the carrying value based~~recognized within losses on ~~the expected future sale proceeds. In addition, during the Current Period, the net loss on divestitures and~~ sales of property, equipment and ~~equipment held-for-sale was $3.5 million.~~divestitures, net on the accompanying consolidated statements of operations.

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NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs (see Note 12). During the ~~first quarter of 2019,~~Current Quarter, the Affirm goodwill was reduced to 0 from the crane divestiture and impairment. The $4.4 million of goodwill impairment was based on the expected proceeds from selling and winding down the rest of the Affirm business. Also,Company had triggering events in connection with the resulting significant adverse change to the demand for the Company’s ~~segment realignment,~~services in connection with a significant decline in the price of oil and the related global economic impacts resulting from the OPEC+ disputes with increasing oil supply as well as the COVID-19 pandemic. This included uncertainty regarding oil prices and the length of the recovery following the significant market disruption in the oil and gas industry. As a result, the Company ~~reallocated goodwill from~~performed quantitative tests for reporting units in both the ~~2018 Water Solutions segment to reporting units in the 2019~~ Water Services and Water Infrastructure segments using the income and market approaches, resulting in a full impairment to goodwill in both segments. The changes in the carrying amounts of goodwill by reportable segment as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are as follows:

Oilfield

Water

Wellsite

Water

Water


Chemicals

Solutions

Services

Services

Infrastructure

Other

Total

(in thousands)
Balance as of December 31, 2017

$
15,637

$
245,542

$
12,242

$
—

$
—

$
—

$
273,421
Additions

—

982

—

—

—

—

982
Impairment

(12,652)

—

(5,242)

—

—

—

(17,894)
Measurement period adjustments

(2,985)

20,277

—

—

—

—

17,292
Balance as of December 31, 2018

—

266,801

7,000

—

—

—

273,801
Resegmentation

—

(266,801)

(7,000)

186,335

80,466

7,000

—
Measurement period adjustment⁽¹⁾

—

—

—

133

—

—

133
Affirm crane business divestiture

—

—

—

—

—

(2,604)

(2,604)
Affirm impairment

—

—

—

—

—

(4,396)

(4,396)
Balance as of September 30, 2019

$
—

$
—

$
—

$
186,468

$
80,466

$
—

$
266,934


	Water		Water
	Services		Infrastructure		Total

Balance as of December 31, 2019		186,468		80,466		266,934
Impairment		(186,468)		(80,466)		(266,934)
Balance as of March 31, 2020	$	—	$	—	$	—

~~(1)~~

~~2019 measurement period adjustment related to the Pro Well working capital settlement. See Note 3.~~

The components of other intangible assets, net as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are as follows:


	As of September 30, 2019						As of December 31, 2018						As of March 31, 2020								As of December 31, 2019
	Gross		Accumulated		Net		Gross		Accumulated		Net		Gross				Accumulated		Net		Gross		Accumulated		Net
	Value		Amortization		Value		Value		Amortization		Value		Value		Impairment		Amortization		Value		Value		Amortization		Value
	(in thousands)						(in thousands)						(in thousands)								(in thousands)
Definite-lived
Customer relationships	$	116,578	$	17,966	$	98,612	$	171,245	$	66,402	$	104,843	$	116,554	$	—	$	(22,499)	$	94,055	$	116,554	$	(20,233)	$	96,321
Patents		10,110		2,169		7,941		10,110		1,417		8,693		10,110		—		(2,670)		7,440		10,110		(2,420)		7,690
Other		7,516		4,573		2,943		7,234		2,866		4,368		7,234		—		(5,242)		1,992		7,234		(4,766)		2,468
Total definite-lived		134,204		24,708		109,496		188,589		70,685		117,904		133,898		—		(30,411)		103,487		133,898		(27,419)		106,479
Indefinite-lived
Water rights		7,031		—		7,031		7,031		—		7,031		7,031		—		—		7,031		7,031		—		7,031
Trademarks		23,442		—		23,442		23,442		—		23,442		23,442		(9,082)		—		14,360		23,442		—		23,442
Total indefinite-lived		30,473		—		30,473		30,473		—		30,473		30,473		(9,082)		—		21,391		30,473		—		30,473

Total other intangible assets, net	$	164,677	$	24,708	$	139,969	$	219,062	$	70,685	$	148,377	$	164,371	$	(9,082)	$	(30,411)	$	124,878	$	164,371	$	(27,419)	$	136,952

Due to the triggering events discussed above, the Company tested all intangible assets for impairment, which resulted in $9.1 million of impairment to trademarks using the relief from royalty method. The impairment was recorded in the Oilfield Chemicals segment.

The weighted average amortization period for customer relationships, patents, and other definite lived assets was ~~11.0~~10.4 years, ~~8.0~~7.5 years, and 2.2 years, respectively, as of ~~September 30, 2019.~~March 31, 2020. See Note 7 for the amortization expense during the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. The indefinite lived water rights and trademarks are generally subject to renewal every five to ten years at immaterial renewal costs. Annual amortization of intangible assets for the next five years and beyond is as follows:

Amount

(in thousands)
Remainder of 2019

$
2,989
2020

11,661
2021

10,478


		Amount
		(in thousands)

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2022

10,263
2023

10,192
Thereafter

63,913

$
109,496

Remainder of 2020	$	8,685
Year ending December 31, 2021		10,494
Year ending December 31, 2022		10,280
Year ending December 31, 2023		10,209
Year ending December 31, 2024		10,139
Thereafter		53,680
	$	103,487

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NOTE 9—DEBT

Credit facility and revolving line of credit

On November 1, 2017, SES Holdings and Select LLC entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, the Company has the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the closing. The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.

The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.

Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1% and (iii) the Administrative Agent’s prime rate (the ”Base Rate”), in each case plus an applicable margin. Interest is payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.


Level	Average Excess Availability	Base Rate Margin	Eurocurrency Rate Margin

I	< 33% of the commitments	1.00%	2.00%
II	< 66.67% of the commitments and ≥ 33.33% of the commitments	0.75%	1.75%
III	≥ 66.67% of the commitments	0.50%	1.50%


Level	Average Revolver Usage	Unused Line Fee Percentage

I	≥ 50% of the commitments	0.250%
II	< 50% of the commitments	0.375%

The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.

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The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the Credit Agreement to be immediately due and payable.

In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements. See ~~Note~~“Note 13—Related Party ~~Transactions~~Transactions” for further discussion of the Tax Receivable Agreements.

The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.

Certain lenders party to the Credit Agreement and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.

The Company had 0 borrowings ~~and $45.0 million~~ outstanding under the Credit Agreement as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, respectively. The weighted-average interest rate of outstanding borrowings under the Credit Agreement was 4.256% as of December 31, 2018.~~2019. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the borrowing base under the Credit Agreement was ~~$228.4~~$200.6 million and ~~$270.5~~$214.6 million, respectively. The borrowing capacity under the Credit Agreement was reduced by outstanding letters of credit of ~~$19.9~~$19.8 million and ~~$20.8~~$19.9 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The Company’s letters of credit have a variable interest rate between 1.50% and 2.00% based on the Company’s average excess availability as outlined above. The unused portion of the available borrowings under the Credit Agreement was ~~$208.5~~$180.8 million as of ~~September 30, 2019.~~March 31, 2020.

Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were ~~$2.1~~$1.8 million and ~~$2.6~~$2.0 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheets. Amortization expense related to debt issuance costs was $0.2 million ~~$0.2 million, $0.5 million and $0.5 million~~ for both the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period, respectively.~~Quarter.

The Company was in compliance with all debt covenants as of ~~September 30, 2019.~~March 31, 2020.

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NOTE 10—COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to a number of lawsuits and claims arising out of the normal conduct of its business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. Based on a consideration of all relevant facts and circumstances, including applicable insurance coverage, it is not expected that the ultimate outcome of any currently pending lawsuits or claims against the Company will have a material adverse effect on its consolidated financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters.

~~Certain~~As previously disclosed, certain subsidiaries acquired in the Rockwater ~~Merger~~merger are under investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania and the U.S. Environmental Protection ~~Agency (the “EPA”).~~Agency. It is alleged that certain employees at some of the facilities altered emissions controls systems on 4%less than 5% of the vehicles in the fleet in violation of the Clean Air Act. The Company is ~~cooperating~~continuing to cooperate with the relevant authorities to resolve the ~~matter.~~matter including locating any pertinent information to determine if such violations occurred and what, if any, the applicable fine would be related to any such potential violations. At this time no administrative, civil or criminal charges have been brought against the ~~Company and~~Company. Additionally, while the Company cannot currently estimate ~~the~~an amount of possible fines ~~and~~or penalties, we do not believe that ~~may~~such amounts will be ~~levied against~~material to the ~~Company.~~Company’s financial statements.

Self-Insured Reserves

We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.

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NOTE 11—EQUITY-BASED COMPENSATION

The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the board of managers of SES Holdings in April 2011. In conjunction with the Select 144A Offering, the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan.

On July 18, 2017, the Select Inc. board of directors approved the First Amendment to the 2016 Plan (the “Equity Plan Amendment”), which clarifies the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater ~~Merger~~merger which occurred on November 1, 2017) and allowed for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which the Company’s Class A Common Stock is listed. The effectiveness of the Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement for the Rockwater ~~Merger.~~merger. The Company’s consenting stockholders, who held a majority of the outstanding common stock of the Company, approved the Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment became effective on November 1, 2017 upon the consummation of the Rockwater ~~Merger.~~merger. Currently, the maximum number of shares reserved for issuance under the 2016 Plan, taking into account the impact of the Rockwater ~~Merger,~~merger, is approximately 9.3 million shares. For all share-based compensation award types, the Company accounts for forfeitures as they occur.

Stock option awards

Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Class A Common Stock as of the date of grant. Prior to the Company’s initial public offering on April 26, 2017, the Company historically valued Class A Common Stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. This fair value measurement relied on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certainCertain awards granted during the years ended December 31, 2017 and 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were either granted in exchange for the cancellation of outstanding options granted under the 2011 Plan or the Rockwater Equity Plan, as applicable, that were fully vested and exercisable prior to such cancellation.

The Company utilized the Monte Carlo option pricing model to determine fair value of the options granted during 2018, which incorporates assumptions to value equity-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected life of the options was based on the vesting period and term of the options awarded, which is ten years. NaN stock options were granted in 2019 or in the Current Quarter.

A summary of the Company’s stock option activity and related information as of and for the Current Quarter is as follows:


	For the three months ended March 31, 2020
				Weighted-average
		Weighted-average		Grant Date Value	Aggregate Intrinsic
	Stock Options	Exercise Price		Term (Years)	Value (in thousands) ^(a)
Beginning balance, outstanding	3,797,319	$	15.95	4.2	$	509
Forfeited	(20,091)		14.68
Ending balance, outstanding	3,777,228	$	15.96	4.0	$	—
Ending balance, exercisable	3,764,205	$	15.94	4.0	$	—
Nonvested at end of period	13,023	$	20.58

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~~A summary of the Company’s stock option activity and related information as of and for the Current Period is as follows:~~

For the nine months ended September 30, 2019

Weighted-average

Weighted-average

Remaining Contractual

Aggregate Intrinsic


Stock Options

Exercise Price

Term (Years)

Value (in thousands) ^(a)
Beginning balance, outstanding

3,865,678

$
16.00

4.9

$
19
Granted

—

—

Exercised

(5,282)

5.68

Forfeited

(12,459)

17.83

Expired

(32,638)

21.85

Ending balance, outstanding

3,815,299

$
15.96

4.5

$
71
Ending balance, exercisable

3,369,567

$
15.27

4.0

$
71
Nonvested at end of period

445,732

$
21.15

^(a)Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of ~~$8.66~~$3.23 and ~~$6.32~~$9.28 as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The Company recognized ~~$1.0 million, $1.2 million, $3.4~~$0.2 million and ~~$3.9~~$1.3 million of compensation expense related to stock options during the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$1.2 million~~a nominal amount of unrecognized equity-based compensation expense remaining related to nonvested stock options. ~~This cost is expected to be recognized over a weighted-average period of one year.~~

Restricted Stock Awards and Restricted Stock Units

The value of the restricted stock awards and restricted stock units issued was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of ~~$2.3 million, $1.1 million, $6.3~~$1.9 million and ~~$3.2~~$1.8 million related to the restricted stock awards and restricted stock units for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$11.5~~$13.3 million of unrecognized compensation expense with a weighted-average remaining life of ~~1.5~~1.7 years related to unvested restricted stock awards and restricted stock units.

A summary of the Company’s restricted stock awards activity and related information for the Current ~~Period~~Quarter is as follows:


	For the nine months ended September 30, 2019			For the three months ended March 31, 2020
		Weighted-average			Weighted-average
	Restricted Stock Awards	Grant Date Fair Value		Restricted Stock Awards	Grant Date Fair Value
Nonvested at December 31, 2018	496,945	$	19.02
Nonvested at December 31, 2019				1,518,193	$	10.08
Granted	1,391,479		8.80	1,271,706		5.89
Vested	(259,989)		18.81	(406,289)		12.54
Forfeited	(10,532)		19.79	(199,069)		7.52
Nonvested at September 30, 2019	1,617,903	$	10.26
Nonvested at March 31, 2020				2,184,541	$	7.42

~~Table of Contents~~

A summary of the Company’s restricted stock unit activity and related information for the Current ~~Period~~Quarter is as follows:


	For the nine months ended September 30, 2019			For the three months ended March 31, 2020
		Weighted-average			Weighted-average
	Restricted Stock Units	Grant Date Fair Value		Restricted Stock Units	Grant Date Fair Value
Nonvested at December 31, 2018	2,500	$	19.00
Granted	—		—
Nonvested at December 31, 2019				1,250	$	19.00
Vested	(1,250)		19.00	(625)		20.00
Nonvested at September 30, 2019	1,250	$	19.00
Forfeited				(625)		18.00
Nonvested at March 31, 2020				—	$	—

Performance Share Units (PSUs)

During 2018 and 2019, the Company approved grants of performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSU will be calculated based on performance against certain metrics that relate to the Company’s return on asset performance over the January 1, 2018 through December 31, 2020 and January 1, 2019 through December 31, 2021 performance periods, respectively.

The target number of shares of Class A Common Stock subject to each PSU granted in 2018 and 2019 is 1; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0 to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation

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committee, which will be no later than June 30, 2021 for the 2018 PSU grants, and June 30, 2022 for the 2019 PSU grants, assuming the minimum performance metrics are achieved. The target PSUs that become earned PSUs during the performance period will be determined in accordance with the following table:


Return on Assets at Performance Period End Date		Percentage of Target PSUs Earned
Less than 9.6%		0%
9.6%		50%
12%		100%
14.4%		175%

During 2020, the Company approved grants of PSUs that are subject to both performance-based and service-based vesting provisions related to (i) return on asset performance (“ROA”) in comparison to thirteen peer companies and (ii) Adjusted Free Cash Flow (“FCF”) performance percentage. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSUs will be calculated based on ROA and FCF performance over the period from January 1, 2020 through December 31, 2022.

The target number of shares of Class A Common Stock subject to each PSU granted in 2020 is one; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0 to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, ~~2021~~2023 for the ~~2018 PSU grants, and June 30, 2022 for the 2019~~2020 PSU grants, assuming the minimum performance metrics are achieved.

The target PSUs that become earned ~~PSUs during~~connected with the ~~performance period~~ROA in comparison to other companies will be determined based on the Company’s Average Return on Assets (as defined in the applicable PSU agreement) relative to the Average Return on Assets of the peer companies (as defined in the applicable PSU agreement) in accordance with the following table:

Return on Assets at Performance Period End Date

Percentage of Target PSUs Earned
Less than 9.6%

0%
9.6%

50%
12%

100%
14.4%

175%


Ranking Among Peer Group		Percentage of Target Amount Earned
Outside of Top 10		0%
Top 10		50%
Top 7		100%
Top 3		175%

The ~~grant date~~target PSUs that become earned in connection with the adjusted FCF performance percentage will be determined (as defined in the applicable PSU agreement) in accordance with the following table:


Adjusted FCF Performance Percentage		Percentage of Target Amount Earned
Less than 70%		0%
70%		50%
100%		100%
130%		175%

The fair value ofon the date the PSUs ~~granted~~were issued during 2020, 2019 and 2018 was $4.4 million, $7.0 million and $5.9 million, ~~and the grant fair value of PSUs granted during the Current Period was $7.0 million.~~respectively. Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest, by the measurement-date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. The Company recognized a credit to compensation expense of ~~$0.1 million, $0.1 million, $1.8~~$1.4 million and ~~$0.7~~compensation expense of $0.9 million related to the PSUs for the Current Quarter and Prior Quarter, ~~Current Period and Prior Period,~~ respectively.

As of September 30, 2019, the fair value of outstanding PSUs issued was $8.9 million. The unrecognized compensation cost related to our unvested PSUs is estimated to be $5.4 million and is expected to be recognized over a weighted-average period of 1.6 years as of September 30, 2019.

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As of March 31, 2020, the unrecognized compensation cost related to our unvested PSUs is estimated to be $3.6 million and is expected to be recognized over a weighted-average period of 1.7 years as of March 31, 2020. However, this compensation cost will be adjusted as appropriate throughout the applicable performance periods.

The following table summarizes the information about the performance share units outstanding as of ~~September 30, 2019:~~March 31, 2020:


		Performance Share Units
Nonvested as of December 31, ~~2018~~2019		~~255,364~~1,014,990
Target shares granted		~~778,118~~
~~Target shares vested~~		—
~~Target shares forfeited~~		~~(9,442)~~753,378
Target shares outstanding as of ~~September 30, 2019~~March 31, 2020		~~1,024,040~~1,768,368

Stock-Settled Incentive Awards

Effective May 17, 2018, the Company approved grants of stock-settled incentive awards to certain key employees under the 2016 Equity Incentive Plan that are subject to both market-based and service-based vesting provisions. These awards will vest after a two-year service period and, if earned, settled in shares of Class A Common Stock. The ultimate amount earned is based on the achievement of the market metrics, which is based on the stock price of the Class A Common Stock at the vesting date, for which payout could range from 0% to 200%. Any award not earned on the vesting date is forfeited. The target amount that becomes earned during the performance period will be determined in accordance with the following table:


Stock Price at Vesting Date⁽¹⁾		Percentage of Target Amount Earned
Less than $20.00		0%
At least $20.00, but less than $25.00		100%
$25.00 or greater		200%

(1)

The stock price at vesting date equals the greater of (i) the fair market value of a share of the Class A Common Stock on the vesting date, or (ii) the volume weighted average closing price of a share of the Class A Common Stock, as reported on the New York Stock Exchange, for the 30 trading days preceding the vesting date.

The target amount of stock-settled incentive awards granted was $3.9 million. However, the ultimate settlement of the awards will be in shares of Class A Common Stock with a fair market value equal to the earned amount, which could range from 0% to 200% of the target amount depending on the stock price at vesting date.

Compensation expense associated with the stock-settled incentive awards is recognized ratably over the corresponding requisite service period. The fair value of the stock-settled incentive awards was determined using a Monte Carlo option pricing model, similar to the Black-Scholes-Merton model, and adjusted for the specific characteristics of the awards. The key assumptions in the model included price, the expected volatility of our stock, risk-free interest rate based on U.S. Treasury yield curve, cross-correlations between us and our self-determined peer companies’ asset, equity and debt-to-equity volatility.

The Company recognized ~~stock compensation expense of $0.1 million, $0.1 million, $0.4 million and $0.2 million related to the stock-settled incentive awards for~~a nominal credit during the Current Quarter and $0.1 million of expense in the Prior Quarter, ~~Current Period and Prior Period, respectively.~~respectively, related to stock-settled incentive awards. The unrecognized compensation cost related to our unvested stock-settled incentive awards is ~~estimated to be $0.4~~$0.1 million and is expected to be fully recognized ~~over approximately eight months~~in the second quarter of 2020.

The following table summarizes the information about the stock-settled incentive awards outstanding as of ~~September 30, 2019.~~March 31, 2020:

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~~The following table summarizes the information about the stock-settled incentive awards outstanding as of September 30, 2019:~~

Award Value

Value at Target

Being Recognized
Nonvested as of December 31, 2018

$
3,147

$
1,202
Granted during 2019

—

—
Forfeited during 2019

(210)

(80)
Nonvested as of September 30, 2019

$
2,937

$
1,122


			Award Value
	Value at Target		Being Recognized
Nonvested as of December 31, 2019	$	2,937	$	1,122
Forfeited during 2020		(409)		(157)
Nonvested as of March 31, 2020	$	2,528	$	965

Employee Stock Purchase Plan (ESPP)

We have an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of Class A Common Stock at a discount. The plan provides for four offering periods for purchases: December 1 through February 28, March 1 through May 31, June 1 through August 31 and September 1 through November 30. At the end of each offering period, enrolled employees purchase shares of Class A Common Stock at a price equal to 95% of the market value of the stock on the last day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period. Subject to limitations set forth in the plan and under IRS regulations, eligible employees may elect to contribute a maximum of $15,000 to the plan in a single calendar year. The plan is deemed to be noncompensatory.

The following table summarizes ESPP activity (in thousands, except shares):

Share Repurchases

During the Current Quarter, ~~and Current Period,~~ the Company repurchased ~~1,443,409 and 1,525,501~~849,711 shares ~~respectively,~~ of Class A Common Stock in the open market and repurchased ~~1,239 and 71,649~~129,680 shares ~~respectively,~~ of Class A Common Stock in connection with employee minimum tax withholding requirements for units vested under the 2016 Plan. All repurchased shares were retired. During the Current ~~Period,~~Quarter, the repurchases were ~~was~~ accounted for as a decrease to paid-in-capital of ~~$15.9~~$6.6 million and a decrease to Class A Common Stock of approximately ~~$16,000.~~$10,000. In the Prior Quarter, ~~and Prior Period, there were no~~the Company repurchased 82,092 shares in the open market ~~repurchases; however, the Company purchased 17,743~~ and ~~62,277~~repurchased 43,694 shares ~~respectively,~~ in connection with employee minimum tax withholding requirements.

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NOTE 12—FAIR VALUE MEASUREMENT

The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment of property and equipment, intangible assets and goodwill. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2—Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value).

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were 0 transfers into, or out of, the three levels of the fair value hierarchy for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 or the year ended December 31, ~~2018.~~2019. The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of ~~September 30, 2019.~~March 31, 2020.


	Fair Value										Fair Value
	Measurements Using						Carrying				Measurements Using						Carrying
	Level 1		Level 2		Level 3		Value⁽¹⁾		Impairment		Level 1		Level 2		Level 3		Value⁽¹⁾		Impairment
	(in thousands)										(in thousands)
Affirm goodwill	$	—	$	—	$	—	$	4,396	$	4,396

Quarter Ended March 31, 2020
Goodwill											$	—	$	—	$	—	$	266,934	$	266,934
Trademark												—		—		14,360		23,442		9,082
Property and equipment		—		—		4,770		5,712		942		—		—		176		3,360		3,184

(1)

Amount represents carrying value at the date of assessment.

Other fair value considerations

The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, due to the short-term maturity of these instruments. The carrying value of bank debt as of December 31, 2018 approximated fair value due to variable market rates of interest. The fair value of bank debt as of December 31, 2018, which is a Level 3 measurement, was estimated based on the Company’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices are not available. The Company did not have any ~~bank~~ debt as of ~~September 30,~~March 31, 2020 or December 31, 2019. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The Affirm goodwill impairment was based on the Company’s estimate as of March 31, 2019 of fair value based on the expected proceeds to sell the remaining property and equipment utilizing Level 3 inputs. The property and equipment impairment during the Current Period was based on the expected proceeds from selling a portion of the remaining Canadian property and equipment utilizing Level 3 inputs.

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NOTE 13—RELATED-PARTY TRANSACTIONS

The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons and an unconsolidated joint venture. The Company has entered into a number of transactions with related parties. In accordance with the Company’s related persons transactions policy, the audit committee of the Company’s board of directors regularly reviews these transactions. However, the Company’s results of operations may have been different if these transactions were conducted with non-related parties. For more information regarding the Company’s policies and procedures for review of related party transactions, see the Company’s Definitive Proxy Statement for the ~~2019~~2020 Annual Meeting of Stockholders filed with the SEC on March ~~22, 2019.~~27, 2020.

During the Current Quarter, sales to related parties were ~~$3.5~~$2.4 million and purchases from related-party vendors were ~~$3.2~~$4.2 million. These purchases consisted of ~~$0.6~~$3.7 million relating to the rental of certain equipment or other services used in operations, $0.2 million relating to purchases of property and equipment, ~~$2.3~~$0.2 million relating to management, consulting and other services and $0.1 million related to inventory and consumables.

During the Prior Quarter, sales to related parties were $6.3 million and purchases from related-party vendors were $6.0 million. These purchases consisted of $1.5 million relating to purchases of property and equipment, $3.9 million relating to the rental of certain equipment or other services used in operations and ~~$0.3~~$0.6 million relating to management, consulting and other services.

During the Prior Quarter, sales to related parties were $2.7 million and purchases from related-party vendors were $5.2 million. These purchases consisted of $1.0 million relating to purchases of property and equipment, $4.0 million relating to the rental of certain equipment or other services used in operations and $0.2 million relating to management, consulting and other services.

During the Current Period, sales to related parties were $10.8 million and purchases from related-party vendors were $15.6 million. These purchases consisted of $2.5 million relating to purchases of property and equipment, $11.8 million relating to the rental of certain equipment or other services used in operations and $1.3 million relating to management, consulting and other services.

During the Prior Period, sales to related parties were $6.3 million and purchases from related-party vendors were $12.7 million. These purchases consisted of $3.5 million relating to purchases of property and equipment, $0.3 million relating to inventory and consumables, $7.8 million relating to the rental of certain equipment or other services used in operations and $1.1 million relating to management, consulting and other services.

Tax Receivable Agreements

In connection with the Select 144A Offering, the Company entered into the Tax Receivable Agreements with the TRA Holders.

The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview Partners II GP, L.P. (“Crestview GP”), generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the Select 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement.

The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of the Contributing Legacy Owners and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) any net operating losses available to the Company as a result of certain reorganization transactions

~~Table of Contents~~

entered into in connection with the Select 144A Offering and (ii) imputed interest deemed to be paid by the Company as a result of any payments the Company makes under such Tax Receivable Agreement.

On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements revising the definition of a “change of control” for purposes of the Tax Receivable Agreements and acknowledging that the Rockwater ~~Merger~~merger would not result in such a change of control.

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NOTE 14—INCOME TAXES

The Company’s income tax information is presented in the table below. The effective tax rate is different than the 21% standard Federal rate due to net income allocated to noncontrolling interests, state income taxes and valuation allowances.


	Three months ended September 30,				Nine months ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(in thousands)								(in thousands)
Current income tax expense	$	2,115	$	1,421	$	2,698	$	2,043
Deferred income tax expense (benefit)		386		(6)		552		(16)
Total income tax expense	$	2,501	$	1,415	$	3,250	$	2,027
Current income tax (benefit) expense									$	(72)	$	178
Deferred income tax (benefit) expense										(92)		-
Total income tax (benefit) expense									$	(164)	$	178
Effective Tax Rate		25.9%		4.3%		16.3%		2.7%		0.1%		11.3%

On March 27, 2020, the CARES Act was enacted. The CARES Act includes, among other things, certain income tax provisions for businesses. The Company recognized an income tax benefit of $0.4 million during the quarter ended March 31, 2020, as a result of the net operating loss carryback and interest expense limitation provisions of the CARES Act.

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NOTE 15—NONCONTROLLING INTERESTS

The Company’s noncontrolling interests fall into two categories as follows:

●

Noncontrolling interests attributable to joint ventures formed for water-related services.

●

Noncontrolling interests attributable to holders of Class B Common Stock.


	As of		As of		As of		As of
	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(in thousands)				(in thousands)
Noncontrolling interests attributable to joint ventures formed for water-related services	$	2,423	$	3,273	$	2,584	$	2,674
Noncontrolling interests attributable to holders of Class B Common Stock		197,988		274,566		126,544		172,961
Total noncontrolling interests	$	200,411	$	277,839	$	129,128	$	175,635

For all periods presented, there were no changes to Select’s ownership interest in joint ventures formed for water-related services. However, during the Current ~~Period~~Quarter and Prior ~~Period,~~Quarter, there were changes in Select’s ownership interest in SES Holdings LLC. The effects of the changes in Select’s ownership interest in SES Holdings LLC is as follows:


	For the nine months ended September 30,				For the three months ended March 31,
	2019		2018		2020		2019
	(in thousands)				(in thousands)
Net income attributable to Select Energy Services, Inc.	$	12,714	$	50,012
Net (loss) income attributable to Select Energy Services, Inc.					$	(245,862)	$	1,135
Transfers (to) from noncontrolling interests:
Increase in additional paid-in capital as a result of stock option exercises		54		374
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures		3,568		1,946		1,831		3,021
Increase in additional paid-in capital as a result of issuance of common stock due to vesting of restricted stock units		4		104		1		2
(Decrease) increase in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units		(2,501)		73
Increase in additional paid-in capital as a result of exchanges of SES Holdings LLC Units (an equivalent number of shares of Class B Common Stock) for shares of Class A Common Stock		82,706		146,865
(Decrease) increase in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued		(1)		13
Change to equity from net income attributable to Select Energy Services, Inc. and transfers from noncontrolling interests	$	96,544	$	199,387
Decrease in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units						(603)		(29)
Increase in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued						3		2
Change to equity from net (loss) income attributable to Select Energy Services, Inc. and transfers from noncontrolling interests					$	(244,630)	$	4,131

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NOTE 16—(LOSS) EARNINGS PER SHARE

(Loss) earnings per share are based on the amount of (loss) income allocated to the shareholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 3,777,228 and 2,980,567 shares are not included in the calculation of diluted weighted-average shares outstanding for the Current Quarter and Prior Quarter, respectively, as the effect is antidilutive.

The following tables present the Company’s calculation of basic and diluted (loss) earnings per share for the Current and Prior Quarter (dollars in thousands, except share and per share amounts):


	Three months ended March 31, 2020						Three months ended March 31, 2019
	Select Energy						Select Energy
	Services, Inc.		Class A		Class B		Services, Inc.		Class A		Class B
Numerator:
Net (loss) income	$	(291,220)					$	1,400
Net loss (income) attributable to noncontrolling interests		45,358						(265)
Net (loss) income attributable to Select Energy Services, Inc. — basic		(245,862)	$	(245,862)	$	—		1,135	$	1,135	$	—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock		—		—		—		1		1		—
Net (loss) income attributable to Select Energy Services, Inc. — diluted	$	(245,862)	$	(245,862)	$	—	$	1,136	$	1,136	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				86,104,925	��	16,221,101				78,523,768		26,026,843
Dilutive effect of restricted stock				—		—				209,811		—
Dilutive effect of stock options				—		—				34,488		—
Dilutive effect of ESPP				—		—				94		—
Weighted-average shares of common stock outstanding — diluted				86,104,925		16,221,101				78,768,161		26,026,843
Earnings per share:
Basic			$	(2.86)	$	—			$	0.01	$	—
Diluted			$	(2.86)	$	—			$	0.01	$	—

Table of Contents

NOTE ~~16—EARNINGS PER SHARE~~

Earnings per share are based on the amount of income allocated to the shareholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 2,956,610, 2,682,883, 2,956,837 and 1,856,550 shares are not included in the calculation of diluted weighted-average shares outstanding for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively, as the effect is antidilutive.

The following tables present the Company’s calculation of basic and diluted earnings per share for the Current and Prior Quarter and the Current and Prior Period (dollars in thousands, except share and per share amounts):

Three months ended September 30, 2019

Three months ended September 30, 2018

Select Energy

Select Energy


Services, Inc.

Class A

Class A-2

Class B

Services, Inc.

Class A

Class A-2

Class B
Numerator:

Net income

$
7,172

$
31,267

Net income attributable to noncontrolling interests

(1,793)

(8,316)

Net income attributable to Select Energy Services, Inc. — basic

5,379

$
5,379

$
—

$
—

22,951

$
22,951

$
—

$
—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock

7

7

—

—

4

4

—

—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options

1

1

—

—

15

15

—

—
Net income attributable to Select Energy Services, Inc. — diluted

$
5,387

$
5,387

$
—

$
—

$
22,970

$
22,970

$
—

$
—
Denominator:

Weighted-average shares of common stock outstanding — basic

79,468,991

—

24,513,654

78,896,373

—

27,239,419
Dilutive effect of restricted stock

339,911

—

—

55,858

—

—
Dilutive effect of stock options

28,575

—

—

188,179

—

—
Dilutive effect of ESPP

104

—

—

92

—

—
Weighted-average shares of common stock outstanding — diluted

79,837,581

—

24,513,654

79,140,502

—

27,239,419
Earnings per share:

Basic

$
0.07

$
—

$
—

$
0.29

$
—

$
—
Diluted

$
0.07

$
—

$
—

$
0.29

$
—

$
—

Nine months ended September 30, 2019

Nine months ended September 30, 2018

Select Energy

Select Energy


Services, Inc.

Class A

Class A-2

Class B

Services, Inc.

Class A

Class A-2

Class B
Numerator:

Net income

$
16,640

$
72,421

Net income attributable to noncontrolling interests

(3,926)

(22,409)

Net income attributable to Select Energy Services, Inc. — basic

12,714

$
12,714

$
—

$
—

50,012

$
48,523

$
1,489

$
—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock

15

15

—

—

8

10

(2)

—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options

3

3

—

—

22

27

(5)

—
Net income attributable to Select Energy Services, Inc. — diluted

$
12,732

$
12,732

$
—

$
—

$
50,042

$
48,560

$
1,482

$
—
Denominator:

Weighted-average shares of common stock outstanding — basic

78,848,939

—

25,516,904

69,929,330

2,145,311

33,994,800
Dilutive effect of restricted stock

358,503

—

—

95,822

—

—
Dilutive effect of stock options

60,174

—

—

285,606

—

—
Dilutive effect of ESPP

299

—

—

94

—

—
Weighted-average shares of common stock outstanding — diluted

79,267,915

—

25,516,904

70,310,852

2,145,311

33,994,800
Earnings per share:

Basic

$
0.16

$
—

$
—

$
0.69

$
0.69

$
—
Diluted

$
0.16

$
—

$
—

$
0.69

$
0.69

$
—

~~Table of Contents~~

~~NOTE~~ 17—SEGMENT INFORMATION

Select Inc. is ~~an oilfield services company that provides~~a leading provider of comprehensive water-management solutions to the ~~onshore~~ oil and ~~natural~~ gas industry in the ~~United States.~~U.S. The Company’s services are offered through 3 ~~operating~~reportable segments. ~~Operating~~Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the CODM in deciding how to allocate resources and assess performance. The Company’s CODM assesses performance and allocates resources on the basis of the 3 reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate or Other. Each ~~operating segment reflects a~~ reportable segment is led by a separate ~~managers~~manager that ~~report~~reports directly to the Company’s CODM.

During the first quarter of 2019, the Company made the decision to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its Affirm subsidiary, its sand hauling operations and its Canadian operations. As a result, the Company reevaluated its segment structure and changed its reportable segments to Water Services, Water Infrastructure, and Oilfield Chemicals.

The Company’s CODM assesses performance and allocates resources on the basis of the following three reportable segments:

Water Services — The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, ~~containment,~~ water ~~treatment~~containment and water network ~~automation.~~automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals ~~business, which were previously a part of the former Wellsite Services segment.~~ business.

Water Infrastructure — The Water Infrastructure segment consists of the Company’s ~~strategic~~ infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and ~~pipelines,~~pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and salt water disposal ~~wells.~~wells, primarily serving E&P companies.

Oilfield Chemicals — The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, and well completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed by our customers to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily pressure pumpers, ~~along with~~but also include major integrated and independent oil and gas producers.

The results of our ~~divested~~ service lines ~~that were previously a part of the former Wellsite Services segment,~~divested during 2019, including the operations of our Affirm subsidiary, our sand hauling operations and our Canadian operations, are combined in the “Other” category.

Financial information by segment for the Current and Prior Quarter is as follows:


	For the three months ended March 31, 2020
			(Loss) Income		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures
	(in thousands)
Water Services	$	150,152	$	(195,900)	$	17,156	$	1,267
Water Infrastructure		57,884		(82,077)		7,028		2,568
Oilfield Chemicals		71,028		(2,896)		1,998		2,890
Other		—		25		—		325
Eliminations		(779)		—		—		—
Loss from operations				(280,848)
Corporate		—		(9,983)		685		—
Interest expense, net		—		(331)		—		—
Other income, net		—		(222)		—		—
	$	278,285	$	(291,384)	$	26,867	$	7,050

For the three months ended March 31, 2019

Income (loss)

Depreciation and

Capital

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	Revenue		before taxes		Amortization		Expenditures
	(in thousands)
Water Services	$	220,880	$	23,660	$	21,262	$	13,126
Water Infrastructure		53,616		3,801		6,089		17,238
Oilfield Chemicals		67,119		2,013		2,453		1,220
Other		23,670		(6,523)		1,714		61
Eliminations		(2,639)		—		—		—
Income from operations				22,951
Corporate		—		(16,318)		1,000		—
Interest expense, net		—		(1,093)		—		—
Other income, net		—		(3,962)		—		—
	$	362,646	$	1,578	$	32,518	$	31,645

~~Financial information by segment for the Current and Prior Quarter and the Current and Prior Period is as follows:~~

For the three months ended September 30, 2019




Income (loss)

Depreciation and

Capital

Revenue

before taxes

Amortization

Expenditures

(in thousands)
Water services

$
196,772

$
13,787

$
19,418

$
10,061
Water infrastructure

63,953

8,234

6,410

13,873
Oilfield chemicals

67,933

5,514

2,435

3,162
Other

310

(2,347)

—

—
Eliminations

—

—

—

—
Income from operations

25,188

Corporate

—

(12,713)

952

—
Interest expense, net

—

(438)

—

—
Other income, net

—

(2,364)

—

—

$
328,968

$
9,673

$
29,215

$
27,096

For the three months ended September 30, 2018




Income (loss)

Depreciation and

Capital

Revenue

before taxes

Amortization

Expenditures

(in thousands)
Water services

$
233,603

$
25,978

$
19,987

$
30,033
Water infrastructure

65,886

14,224

5,960

11,019
Oilfield chemicals

64,206

2,824

2,115

2,585
Other

33,817

(1,651)

3,791

1,493
Eliminations

(542)

—

—

—
Income from operations

41,375

Corporate

—

(9,117)

984

—
Interest expense, net

—

(1,322)

—

—
Other income, net

—

1,746

—

—

$
396,970

$
32,682

$
32,837

$
45,130

For the nine months ended September 30, 2019




Income (loss)

Depreciation and

Capital

Revenue

before taxes

Amortization

Expenditures

(in thousands)
Water services

$
620,649

$
53,681

$
61,704

$
32,676
Water infrastructure

169,288

15,237

18,571

42,653
Oilfield chemicals

198,049

11,951

6,635

6,514
Other

33,383

(8,197)

1,714

64
Eliminations

(5,868)

—

—

—
Income from operations

72,672

Corporate

—

(42,385)

2,858

—
Interest expense, net

—

(2,370)

—

—
Other income, net

—

(8,027)

—

—

$
1,015,501

$
19,890

$
91,482

$
81,907

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For the nine months ended September 30, 2018




Income (loss)

Depreciation and

Capital

Revenue

before taxes

Amortization

Expenditures

(in thousands)
Water services

$
685,998

$
75,735

$
57,826

$
81,251
Water infrastructure

175,676

27,003

16,216

25,669
Oilfield chemicals

192,678

4,786

7,853

8,264
Other

113,984

(1,709)

11,285

6,871
Eliminations

(1,724)

—

—

—
Income from operations

105,815

Corporate

—

(30,159)

2,332

—
Interest expense, net

—

(3,815)

—

—
Other income, net

—

2,607

—

—

$
1,166,612

$
74,448

$
95,512

$
122,055

Total assets by segment as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 is as follows:


	As of		As of		As of		As of
	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(in thousands)				(in thousands)
Water services	$	862,342	$	865,992
Water infrastructure		320,721		250,207
Oilfield chemicals		184,882		173,762
Water Services					$	600,200	$	831,123
Water Infrastructure						230,899		314,026
Oilfield Chemicals						188,472		192,224
Other		8,912		70,644		7,337		10,247
	$	1,376,857	$	1,360,605	$	1,026,908	$	1,347,620

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NOTE 18—SUBSEQUENT EVENTS

The Company ~~has evaluated subsequent events for potential recognition and/or disclosure through November 7, 2019,~~is closely monitoring the ~~date these consolidated~~impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it may impact our customers, employees, vendors and contractors. While the Company did not incur significant disruptions during the three months ended March 31, 2020 from COVID-19, we are unable to predict the impact that the COVID-19 pandemic will have on our financial ~~statements were available~~position, operating results and ability to ~~be issued.~~obtain future financing due to numerous uncertainties.

The magnitude and duration of the COVID-19 pandemic is also uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty, but at this time, we expect a net loss for 2020. We are taking further actions to maintain our liquidity, including decreasing operating expenses by reducing headcount, reducing salaries, closing yard locations, reducing third party expenses and streamlining operations, as well as reducing capital expenditures. We are also deferring employer payroll tax payments for the remainder of 2020, in accordance with the provisions of the CARES Act, and may take advantage of future legislation passed by the United States Congress in response to COVID-19. In this environment, the duration of which remains uncertain, the Company has planned for a range of scenarios and has taken a number of actions. To protect our workforce in the wake of COVID-19, we have taken steps to keep our people safe by supporting those affected, mandating that as many employees and contractors as possible work from home, and monitoring and consistently communicating with those who cannot do so and are required to be at work.

Based on our current cash position, lack of bank debt and these ongoing actions, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants for the next twelve months, prior to giving effect to any financing that may occur.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in our ~~2018~~2019 Form 10-K. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements.” We assume no obligation to update any of these forward-looking statements.

This discussion relates to the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 (the “Current Quarter” ~~and the “Current Period”, respectively)~~) and the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 (the “Prior Quarter” ~~and the “Prior Period”, respectively)~~).

Overview

We are a leading provider of comprehensive water-management solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical ~~solutions~~products for use in oil and gas well completion and production operations. ~~Within~~Through a combination of organic growth and acquisitions over the ~~major shale plays~~last decade, we have developed a leading position in the ~~U.S., we believe we are a market leader in~~relatively new water sourcing, water transfer (both by permanent pipeline and temporary hose) and temporary water containment prior to its use in drilling and completion activities associated with hydraulic fracture stimulation or “fracking,” which we refer to collectively as “pre-frac water services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water-related services that support oil and gas well completion and production activities, including water network automation, treatment, hauling, water recycling and disposal. We also manufacture a full suite of specialty chemicals used in the fracturing and water recycling process, and we provide chemicals needed by our customers to increase oil and gas production and lower production costs over the life of a well.solutions industry. We believe we are the only company in the oilfield services industry that combines ~~full life cycle~~comprehensive water-management services with related chemical products. Furthermore, we are one of the few large oilfield services companies whose primary focus is on the management of water and water logistics in the oil and gas development industry. Accordingly, as an industry leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.

In many regions of the country, there has been growing concern about the volumes of water required for new oil and gas well completions. Working with our customers and local communities, we strive to be an industry leader in the development of cost-effective alternatives to fresh water. Specifically, we offer services that enable our E&P customers to treat and reuse produced water, thereby reducing the demand for fresh water while also reducing the volumes of saltwater that must be disposed by injection. In many areas, we have also acquired sources of non-potable water such as brackish water or municipal or industrial effluent. We work with our customers to optimize their fluid systems to economically enable the use of these alternative sources. We also work with our E&P customers to reduce the environmental footprint of their operations through the use of temporary hose and permanent pipeline systems. These solutions reduce the demand for trucking operations, thereby reducing diesel emissions, increasing safety and decreasing traffic congestion in nearby communities.

Industry Overview

Significant challenges that emerged during the Current Quarter, and which are expected to continue into the foreseeable future, have had and will continue to have a negative impact on our results of operations. The novel coronavirus (“COVID-19”) outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in global oil demand as well as international and U.S. economies and financial markets. Additionally, the failure of Saudi Arabia and Russia to reach a decision to cut production of oil and gas along with the Organization of the Petroleum Exporting Countries (“OPEC”), and Saudi Arabia’s subsequent decision to reduce the prices at which it sells oil and increase production, combined with the continued outbreak of COVID-19, contributed to a sharp drop in prices for oil in the Current Quarter. While an agreement to cut production was reached in April 2020, oil prices have remained low, and global oil demand is expected to remain challenged at least until the COVID-19 outbreak can be contained. As a result of these market disruptions, oil prices have declined significantly and our Current Quarter results have been negatively impacted. With the significant recent drop in oil prices, the activity

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levels of our customers and the demand for our services will certainly decrease materially in the near-term; however, at this time, we believe it is too soon to determine the depth or magnitude of the declines.

We believe the ongoing effects of COVID-19 on our operations have had, and will continue to have, a material negative impact on our financial results, and such negative impact may continue well beyond the containment of such outbreak until oil demand and prices, recover. We cannot assure you that our assumptions used to estimate our future financial results will be correct given the unpredictable nature of the current market environment after the rapid decline in the demand for oil and demand for our services. As a consequence, our ability to ~~develop~~accurately forecast our activity and ~~provide related chemical products.~~profitability is uncertain.

~~Our~~

The magnitude and duration of the COVID-19 pandemic is also uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty, but at this time, we expect a net loss for 2020. We are taking further actions to maintain our liquidity, including decreasing operating expenses by reducing headcount, reducing salaries, closing yard locations, reducing third party expenses and streamlining operations, ~~have benefited from~~as well as reducing capital expenditures. We are also deferring employer payroll tax payments for the ~~investments~~remainder of 2020, in accordance with the provisions of the CARES Act, and ~~acquisitions~~may take advantage of future legislation passed by the United States Congress in response to COVID-19. In this environment, the duration of which remains uncertain, the Company has planned for a range of scenarios and has taken a number of actions. To protect our workforce in the wake of COVID-19, we have ~~made,~~taken steps to keep our people safe by supporting those affected, mandating that as many employees and contractors as possible work from home, and monitoring and consistently communicating with those who cannot do so and are required to be at work.

Based on our current cash position, lack of bank debt and these ongoing actions, we ~~continue~~believe that we will be able to ~~invest both~~maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants for the next twelve months, prior to giving effect to any financing that may occur.

During the Current Quarter, the average spot price of West Texas Intermediate (“WTI”) (Cushing) crude oil was $45.34 versus an average price of $54.82 for the Prior Quarter. The WTI price closed at $20.51 on March 31, 2020, which was nearly 55% lower than the average price for the Current Quarter, illustrating the significant decline and volatility of the price of oil and gas prices in the Current Quarter. The average Henry Hub natural gas spot price during the Current Quarter was $1.91 versus an average of $2.92 for the Prior Quarter. The significant decline in oil and gas prices in the Current Quarter relative to the Prior Quarter, as well as the more recent oil pricing volatility driven by market dislocation, has been driven largely by increased supply from OPEC+ and decreased demand due to the COVID-19 pandemic, as well as increased utilization of existing storage capacity, which may result in our ~~existing business~~E&P customers being forced to shut-in production.

Additionally, both debt and equity capital markets, and in ~~new infrastructure~~particular the IPO market, do not appear favorably disposed towards investing in the oil and ~~technology. When evaluating new investment decisions, we prioritize high returns on long-lived assets where applicable. One way~~gas industry at this time. In light of these factors, combined with the downward revisions made to many of our customers’ respective annual capital budgets and financial outlooks, we do ~~this is through margin-enhancing~~not anticipate large incremental sums of capital ~~expenditures, which often comprises upgrading or automating equipment~~entering the market to increase margin realization from those assets. One example of this type of investment is replacing conventional water transfer pumps with automated pumps, which lowers labor costs, increases reliability and improves environmental safeguardscreate higher demand for our ~~customers. Another area~~services for the remainder of ~~focus is longer-lived infrastructure assets~~2020, which will likely lead to decreased activity for us. Additionally, this lack of available capital in ~~areas~~the current market environment will make it challenging for distressed oil and gas companies to resolve their debt covenant and liquidity challenges in the near-term, potentially resulting in a number of restructuring activities, including bankruptcies, in the industry.

Outside of the macroeconomic challenges, from an operational standpoint, many of the recent trends still apply to ongoing unconventional oil and gas development. For example, while we believe ~~will experience consistently high levels~~leading-edge lateral lengths and proppant use are plateauing, the average operator continues to catch up to this leading edge and many smaller operators with less robust completion designs may be challenged in this environment. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of ~~completion activity. We have successfully executed these types~~well completions, while increasing frac efficiency and the use of ~~investments both in~~lower cost in-basin sand, all of which has decreased total costs for our customers.

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This multi-well pad development, combined with recent upstream acreage consolidation and the ~~Bakken, through our fixed infrastructure investments there, and~~emerging trends around the reuse applications of produced water, particularly in the Permian Basin, ~~through~~provides significant opportunity for companies like us that can deliver increasingly complex solutions for our ~~GRR Acquisition~~E&P customers across the full completion and production life of wells over the long-term. However, we note the continued efficiency gains in the ~~northern Delaware Basin and with our northern Delaware Basin pipeline project. Additionally, as market opportunities continue to grow for treating and re-using produced water for new~~ well completions process can limit the days we ~~are also focused~~spend on ~~developing~~the wellsite and expanding our production-related services, including our existing produced water gathering infrastructure, to help manage growing produced water volumes. The quality of water used for a well completion directly impactstherefore negatively impact the completion chemicals that are used in the frac fluid system. Our knowledge and expertise related to treatment, recycling and frac fluid chemistry allows us to provide our customers with sustainable solutions across a range of various water attributes.total revenue opportunity.

For our Oilfield Chemicals segment, the opening of our Midland Friction Reducer production line has saved us freight and logistics costs relative to shipping this high-volume product out of our Tyler, Texas production facility. We continue to make investments in driving operational efficiencies with our in-basin manufacturing that will continue to reduce unnecessary logistics and freight costs, making us more competitive and more nimble to our customers. The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our ~~existing~~ water treatment capabilities, ~~as well as~~ our recent WCS acquisition ~~of a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, which provides advanced water treatment solutions, specialized stimulation flow assurance~~ and ~~integrity additives and pre-during and post-treatment monitoring service in the United States. We expect~~ our ~~Oilfield Chemicals business will continue to grow along with the rise of produced water utilization in our served markets. As a leading provider of chlorine dioxide generators and specialty chemical~~

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~~deployment services in the U.S., we are now positioned to serve a much larger customer~~knowledge base with multiple disinfection service offerings. In addition, WCS’s large fleet of chemical addition units allows us to expand well chemical services by applying various biocides, preservatives, scale inhibitors and corrosion inhibitors for the hydraulic fracturing process. WCS will also be the exclusive provider of certain proprietary dry scale additives that are used in the fracking process for long-term well flow assurance. WCS will report within our Oilfield Chemicals ~~segment,~~segment. Additionally, this trend supports more complex “on the fly” solutions that treat, proportion, and ~~will work closely~~blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions that are able to economically compete with ~~both~~alternative historical solutions.

Regardless of these operational trends, the ~~Oilfield Chemicals~~current environment is one of the most challenging in decades for the oilfield services industry due to the large imbalance between oil supply and ~~Water Services operational teams~~demand. Many operators may prioritize decreasing their activity levels or pursuing near-term cost savings rather than long-term efficiencies, which could negatively impact the demand and pricing for our services. While we enjoy an advantaged position relative to manage the unique relationship between water quality and frac chemistry to deliver superior water treatment and chemical additive solutions to our customers. We have executed these acquisitions and investments within the context of a steadily improving balance sheet.

~~Going forward, we may pursue selected acquisitions of complementary assets, businesses and technologies, and believe we are well positioned to capture attractive opportunities~~many other oilfield services companies due to our ~~market~~cash position ~~customer~~ and ~~landowner relationships and industry experience and expertise.~~absence of debt on the balance sheet at the end of the Current Quarter, our full year 2020 financial results are likely to be materially worse than those of recent years.

Our Segments

Our services are offered through three ~~operating~~reportable segments: (i) Water Services; (ii) Water Infrastructure; and (iii) Oilfield Chemicals.

●

Water Services. The Water Services segment consists of the Company’s services businesses including water transfer, flowback and well testing, fluids hauling, ~~containment,~~ water ~~treatment~~containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals ~~business, which were previously a part of our former Wellsite Services segment.~~business.

●

Water Infrastructure. The Water Infrastructure segment consists of the Company’s ~~strategic~~ infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and ~~pipelines,~~pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and salt water disposal wells, primarily serving E&P companies.

●

Oilfield Chemicals.The Oilfield Chemicals segment, ~~develops, manufactures~~provides technical solutions and ~~provides~~expertise related to chemical applications in the oil and gas industry. We also have significant capabilities in supplying logistics for chemical applications. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well ~~completion and production services,~~completions, including polymer slurries, crosslinkers, friction reducers, biocides, ~~dry and liquid~~ scale inhibitors corrosion inhibitors, buffers, breakers and other chemical technologies. ~~This segment also provides~~With the range of chemicals ~~needed by~~and application expertise our customers ~~to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily~~range from pressure pumpers ~~along with~~to major integrated and independent U.S. and international oil and gas producers.This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to maximize the effectiveness of and optimize the efficiencies of the fracturing fluid system in conjunction with the quality of water used in well completions.

The results of our divested service lines that were previously a part of our former Wellsite Services segment including the operations of our Affirm subsidiary, our sand hauling operations and our Canadian operations are combined in the “Other” category. As of September 30, 2019, these operations have ceased, and we do not expect regular recurring revenue going forward from this segment.

How We Generate Revenue

We currently generate most of our revenue through our water-management services associated with hydraulic fracturing, provided through our Water Services and Water Infrastructure segments. We generate the majority of our revenue through customer agreements with fixed pricing terms and earn revenue when delivery of services is provided,

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generally at our customers’ sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer.

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We also generate revenue by providing completion, specialty chemicals and production chemicals through our Oilfield Chemicals segment. We invoice the majority of our Oilfield Chemicals customers for services provided based on the quantity of chemicals used or pursuant to short-term contracts as the customers’ needs arise.

Costs of Conducting Our Business

The principal expenses involved in conducting our business are labor costs, equipment costs (including depreciation, repair, rental and maintenance and leasing costs), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low. Most of the costs of serving our customers are variable, i.e., they are only incurred when we provide water and water-related services, or chemicals and chemical-related services to our customers.

Labor costs associated with our employees and contract labor represent the most significant costs of our business. We incurred labor and labor-related costs of ~~$116.7 million, $140.4 million, $375.7~~$101.6 million and ~~$408.4~~$138.8 million for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. The majority of our recurring labor costs are variable and are incurred only while we are providing our operational services. We also incur costs to employ personnel to sell and supervise our services and perform maintenance on our assets, which is not directly tied to our level of business activity. Additionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters. In light of the challenging activity and pricing trends, management has taken direct action during the Current Quarter to reduce operating and equipment costs, as well as selling, general and administrative costs, in order to proactively manage these expenses as a percentage of revenue. We expect to continue pursuing meaningful direct actions to reduce our labor costs in the coming quarters.

We incur significant equipment costs in connection with the operation of our business, including depreciation, repair and maintenance, rental and leasing costs. We incurred equipment costs of ~~$62.1 million, $73.6 million, $189.7~~$47.3 million and ~~$213.4~~$66.1 million for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively.

We incur significant transportation costs associated with our service lines, including fuel and freight. We incurred fuel and freight costs of ~~$20.3 million, $25.9 million, $62.8~~$18.1 million and ~~$73.2~~$22.3 million for the Current Quarter ~~Prior Quarter, Current Period~~ and Prior ~~Period,~~Quarter, respectively. Fuel prices impact our transportation costs, which affect the pricing and demand for our services and have an impact on our results of operations.

We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred raw material costs of ~~$71.2 million, $72.8 million, $207.5~~$70.1 million and ~~$210.7~~$70.4 million for the Current Quarter and Prior Quarter, ~~Current Period and Prior Period,~~ respectively.

~~Industry Overview~~

During the Current Quarter, the average spot price of West Texas Intermediate (“WTI”) (Cushing) crude oil was $56.33 versus an average price of $69.69 for the Prior Quarter. The average Henry Hub natural gas spot price during the Current Quarter was $2.38 versus an average of $2.93 for the Prior Quarter. The decline in oil and gas prices in the Current Quarter relative to the Prior Quarter has negatively impacted the pace of completions activity in 2019, relative to 2018. Additionally, debt and equity capital markets, especially the IPO market, do not appear favorably disposed towards the oil and gas industry at this time. In light of these factors, combined with the pending exhaustion of many of our customers’ respective annual capital budgets, we do not anticipate large incremental sums of capital potentially entering the market to create higher demand for our services for the remainder of 2019, which may lead to decreased activity for us.

While we cannot predict the future direction of oil or natural gas prices, our discussions with customers lead us to believe that current price levels support continued capital investment by our customers, over the longer term, to maintain and grow oil and gas production from U.S. onshore resources, though the pace of this investment could slow in the near-term. Additionally, the high rate of decline of U.S. onshore unconventional resources requires significant ongoing investment just to maintain production levels.

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Trends beyond oil and natural gas prices present both support and challenges. Our customers, generally speaking, have transitioned from a focus on production growth to a focus on free cash flow generation. While this should lead to a better capitalized industry with greater resilience to commodity price cyclicality over the longer term, this transition has negatively impacted the overall level of spending on oilfield services and equipment in the Current Quarter, and will likely constrain customer capital expenditures in 2020 as well.

While we believe leading-edge lateral lengths and proppant use are plateauing, the average operator continues to catch up to this leading edge. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing frac efficiency and the use of lower cost in-basin sand have decreased total costs for our customers. This multi-well pad development, combined with recent upstream acreage consolidation and the emerging trends around the reuse applications of produced water, particularly in the Permian Basin, provides significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production life of wells. However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and therefore negatively impact the total revenue opportunity.

The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our water treatment capabilities, our recent WCS acquisition and our knowledge base within our Oilfield Chemicals segment. Additionally, this trend supports more complex “on the fly” solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions.

How We Evaluate Our Operations

We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:

●

Revenue;

●

Gross Profit;

●

Gross Margins;

●

EBITDA; and

●

Adjusted EBITDA.

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Revenue

We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our ~~operating~~reportable segments to identify potential areas for improvement, as well as to determine whether segments are meeting management’s expectations.

Gross Profit

To measure our financial performance, we analyze our gross profit, which we define as revenues less direct operating expenses (including depreciation and amortization expenses). We believe gross profit provides insight into profitability and true operating performance of our assets. We also compare gross profit to prior periods and across segments to identify trends as well as underperforming segments.

~~Table of Contents~~

Gross Margins

Gross margins provide an important gauge of how effective we are at converting revenue into profits. This metric works in tandem with gross profit to ensure that we do not increase gross profit at the expense of lower margins, ~~thus decreasing our return on capital employed,~~ nor pursue higher gross margins exclusively at the expense of declining gross profits. We track gross margins by segment and service line and compare them across prior periods and across segments and service lines to identify trends as well as underperforming segments.

EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income/(loss), plus interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to ~~GAAP,~~accounting principles generally accepted in the U.S. (“GAAP”), plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs. The adjustments to EBITDA are generally consistent with such adjustments described in our Credit Facility. See “—Note Regarding Non-GAAP Financial Measures—EBITDA and Adjusted EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations

Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described ~~below.~~below and those described in “—Industry Overview” above.

Acquisition and Divestiture Activity

As described above, we are continuously evaluating potential investments, particularly in water infrastructure and other water-related services and technology. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.

Well Chemical Services Acquisition

On September 30, 2019, we completed our acquisition of WCS. Our historical financial statements for periods prior to September 30, 2019 do not include the results of operations of WCS.

~~Pro Well Acquisition~~43

~~On November 20, 2018, we completed our acquisition~~Table of ~~Pro Well Testing and Wireline, Inc. (“Pro Well”). Our historical financial statements for periods prior to November 20, 2018, do not include the results of operations of Pro Well.~~Contents

Affirm Divestitures

We sold the Affirm crane and field services businesses on February 26, 2019 and June 28, 2019, respectively. Affirm accounted for ~~$58.9~~$21.8 million of revenue during ~~2018.~~2019. Following the two divestitures, the divested operations were not included in the consolidated results of operations.

Canadian Operations Divestitures

On March 19, 2019, we sold over half of our Canadian operations ~~which accounted for approximately $40.0 million of annual revenue during 2018. On~~and on April 1, 2019, we sold and wound down the rest of the Canadian operations. Canadian operations

~~Table of Contents~~

~~which~~ accounted for ~~approximately~~ $8.6 million of annual revenue during ~~2018.~~2019. Following the divestitures, the divested Canadian operations were not included in the consolidated results of operations.

Sand Hauling Wind Down

During ~~the Current Period,~~2019, we wound down our sand hauling operations and sold certain of our sand hauling property and equipment. Sand hauling accounted for ~~$37.0~~$3.3 million of annual revenue during ~~2018.~~2019.

Proceeds received from Divestitures and Wind Down

During ~~the Current Period,~~2019, we received ~~$30.2~~$30.1 million from divestitures and fixed asset sale activity in connection with the sale and wind down of our Affirm subsidiary and the sand hauling and Canadian operations.

~~Impact of Industry Conditions on Our Operating Results~~

Demand for our services depends substantially on drilling, completion and production activity by E&P companies, which, in turn, depends largely upon the current and anticipated profitability of developing oil and natural gas reserves in the United States. The significant decline in oil and gas prices that began in the fourth quarter of 2014 caused a reduction in the development activities of most of our customers and their spending on our services in 2015 and 2016, which led to a reduction in the rates we were able to charge and the utilization of our assets. In 2017 and through the third quarter of 2018, our clients steadily increased their spending as compared to 2016 levels as oil prices generally recovered; however, in the fourth quarter of 2018, we experienced a pullback in spending by our customers, driven by a decline in oil prices and seasonal factors. Through 2019, customers have prioritized spending within their cash flows and capital budgets, and additional volatility or declines could result in our customers cancelling or curtailing their spending on our services. In the discussion of our operating results below, we reference the fluctuations in industry conditions in connection with certain changes in our results of operations.

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Results of Operations

The following tables set forth our results of operations for the periods presented, including revenue by segment.

Current Quarter Compared to the Prior Quarter


	Three months ended September 30,				Change				Three months ended March 31,				Change
	2019		2018		Dollars		Percentage		2020		2019		Dollars		Percentage
	(in thousands)								(in thousands)
Revenue
Water services	$	196,782	$	233,503	$	(36,721)	(15.7)	%
Water infrastructure		63,953		65,878		(1,925)	(2.9)	%
Oilfield chemicals		67,932		63,985		3,947	6.2	%
Water Services									$	149,511	$	220,595	$	(71,084)	(32.2)	%
Water Infrastructure										57,762		53,616		4,146	7.7	%
Oilfield Chemicals										71,012		66,829		4,183	6.3	%
Other		301		33,604		(33,303)	NM			—		21,606		(21,606)	(100.0)	%
Total revenue		328,968		396,970		(68,002)	(17.1)	%		278,285		362,646		(84,361)	(23.3)	%

Costs of revenue
Water services		153,741		177,643		(23,902)	(13.5)	%
Water infrastructure		46,748		42,324		4,424	10.5	%
Oilfield chemicals		57,357		56,473		884	1.6	%
Water Services										129,114		163,121		(34,007)	(20.8)	%
Water Infrastructure										47,813		41,430		6,383	15.4	%
Oilfield Chemicals										59,876		59,527		349	0.6	%
Other		1,865		29,280		(27,415)	NM			4		21,053		(21,049)	(100.0)	%
Depreciation and amortization		28,263		31,853		(3,590)	(11.3)	%		26,182		31,518		(5,336)	(16.9)	%
Total costs of revenue		287,974		337,573		(49,599)	(14.7)	%		262,989		316,649		(53,660)	(16.9)	%
Gross profit		40,994		59,397		(18,403)	(31.0)	%		15,296		45,997		(30,701)	(66.7)	%

Operating expenses
Selling, general and administrative		27,280		25,110		2,170	8.6	%		25,289		32,376		(7,087)	(21.9)	%
Depreciation and amortization		952		984		(32)	(3.3)	%		685		1,000		(315)	(31.5)	%
Impairment of goodwill and trademark										276,016		4,396		271,620	NM
Impairment of property and equipment		49		—		49	NM			3,184		519		2,665	NM
Lease abandonment costs		238		1,045		(807)	(77.2)	%		953		1,073		(120)	(11.2)	%
Total operating expenses		28,519		27,139		1,380	5.1	%		306,127		39,364		266,763	NM
Income from operations		12,475		32,258		(19,783)	(61.3)	%
(Loss) income from operations										(290,831)		6,633		(297,464)	NM

Other income (expense)
(Losses) gains on sales of property and equipment, net		(2,033)		1,458		(3,491)	NM
Other expense
Losses on sales of property and equipment and divestitures, net										(435)		(4,491)		4,056	NM
Interest expense, net		(438)		(1,322)		884	(66.9)	%		(331)		(1,093)		762	(69.7)	%
Foreign currency (loss) gain, net		(59)		248		(307)	NM			(46)		260		(306)	NM
Other (expense) income, net		(272)		40		(312)	NM
Income before income tax expense		9,673		32,682		(23,009)	(70.4)	%
Income tax expense		(2,501)		(1,415)		(1,086)	NM
Net income	$	7,172	$	31,267	$	(24,095)	(77.1)	%
Other income, net										259		269		(10)	NM
(Loss) income before income tax benefit (expense)										(291,384)		1,578		(292,962)	NM
Income tax benefit (expense)										164		(178)		342	NM
Net (loss) income									$	(291,220)	$	1,400	$	(292,620)	NM

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Revenue

Our revenue decreased ~~$68.0~~$84.4 million, or ~~17.1%~~23.3%, to ~~$329.0~~$278.3 million for the Current Quarter compared to ~~$397.0~~$362.6 million for the Prior Quarter. The decrease was driven by ~~$33.3~~a $71.1 million decline in Water Services revenue, $21.6 million lower revenue from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were fully divested and wound down during ~~the Current Period. Also contributing to the decrease was a $36.7 million decline in Water Services revenue and a $1.9 million decline in Water Infrastructure revenue,~~2019, partially offset by a ~~$3.9~~$4.2 million increase in Oilfield Chemicals revenue and a $4.1 million increase in Water Infrastructure revenue as discussed below. For the Current Quarter, our Water Services, Water Infrastructure, Oilfield Chemicals and Other segments constituted ~~59.8%~~53.7%, ~~19.4%~~20.8%, ~~20.7%~~25.5% and ~~0.1%~~0.0% of our total revenue, respectively, compared to ~~58.8%~~60.8%, ~~16.6~~14.8%, ~~16.1%~~18.4%, and ~~8.5%~~6.0%, respectively, for the Prior Quarter. The ~~2018 adoption of Accounting Standards Update 2014-09,~~ ~~Revenue from Contracts with Customers,~~ ~~did not have a material impact on~~ revenue ~~recognition. The revenue decrease~~changes by ~~operating~~reportable segment ~~were~~are as follows:

Water Services. Revenue decreased ~~$36.7~~$71.1 million, or ~~15.7%~~32.2%, to ~~$196.8~~$149.5 million for the Current Quarter compared to ~~$233.5~~$220.6 million for the Prior Quarter. The decrease was primarily attributable to reduced pricing for our services coupled with reduced drilling and completions activity due to decreases in oil prices late in the quarter due to OPEC supply and ~~pricing pressures in our water transfer business.~~the COVID-19 pandemic.

Water Infrastructure. Revenue ~~decreased~~increased by ~~$1.9~~$4.1 million, or ~~2.9%~~7.7%, to ~~$64.0~~$57.8 million for the Current Quarter compared to $65.9 million for the Prior Quarter, primarily due to reduced water sourcing revenues from our non-Pipeline related water sales in the Bakken, partially offset by increased revenues in the Permian Basin, particularly in our northern Delaware Basin operations.

~~Oilfield Chemicals~~~~. Revenue increased $3.9 million, or 6.2%, to $67.9 million for the Current Quarter compared to $64.0~~$53.6 million for the Prior Quarter, primarily due to increased ~~friction reducer sales.~~water sales in the Permian and the initiation of our Northern Delaware pipeline system in New Mexico, partially offset by declines in water sourcing volumes in the MidCon.

~~Other.~~Oilfield Chemicals ~~Other revenue decreased $33.3~~. Revenue increased $4.2 million, or ~~99.1%~~6.3%, to ~~$0.3~~$71.0 million for the Current Quarter compared to ~~$33.6~~$66.8 million for the Prior Quarter, due to the incremental revenue from the WCS acquisition, partially offset by lower completions revenue.

Other. Other revenue was zero for the Current Quarter compared to $21.6 million in the Prior Quarter as our Affirm subsidiary, sand hauling operations and Canadian operations were divested and wound down during ~~the Current Period.~~2019.

Costs of Revenue

Costs of revenue decreased ~~$49.6~~$53.7 million, or ~~14.7%~~16.9%, to ~~$288.0~~$263.0 million for the Current Quarter compared to ~~$337.6~~$316.6 million for the Prior Quarter. The decrease was primarily due to ~~$27.4~~a $34.0 million decline in Water Services costs and $21.0 million lower combined costs from our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during ~~the Current Period.~~2019. Also contributing to the decline was a ~~$23.9 million decrease in Water Services costs and a $3.6~~$5.3 million decrease in depreciation costs, partially offset by a ~~$4.4~~$6.4 million increase in Water Infrastructure costs and a ~~$0.9~~$0.3 million increase in Oilfield Chemicals costs as further discussed below.

Water Services. Cost of revenue decreased ~~$23.9~~$34.1 million, or ~~13.5%,~~20.8% to ~~$153.7~~$129.1 million for the Current Quarter compared to ~~$177.6~~$163.1 million for the Prior Quarter. Cost of revenue decreased due to reduced customer drilling and completions activity levels in the Current ~~Quarter and costs~~Quarter. Costs as a percent of revenue increased from ~~76.1%~~73.9% to ~~78.1%~~86.4% due to ~~pricing pressures~~reductions in revenue generating activity we could not fully offset with cost ~~reductions.~~reductions as well as yard closure costs resulting from current market conditions.

Water Infrastructure. Cost of revenue increased ~~$4.4~~$6.4 million, or ~~10.5%~~15.4%, to ~~$46.7~~$47.8 million for the Current Quarter compared to ~~$42.3~~$41.4 million for the Prior Quarter. Cost of revenue as a percent of revenue increased from ~~64.2%~~77.3% to ~~73.1%~~82.8% primarily due to decreased pricing on non-pipeline water sources as well as the acceleration of certain ~~pricing pressures in~~prepaid expenses relating to water rights secured for a customer, due to the ~~Bakken from non-Pipeline related water sales and logistics that we could not fully offset during the period.~~bankruptcy of such customer.

Oilfield Chemicals. Costs of revenue increased ~~$0.9~~$0.3 million, or ~~1.6%~~0.6%, to ~~$57.4~~$59.9 million for the Current Quarter compared to ~~$56.5~~$59.5 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from ~~88.3%~~89.1% to ~~84.4%~~84.3% due primarily to ~~freight cost savings from our Midland, Texas plant~~increased sales of higher-margin friction reducer products as well as ~~increased sales of higher margin friction reducer products.~~incremental gross profits resulting from the WCS acquisition.

Other. Other costs decreased ~~$27.4 million, or 93.6%,~~ to ~~$1.9~~less than $0.1 million for the Current Quarter compared to ~~$29.3~~$21.1 million in the Prior Quarter, primarily due to the divestitures discussed above.

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Depreciation and Amortization. Depreciation and amortization expense decreased ~~$3.6~~$5.3 million, or ~~11.3%~~16.9%, to ~~$28.3~~$26.2 million for the Current Quarter compared to ~~$31.9~~$31.5 million for the Prior Quarter, primarily due to a $4.1 million decrease in our Water Services segment and a $1.7 million decrease related to the divestitures discussed above.

Gross Profit

Gross profit decreased by ~~$18.4~~$30.7 million, or ~~31.0%~~66.7%, to a gross profit of ~~$41.0~~$15.3 million for the Current Quarter compared to a gross profit of ~~$59.4~~$46.0 million for the Prior Quarter primarily due to a ~~$12.8~~$37.1 million decrease in Water Services gross profit stemming from lower revenue, ~~$5.9~~$2.2 million decrease to Water Infrastructure gross profit due to decreased pricing and certain non-recurring costs and $0.6 million lower gross profit from ~~the combination of~~ our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during ~~the Current Period, and a $6.3 million decrease to Water Infrastructure gross profit due to lower revenue in the Bakken.~~2019. This was partially offset by a ~~$3.1~~$3.8 million increase in Oilfield Chemicals gross profit and ~~$3.6~~$5.3 million decrease in depreciation expense. Gross margin as a percent of revenue was ~~12.5%~~5.5% and ~~15.0%~~12.7% in the Current Quarter and Prior Quarter, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~increased $2.2~~decreased $7.1 million, or ~~8.6%~~21.9%, to ~~$27.3~~$25.3 million for the Current Quarter compared to ~~$25.1~~$32.4 million for the Prior Quarter. This was ~~primarily due~~comprised of $3.6 million lower equity-based compensation costs, $2.3 million lower incentive compensation costs, $1.3 million lower professional fees, and $1.6 million of other expense reductions from cost cutting measures in response to lower oil prices partially offset by a ~~$1.4~~$1.7 million increase in ~~labor~~bad debt expense.

Impairment

Goodwill and trademark impairment costs were $276.0 million and ~~a $1.0~~$4.4 million ~~increase in equity incentive plan expenses as the incentive plan initiated in 2018 provides for a three year vesting period and there were more grants outstanding~~ in the Current Quarter ~~than~~and Prior Quarter, respectively. During the Current Quarter, all of our goodwill was impaired due to the dramatic decline in oil prices and the uncertainty associated with the future recovery. We also recorded a $9.1 million partial impairment of our Rockwater trademark. During the Prior Quarter, ~~partially offset by lower insurance costs.~~we incurred $4.4 million of goodwill impairment in connection with divesting Affirm.

Impairment of property and equipment costs were $3.2 million and $0.5 million in the Current Quarter and Prior Quarter, respectively.

Lease Abandonment Costs

Lease abandonment costs were ~~$0.2~~$1.0 million and ~~$1.0~~$1.1 million in the Current Quarter and Prior Quarter, respectively. During the Current Quarter, lease abandonment costs primarily related to ~~the wind-down of impaired right-of-use assets from previously~~newly abandoned properties ~~partially offset by sublease income.~~associated with realignment and combining activity on fewer leased properties. The Prior Quarter costs were primarily due to ~~excess facility capacity stemming from~~early lease terminations in connection with the ~~Rockwater Merger.~~wind-down and divestiture of Canadian operations.

Net Interest Expense

Net interest expense decreased by ~~$0.9~~$0.8 million, or ~~66.9%~~69.7%, to ~~$0.4~~$0.3 million during the Current Quarter compared to ~~$1.3~~$1.1 million in the Prior Quarter primarily due to lower average borrowings resulting from the repayment of all remaining borrowings on our credit facility since the Prior Quarter.

Net (Loss) Income

Net (loss) income decreased by ~~$24.1~~$292.6 million, ~~or 77.1%,~~ to a net ~~income~~loss of ~~$7.2~~$291.2 million for the Current Quarter compared to net income of ~~$31.3~~$1.4 million for the Prior Quarter primarily due to goodwill, trademark and fixed asset impairments and lower Water Services ~~and Water Infrastructure revenue, higher relative Water Infrastructure costs, and lower~~ gross ~~profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, as discussed above.~~profit. This was partially offset by ~~higher Oilfield Chemicals gross profit,~~ lower ~~lease abandonment~~selling, general and administrative costs, lower depreciation costs, lower losses on sales of property and equipment and lower interest expense.

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~~Current Period Compared to the Prior Period~~

Nine months ended September 30,

Change


2019


2018

Dollars

Percentage

(in thousands)

Revenue









Water services

$
619,388

$
685,687

$
(66,299)

(9.7)
%
Water infrastructure

169,279

175,662

(6,383)

(3.6)
%
Oilfield chemicals

197,762

192,422

5,340

2.8
%
Other

29,072

112,841

(83,769)

(74.2)
%
Total revenue

1,015,501

1,166,612

(151,111)

(13.0)
%

Costs of revenue





Water services

472,013

518,844

(46,831)

(9.0)
%
Water infrastructure

126,634

120,304

6,330

5.3
%
Oilfield chemicals

170,935

172,057

(1,122)

(0.7)
%
Other

30,365

98,153

(67,788)

(69.1)
%
Depreciation and amortization

��
88,624

93,180

(4,556)

(4.9)
%
Total costs of revenue

888,571

1,002,538

(113,967)

(11.4)
%
Gross profit

126,930

164,074

(37,144)

(22.6)
%

Operating expenses





Selling, general and administrative

86,953

77,662

9,291

12.0
%
Depreciation and amortization

2,858

2,332

526

22.6
%
Impairment of goodwill

4,396

—

4,396

NM

Impairment of property and equipment

942

2,282

(1,340)

NM

Impairment of cost-method investment

—

2,000

(2,000)

NM

Lease abandonment costs

1,494

4,142

(2,648)

(63.9)
%
Total operating expenses

96,643

88,418

8,225

9.3
%
Income from operations

30,287

75,656

(45,369)

(60.0)
%

Other income (expense)





(Losses) gains on sales of property and equipment, net

(8,233)

2,960

(11,193)

NM

Interest expense, net

(2,370)

(3,815)

1,445

(37.9)
%
Foreign currency gain (loss), net

268

(492)

760

NM

Other (expense) income, net

(62)

139

(201)

NM

Income before income tax expense

19,890

74,448

(54,558)

(73.3)
%
Income tax expense

(3,250)

(2,027)

(1,223)

NM

Net income

$
16,640

$
72,421

$
(55,781)

(77.0)
%

~~Table of Contents~~

~~Revenue~~

Our revenue decreased $151.1 million, or 13.0%, to $1.0 billion for the Current Period compared to $1.2 billion for the Prior Period. The decrease was primarily due to $83.8 million lower revenue from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were fully divested and wound down during the Current Period. Also impacting the change was $66.3 million lower Water Services revenue and $6.4 million lower Water Infrastructure revenue, partially offset by $5.3 million higher Oilfield Chemicals revenue discussed below. For the Current Period, our Water Services, Water Infrastructure, Oilfield Chemicals and Other segments constituted 61.0%, 16.6%, 19.5% and 2.9% of our total revenue, respectively, compared to 58.8%, 15.0%~~, 16.5%, and 9.7%, respectively, for the Prior Period. The 2018 adoption of Accounting Standards Update 2014-09,~~ ~~Revenue from Contracts with Customers,~~ ~~did not have a material impact on revenue recognition. The revenue variances by operating segment were as follows:~~

~~Water Services~~. Revenue decreased $66.3 million, or 9.7%, to $619.4 million for the Current Period compared to $685.7 million for the Prior Period. The decrease was primarily due to lower water transfer and containment revenue primarily attributable to reduced drilling and completions activity and pricing pressure, partially offset by increases in revenues from flowback and well testing, water treatment, equipment rentals and water network automation and technology services.

~~Water Infrastructure.~~ Revenue decreased by $6.4 million, or 3.6%, to $169.3 million for the Current Period compared to $175.7 million for the Prior Period, primarily due to reduced activity on our Bakken pipeline system during the first half of 2019.

~~Oilfield Chemicals~~. Revenue increased $5.3 million, or 2.8%, to $197.8 million for the Current Period compared to $192.4 million for the Prior Period, primarily due to increased sales of our friction reducer products supported by the increased manufacturing capacity from our Midland, Texas plant.

~~Other.~~ Other revenue decreased $83.8 million, or 74.2%, to $29.1 million for the Current Period compared to $112.8 million in the Prior Period as our Affirm subsidiary, sand hauling operations and Canadian operations were divested and wound down.

~~Costs of Revenue~~

Costs of revenue decreased $114.0 million, or 11.4%, to $888.6 million for the Current Period compared to $1.0 billion for the Prior Period. The decrease was primarily due to $67.8 million lower costs from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease was $46.8 million lower Water Services costs, primarily due to aligning our cost structure to lower revenue, further discussed below.

~~Water Services~~. Cost of revenue decreased $46.8 million, or 9.0%, to $472.0 million for the Current Period compared to $518.8 million for the Prior Period primarily driven by reduced drilling and completions activity levels. Cost of revenue as a percent of revenue was relatively flat, moving from 75.7% to 76.2%.

~~Water Infrastructure~~. Cost of revenue increased $6.3 million, or 5.3%, to $126.6 million for the Current Period compared to $120.3 million for the Prior Period. Cost of revenue as a percent of revenue increased from 68.5% to 74.8% primarily due to a decline in contribution from our high-margin Bakken pipeline system.

~~Oilfield Chemicals~~. Costs of revenue decreased $1.1 million, or 0.7%, to $170.9 million for the Current Period compared to $172.1 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 89.4% to 86.4% due primarily to freight cost-savings from our Midland, Texas plant as well as improved inventory management and increased sales of higher-margin friction reducer products.

~~Other.~~ ~~Other costs decreased $67.8 million, or 69.1%, to $30.4 million for the Current Period compared to $98.2 million in the Prior Period, primarily due to the divestitures discussed above.~~

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~~Depreciation and Amortization~~. Depreciation and amortization expense decreased $4.6 million, or 4.9%, to $88.6 million for the Current Period compared to $93.2 million for the Prior Period, primarily due to the divestitures discussed above.

~~Gross Profit~~

~~Gross profit decreased by $37.1 million, or 22.6%, to a gross profit of $126.9 million for the Current Period compared to a gross profit of $164.1~~ million for the Prior Period, primarily due to $16.0 million lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease was $19.5 million lower gross profit from Water Services and $12.7 million lower gross profit from Water Infrastructure discussed above. These were partially offset by $6.5 million higher gross profit from Oilfield Chemicals and $4.6 million lower depreciation costs discussed above. Gross margin as a percent of revenue was 12.5% and 14.1% in the Current Period and Prior Period, respectively.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses increased $9.3 million, or 12.0%, to $87.0 million for the Current Period compared to $77.7 million for the Prior Period. The increase was primarily driven by increased costs associated with our recent divestitures, including severance expenses, professional fees and other transaction costs, as well as increased equity incentive plan expenses as the incentive plan initiated in 2018 provides for a three year vesting period and there were more grants outstanding in the Current Period than the Prior Period.

~~Lease Abandonment Costs~~

Lease abandonment costs were $1.5 million and $4.1 million in the Current Period and Prior Period, respectively. The Current Period costs were primarily due to Canadian lease terminations in connection with divesting and winding down the Canadian business. The Prior Period costs were primarily due to excess facility capacity stemming from the Rockwater Merger.

~~Net Interest Expense~~

Net interest expense decreased by $1.4 million, or 37.9%, to $2.4 million during the Current Period compared to $3.8 million in the Prior Period, primarily due to lower average borrowings resulting from the repayment of all remaining borrowings on our credit facility since the Prior Period.

~~Net Income~~

Net income decreased by $55.8 million, or 77.0%, to net income of $16.6 million for the Current Period compared to net income of $72.4 million for the Prior Period, primarily due to $37.1 million lower gross profit stemming from divestitures and lower revenue discussed above, $11.2 million higher net losses on sales of property and equipment and impairments, largely related to the recent divestitures, and $9.3 million higher selling, general and administrative costs discussed above, partially offset by $2.6 million lower lease abandonment costs discussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs. The adjustments to EBITDA are generally consistent with such adjustments described in our Credit Facility. See “—Note Regarding Non-GAAP Financial Measures—EBITDA and Adjusted

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EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Our board of directors, management and many investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

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Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. One should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Item 6. Selected Financial Data” in our ~~2018~~2019 Form 10-K.

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net (loss) income, which is the most directly comparable GAAP measure for the periods presented:


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2019		2018		2019		2018		2020		2019
	(in thousands)								(in thousands)
Net income	$	7,172	$	31,267	$	16,640	$	72,421
Interest expense		438		1,322		2,370		3,815
Income tax expense		2,501		1,415		3,250		2,027
Net (loss) income									$	(291,220)	$	1,400
Interest expense, net										331		1,093
Income tax (benefit) expense										(164)		178
Depreciation and amortization		29,215		32,837		91,482		95,512		26,867		32,518
EBITDA		39,326		66,841		113,742		173,775		(264,186)		35,189
Impairment of goodwill		—		—		4,396		—
Impairment of property and equipment		49		—		942		2,282
Impairment of cost-method investment		—		—		—		2,000
Lease abandonment costs		238		1,045		1,494		4,142
Impairment of goodwill and trademark⁽¹⁾										276,016		4,396
Non-recurring severance expenses⁽¹⁾		—		495		1,680		495		3,502		1,680
Impairment of property and equipment⁽¹⁾										3,184		519
Yard closure costs related to consolidating operations⁽¹⁾										1,950		—
Non-cash loss on sale of assets or subsidiaries⁽³⁾										1,627		5,906
Lease abandonment costs⁽¹⁾										953		1,073
Non-cash compensation expenses										574		4,179
Foreign currency loss (gain), net										46		(260)
Non-recurring transaction costs⁽²⁾		2,025		2,645		3,099		7,820		12		662
Non-cash compensation expenses		3,566		2,565		11,874		8,030
Non-cash loss on sale of assets or subsidiaries⁽³⁾		3,648		315		16,868		2,079
Foreign currency loss (gain)		59		(248)		(268)		492
Inventory write-down		—		36		75		430		—		75
Adjusted EBITDA	$	48,911	$	73,694	$	153,902	$	201,545	$	23,678	$	53,419

(1)

For the Current ~~Period,~~Quarter, these costs were due to ~~severance payments~~the significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil. For the Prior Quarter, these costs were due to the dissolution of our ~~former Wellsite Services segment. For the Prior Quarter and Prior Period, these costs were associated with severance incurred in connection with the termination of certain Canadian employees.~~divested service lines.

(2)

For the ~~Current~~Prior Quarter, ~~and Current Period,~~ these costs primarily related to the ~~divestiture and wind down~~rebranding of ~~our Affirm subsidiary and the sand hauling and Canadian operations, as well as rebranding Pro Well and~~ our Fluids Hauling business. ~~For the Prior Quarter and Prior Period, these costs were primarily related to rebranding as a result of the Rockwater Merger.~~

(3)

~~Losses of $3.6 million for~~For the ~~Current~~Prior Quarter, ~~were~~these costs primarily ~~due~~related to losses on divestitures and related sales of property and equipment. Losses of $16.9 million losses in the Current Period were primarily due to losses from divestitures including sales of property and equipment. In the Prior Quarter and Prior Period, the losses were incurredequipment in connection with ~~sales~~the wind down of ~~property and equipment.~~former service lines.

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EBITDA was ~~$39.3~~($264.2) million for the Current Quarter compared to ~~$66.8~~$35.2 million for the Prior Quarter. The ~~$27.5~~$299.4 million decrease in EBITDA was primarily driven by a $271.6 million increase in goodwill and trademark impairment costs, a decrease of ~~$12.8~~$37.1 million in Water Services gross profit offset by a $7.1 million decrease ~~of $6.3 million~~ in ~~Water Infrastructure gross profit~~selling, general and administrative costs and a $4.1 million decrease in loss on sale of ~~$5.9 million in gross profit from the operations being divested~~property and ~~wound down, partially offset by an increase of $3.1 million in Oilfield Chemicals gross profit.~~equipment. Adjusted EBITDA was ~~$48.9~~$23.7 million for the Current Quarter compared to ~~$73.7~~$53.4 million for the Prior Quarter. The ~~$24.8~~$29.7 million decrease is primarily attributable to the items discussed above.

~~EBITDA was $113.7 million for the Current Period compared to $173.8 million for the Prior Period. The $60.0 million decrease in EBITDA was primarily driven by a decrease~~49

Table of $19.5 million in Water Services gross profit, a decrease of $16.0 million in gross profit from the operations being divested and wound down, a decrease of $12.7 million in Water Infrastructure gross profit, an increase in selling, general and administrative costs of $9.2 million and $11.2 higher losses on sales of property and equipment including divestitures, partially offset by an increase of $6.5 million in Oilfield Chemicals gross profit. Adjusted EBITDA was $153.9 million for the Current Period compared to $201.5 million for the Prior Period. The $47.6 million decrease in Adjusted EBITDA was primarily due to the $60.0 million decrease in EBITDA discussed above partially offset by a $14.8 million increase in non-cash losses on sales of assets or subsidiaries.Contents

Liquidity and Capital Resources

Overview

The impact of the COVID-19 pandemic and OPEC+ disputes on oil prices and production levels, as well as the uncertainty about the timing of a future recovery is expected to have a negative impact on financial results in the coming quarters. We are taking actions to manage costs and cash, including but not limited to significantly reducing headcount, cutting salaries, closing operational yards, reducing forecasted capital expenditures, streamlining operational and back office functions, selling excess equipment, deferring payroll tax payments for the rest of 2020 in accordance with the CARES Act and deferring applicable lease payments.

Our primary sources of liquidity are cash on hand, borrowing capacity under our current Credit Agreement and cash flows from operations. Our primary uses of capital have been to maintain our asset base, implement technological advancements, make capital expenditures to support organic growth, fund acquisitions, and when appropriate, ~~return capital to shareholders.~~repurchase shares of Class A common stock in the open market. Depending on market conditions and other factors, we may also issue debt and equity securities if needed.

As of ~~September 30, 2019,~~March 31, 2020, we had no outstanding bank debt and a positive net cash position. We prioritize sustained positive free cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers.

We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash generated from operations and borrowings under our Credit Agreement. For a discussion of the Credit Agreement, see “—Credit Agreement” below. Although we cannot provide any assurance, we believe that our current cash balance, operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for at least the next twelve months.

As of ~~September 30, 2019,~~March 31, 2020, cash and cash equivalents totaled ~~$43.0~~$114.1 million and we had approximately ~~$208.5~~$180.8 million of available borrowing capacity under our Credit Agreement. As of ~~September 30, 2019,~~March 31, 2020, the borrowing base under the Credit Agreement was ~~$228.4~~$200.6 million, we had no outstanding borrowings and the outstanding letters of credit totaled ~~$19.9~~$19.8 million. As of ~~November~~May 4, ~~2019,~~2020, we had no outstanding borrowings, the borrowing base under the Credit Agreement was ~~$236.7~~$192.2 million, the outstanding letters of credit totaled $~~19.9~~15.6 million, and the available borrowing capacity under the Credit Agreement was ~~$216.8~~$176.6 million.

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Cash Flows

The following table summarizes our cash flows for the periods indicated:


	Nine months ended September 30,				Change				Three months ended March 31,				Change
	2019		2018		Dollars		Percentage		2020		2019		Dollars		Percentage
	(in thousands)								(in thousands)
Net cash provided by operating activities	$	142,216	$	124,630	$	17,586	14.1	%	$	46,711	$	36,587	$	10,124	27.7	%
Net cash used in investing activities		(57,198)		(102,090)		44,892	(44.0)	%		(5,485)		(16,653)		11,168	(67.1)	%
Net cash used in financing activities		(59,383)		(12,169)		(47,214)	NM			(6,291)		(21,595)		15,304	(70.9)	%
Subtotal		25,635		10,371						34,935		(1,661)
Effect of exchange rate changes on cash and cash equivalents		127		(95)		222	NM			(61)		107		(168)	NM
Net increase in cash and cash equivalents	$	25,762	$	10,276
Net increase (decrease) in cash and cash equivalents									$	34,874	$	(1,554)

Analysis of Cash Flow Changes between the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

Operating Activities. Net cash provided by operating activities was ~~$142.2~~$46.7 million for the Current ~~Period,~~Quarter, compared to ~~$124.6~~$36.6 million for the Prior ~~Period.~~Quarter. The ~~$17.6~~$10.1 million increase in net cash provided by operating activities

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related primarily to improved working capital management, including reductions in accounts receivable and other current assets.

Investing Activities. Net cash used in investing activities was ~~$57.2~~$5.5 million for the Current ~~Period,~~Quarter, compared to ~~$102.1~~$16.7 million for the Prior ~~Period.~~Quarter. The ~~$44.9~~$11.2 million decrease in net cash used in investing activities was primarily due to a ~~$29.5~~$25.2 million reduction in purchases of property and equipment and a $2.6 million increase in proceeds received from sales of property and equipment partially offset by a $15.9 million decrease of proceeds primarily related to the divestiture and wind down of our Affirm subsidiary and the sand hauling and Canadian operations as well as a ~~$23.1~~$0.7 million ~~reduction in purchases of property and equipment, partially offset by an increase of $7.7 million due to acquisitions, net of cash acquired and~~ working capital ~~receipts.~~settlement in the Prior Quarter.

Financing Activities. Net cash used in financing activities was ~~$59.4~~$6.3 million for the Current ~~Period~~Quarter compared to ~~$12.2~~$21.6 million for the Prior ~~Period.~~Quarter. The ~~increase~~decrease in cash used in financing activities was primarily due to ~~a $35~~$20.0 million ~~increase in~~of net debt repayments ~~as well as~~in the Prior Quarter compared to zero in the Current Quarter, partially offset by a ~~$12.5~~$5.4 million increase in repurchases of shares of Class A Common Stock during the Current ~~Period.~~Quarter.

Credit Agreement

On November 1, 2017, in connection with the closing of the Rockwater ~~Merger~~merger (the “Closing”), SES Holdings and Select LLC entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower, certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, we have the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the Closing.

The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.

The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85.0% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75.0% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35.0% of the borrowing base, plus (iii) the lesser of (A) the product of 70.0% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85.0% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30.0% of the borrowing base, minus (iv) the aggregate

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amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.

Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1.0% and (iii) the Administrative Agent’s prime rate (the “Base Rate”), in each case plus an applicable margin, and interest shall be payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.

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In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements.

The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.

We were in compliance with all debt covenants as of ~~September 30, 2019.~~March 31, 2020.

Contractual Obligations

Our contractual obligations include, among other things, our Credit Agreement and operating leases. Refer to Note 5—Leases in our 2019 Form 10-K filed on February 25, 2020 for operating lease obligations as of December 31, 2019 and Note 9—Debt in Part I, Item 1 of this Quarterly Report for an update to our contractual obligations as of ~~September 30, 2019.~~March 31, 2020.

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Critical Accounting Policies and Estimates

~~With the exception of the adoption of the new lease standard, there~~There were no ~~other~~ changes to our critical accounting policies from those disclosed in our ~~2018~~2019 Form 10-K filed on ~~March 1, 2019.~~February 25, 2020.

Recent Accounting Pronouncements

For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Note 2—Significant Accounting Policies in Part I, Item 1 of this Quarterly Report.

Off-Balance-Sheet Arrangements

As of ~~September 30, 2019,~~March 31, 2020, we had no material off-balance-sheet arrangements. As such, we are not exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The demand, pricing and terms for oilfield services provided by us are largely dependent upon the level of activity for the U.S. oil and gas industry. Industry conditions are influenced by numerous factors over which we have no control, including, but not limited to: global epidemics or pandemics, including COVID-19; the supply of and demand for oil and gas; current prices as well as expectations about future prices of oil and gas; the cost of exploring for, developing, producing and delivering oil and gas; the expected decline in rates of current production; the discovery rates of new oil and gas reserves; available storage capacity and pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of oil and gas producers to raise equity capital and debt financing; and merger and divestiture activity among oil and gas producers.

The level of activity in the U.S. oil and gas industry is historically volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. ~~Any prolonged substantial reduction in~~Sustained low oil and gas prices have affected, and would likely continue to affect, oil and gas drilling and completion activity and therefore affect demand for our services. ~~A material decline in~~Sustained low oil and gas prices or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash ~~flows.~~flows, and we have begun to experience the significant negative effects of the severe disruption in the oil and gas industry from the COVID-19 pandemic and other factors.

Interest Rate Risk

As of ~~September 30, 2019,~~March 31, 2020, we had no outstanding borrowings under our Credit Agreement. As of ~~November~~May 4, ~~2019,~~2020, we had no outstanding borrowings and approximately ~~$216.8~~$176.6 million of available borrowing capacity under our Credit Agreement. Interest is calculated under the terms of our Credit Agreement based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.

Foreign Currency Exchange Risk

We ~~are~~have been exposed to fluctuations between the U.S. dollar and the Canadian dollar with regard to the activities of our former Canadian subsidiary, which had designated the Canadian dollar as its functional currency. With the recent divestitures of our Canadian operations, we anticipate minimal future exposure to foreign currency exchange risk.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~September 30, 2019.~~

~~Status of Previously Identified Material Weaknesses~~

Our management concluded that our internal control over financial reporting and our disclosure controls and procedures were ineffective as of December 31, 2018 as a result of control deficiencies related to the purchase price accounting related to the Rockwater Merger and the reconciliation of fixed assets physical counts with the general ledger that constituted material weaknesses. Specifically, the Company did not design and maintain effective controls with respect to the identification and substantiation of fixed assets purchased in the Rockwater Merger and to the reconciliation of our fixed assets physical counts with the general ledger.

~~In response to the material weaknesses described above, during the quarter ended~~ March 31, 2019, we implemented new internal controls which we believe will remediate the previously identified material weaknesses. We are currently testing the operating effectiveness of these new internal controls.2020.

Changes in Internal Control over Financial Reporting

~~Other than noted above, there~~There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended ~~September 30, 2019~~March 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any legal proceedings that, if determined adversely against us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows. We are, however, named defendants in certain lawsuits, investigations and claims arising in the ordinary course of conducting our business, including certain environmental claims and employee-related matters, and we expect that we will be named defendants in similar lawsuits, investigations and claims in the future. While the outcome of these lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. We have not assumed any liabilities arising out of these existing lawsuits, investigations and claims.

In December 2016, Rockwater was notified by the U.S. Attorney’s Office for the Middle District of Pennsylvania that it is being investigated for altering emissions control systems on several of its vehicles. We are cooperating with the investigation and have determined that mechanics servicing our vehicle fleet may have installed software on certain vehicles and modified a few other vehicles to deactivate or bypass the factory-installed emissions control systems. At present, it appears that 31 vehicles in Pennsylvania were modified in this manner, apparently to improve vehicle performance and reliability. As a result of a company-wide investigation undertaken voluntarily and in cooperation with the U.S. Department of Justice, we have determined that approximately 30 additional company vehicles outside of Pennsylvania may have been altered. As of the date of the initiation of the investigation, we operated approximately 1,400 vehicles in the U.S., and the modified vehicles constituted less than 5% of our fleet at such time. We are unable to predict at this time whether any administrative, civil or criminal charges will be brought against us, although we have learned that we may be the target of a criminal investigation, and it is possible that other individuals ~~or we~~ could become targets. We are cooperating with the U.S. Department of Justice in all aspects of the investigation and have instituted procedures to ensure that our mechanics do not tamper with or bypass any emissions control systems when they are performing vehicle maintenance, and we have also reached an agreement with the U.S. Department of Justice providing for either the restoration or removal from service of those vehicles that were modified. In December 2018, we met with the U.S. Attorney’s Office for the Middle District of Pennsylvania to begin discussions regarding a resolution of this ~~matter.~~matter and these discussions continued in 2019 and are ongoing. Although we are unable to predict the timing or outcome of this investigation, we note that in similar circumstances, the EPA has imposed fines of ~~up to~~approximately $7,200 per altered vehicle and has also required the responsible party to disgorge any financial benefit that it may have derived.

Item 1A. Risk Factors

~~There~~Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K. We may experience additional risks and uncertainties not currently known to us. Furthermore, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect us. Any such risks, in addition to those described below and in our 2019 Form 10-K, may materially and adversely affect our business, financial condition, cash flows and results of operations.

Our business depends on capital spending by the oil and gas industry in the U.S. and reductions in capital spending could have a material adverse effect on our liquidity, results of operations and financial condition. We expect capital spending by our customers to decrease for the remainder of 2020 due to the ~~Risk Factors disclosed~~impacts of COVID-19 on demand for oil and reduced prices resulting from the current oversupply of oil.

Demand for our services is directly affected by current and anticipated oil and natural gas prices and related capital spending by our customers to explore for, develop and produce oil and gas in the ~~2018 Form 10-K.~~U.S.Prices for oil and gas historically have been extremely volatile and are expected to continue to be volatile, particularly in light of the impacts of COVID-19. During the first quarter ended March 31, 2020, the average WTI spot price was $45.34, versus an average price of $54.82 for first quarter ended March 31, 2019. In March 2020, Saudi Arabia and Russia failed to reach a decision to cut production of oil and gas along with OPEC. Subsequently, Saudi Arabia significantly reduced the prices

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at which it sells oil and announced plans to increase production. These events, combined with the continued outbreak of COVID-19, contributed to a sharp drop in prices for oil in the first quarter of 2020. The WTI price closed at $20.51 on March 31, 2020. In April 2020, OPEC (which includes Saudi Arabia), Russia (together with OPEC and other allied producing countries, “OPEC+”) and the United States agreed to curtail hydrocarbon production by approximately 10 million barrels per day, but the impact of these cuts on the market price for oil and natural gas remains uncertain. Oil prices have fallen further in recent weeks in light of widespread reduced demand as a result of COVID-19 as well as oversupply of oil and significant storage constraints.

If oil and gas prices remain at current levels or continue to decline, our customers may reduce their exploration, development and production activities and demand lower rates for our services or delay, modify, or terminate their use of our services. Volatility or weakness in oil prices or natural gas prices (or the perception that oil prices or natural gas prices will decrease) affects the spending patterns of our customers and may result in the drilling or completion of fewer new wells or lower production spending on existing wells. This, in turn, could lead to lower demand for our services and may cause lower rates and lower utilization of our assets. For example several leading international and national oil companies have announced their intention to reduce capital expenditures in 2020, and most of our customers have reduced their capital expenditures budget. Even in an environment of stronger oil and gas prices, reduced completion rates of new oil and gas production in our market areas as a result of decreased capital spending may have a negative long-term impact on our business to the extent the reduced number of wells for us to service more than offsets increasing completion activity and intensity. Any of these conditions or events could adversely affect our operating results. If a recovery does not materialize and our customers fail to increase their capital spending, it could have a material adverse effect on our liquidity, results of operations and financial condition.

Industry conditions are influenced by numerous factors over which we have no control, including:

●

the severity and duration of world health events, including the recent COVID-19 outbreak, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business;

●

domestic and foreign economic conditions and supply of and demand for oil and gas;

●

the level of prices, and expectations regarding future prices, of oil and gas;

●

the level of global oil and gas exploration and production and storage capacity;

●

operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges resulting from limited worksite access, remote work arrangements, performance of contracts and supply chain disruption;

●

recommendations of, or restrictions imposed by, government and health authorities, including travel bans, quarantines, and shelter-in-place orders to address the COVID-19 outbreak;

●

actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;

●

governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and gas reserves;

●

taxation and royalty charges;

●

political and economic conditions in oil and gas producing countries;

●

global weather conditions, pandemics and natural disasters;

●

worldwide political, military and economic conditions;

●

the cost of producing and delivering oil and gas;

●

the discovery rates of new oil and gas reserves;

●

activities by non-governmental organizations to limit certain sources of funding for the energy sector or restrict the exploration, development and production of oil and gas;

●

the ability of oil and gas producers to access capital;

●

technical advances affecting production efficiencies and overall energy consumption; and

●

the potential acceleration of the development of alternative fuels.

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The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as COVID-19, could adversely affect our business, results of operations and financial condition.

The global or national outbreak of an illness or any other communicable disease, or any other public health crisis, such as COVID-19, may cause disruptions to our business and operational plans, which may include (i) shortages of employees, (ii) unavailability of contractors and subcontractors, (iii) interruption of supplies from third parties upon which we rely, (iv) recommendations of, or restrictions imposed by, government and health authorities, including quarantines, to address the COVID-19 outbreak and (v) restrictions that we and our contractors and subcontractors impose, including facility shutdowns or access restrictions, to ensure the safety of employees and (vi) reductions, delays or cancellations of planned operations by our customers. Additionally, these disruptions could negatively impact our financial results. For example, in response to COVID-19, we have temporarily closed our corporate offices and restricted all non-critical personnel to work remotely, reduced headcount and employee salaries both temporarily and permanently, closed certain yard locations, reduced third party expenses, streamlined operations, reduced capital expenditures and recorded impairment expenses.

Further, the effects of COVID-19 and concerns regarding its global spread have negatively impacted the global economy, reduced global oil demand, disrupted global supply chains and created significant volatility and disruption of financial and commodities markets, which could lead to our customers curtailing existing production due to lack of downstream demand or storage capacity as well as reducing or eliminating the number of wells completed in the near to medium term.

The extent of the impact of COVID-19 on our operational and financial performance, including our ability to execute our business strategies and initiatives, will depend on future developments, including the duration and spread of COVID-19 and related restrictions on travel and transports, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption, as well as significantly decreased demand for oil and gas, could materially affect our business, results of operations, access to sources of liquidity and financial condition, and we have begun to experience the negative impacts of such disruption.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

During the Current Quarter, we repurchased the shares of Class A Common Stock as shown in the table below, which included ~~1,443,409~~849,711 shares purchased in the open market pursuant to a repurchase plan, and ~~1,239~~129,680 shares purchased to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees:


	Total Number of	Weighted Average Price		Total Number of	Weighted Average Price
Period	Shares Purchased	Paid Per Share		Shares Purchased	Paid Per Share
July 1, 2019 to July 31, 2019	763	$	11.79
August 1, 2019 to August 31, 2019	1,171,785	$	8.24
September 1, 2019 to September 30, 2019	272,100	$	8.16
January 1, 2020 to January 31, 2020				486,366	$	7.64
February 1, 2020 to February 29, 2020				351,710	$	7.06
March 1, 2020 to March 31, 2020				141,315	$	3.10
Total	1,444,648	$	8.23	979,391	$	6.78

~~Table of Contents~~

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information.

None.

Item 6. Exhibits

The following exhibits are filed, furnished or incorporated by reference, as applicable, as part of this report.

6758

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HIDDEN_ROW
Exhibit Number		Description

3.1		Fourth Amended and Restated Certificate of Incorporation of Select Energy Services, Inc. dated as of May 10, 2019 (incorporated by reference herein to Exhibit 3.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed May 15, 2019).

3.2		Second Amended and Restated Bylaws of Select Energy Services, Inc. dated as of May 10, 2019 (incorporated by reference herein to Exhibit 3.2 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed May 15, 2019).

10.1		Global Amendment to Performance Share Unit Grant Notices and Agreements (incorporated by reference herein to Exhibit 10.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed January 24, 2020).

*10.2		Form of Performance Share Unit Grant Notice and Performance Share Unit Agreement – Adjusted Free Cash Flow – under the Select Energy Services, Inc. 2016 Equity Incentive Plan.

*10.3		Form of Performance Share Unit Grant Notice and Performance Share Unit Agreement – Return on Assets – under the Select Energy Services, Inc. 2016 Equity Incentive Plan.

*31.1		Certification of Chief Executive Officer required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.

*31.2		Certification of Chief Financial Officer required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.

**32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*101		Interactive Data Files

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith

**Furnished herewith

6859

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SELECT ENERGY SERVICES, INC.

Date: ~~November 7, 2019~~May 6, 2020	By:	/s/ Holli Ladhani
		Holli Ladhani
		President and Chief Executive Officer


Date: ~~November 7, 2019~~May 6, 2020	By:	/s/ Nick Swyka
		Nick Swyka
		Senior Vice President and Chief Financial Officer

6960


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4639

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6453

Item 4.	Controls and Procedures	6554

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	6655

Item 1A.	Risk Factors	6655

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6657

Item 3.	Defaults upon Senior Securities	6757

Item 4.	Mine Safety Disclosures	6757

Item 5.	Other Information	6758

Item 6.	Exhibits	6758


	Nine months ended September 30, 2019
	(in thousands)
Balance at beginning of Current Period	$	1,898
Accretion expense, included in depreciation and amortization expense		86
Change in estimate		—
Divestitures		(210)
Balance at end of Current Period	$	1,774


Preliminary purchase price allocation	Amount
Consideration transferred	(in thousands)
Cash paid	$	10,400
Total consideration transferred		10,400
Less: identifiable assets acquired and liabilities assumed
Inventory		6,287
Property and equipment		3,713
Intangible assets		500
Current liabilities		(100)
Total identifiable net assets acquired		10,400
Fair value allocated to net assets acquired	$	10,400


Date of Divestiture	Entity	Initial Net Proceeds		Working Capital True Up		Adjusted Net Proceeds		Working Capital Status at September 30, 2019	(Gain)/loss for the nine months ended September 30, 2019
		(in thousands)
February 26, 2019	Affirm	$	10,982	$	92	$	To be determined	Not Final	$	(92)
June 28, 2019	Affirm		6,968		—		6,968	Final		(1,646)
March 19, 2019	Canada		4,975		(189)		4,786	Final		4,900
April 1, 2019	Canada		2,242		—		2,242	Final		101


Balance Sheet	Classification	As of September 30, 2019
		(in thousands)
Assets
ROU Assets⁽¹⁾	Long-term right-of-use assets	$	73,138
Finance lease assets⁽²⁾	Property and equipment		386
Liabilities
Operating lease liabilities ― ST	Current operating lease liabilities	$	19,488
Operating lease liabilities ― LT⁽³⁾	Long-term operating lease liabilities		72,672
Finance lease liabilities ― ST	Current portion of finance lease obligations		248
Finance lease liabilities ― LT	Other long term liabilities		108


		Three Months Ended		Nine months ended
Statements of Operations and Cash Flows	Classification	September 30, 2019		September 30, 2019
		(in thousands)
Operating lease cost:
Operating lease cost ― fixed	Cost of revenue and Selling, general and administrative	$	6,242	$	21,392
Lease abandonment costs	Lease abandonment costs		238		1,494

Short-term agreements:	Cost of revenue	$	25,611	$	73,423

Finance lease cost:
Amortization of leased assets	Depreciation and amortization	$	54	$	791
Interest on lease liabilities	Interest expense, net		14		21

Lessor income:
Sublease income	Cost of sales and lease abandonment costs	$	393	$	1,155
Lessor income	Cost of sales		184		364

Statement of cash flows
Cash paid for operating leases	Operating cash flows	$	7,689	$	23,646
Cash paid for finance leases lease interest	Operating cash flows		14		21
Cash paid for finance leases	Financing cash flows		194		743


Period	Operating Leases^{(1) (2)}		Finance Leases		Total
	(in thousands)
October 2019 through December 2019	$	7,197	$	144	$	7,341
2020		22,079		135		22,214
2021		15,371		89		15,460
2022		12,039		—		12,039
2023		10,141		—		10,141
Thereafter		48,287		—		48,287
Total minimum lease payments	$	115,114	$	368	$	115,482

Less reconciling items to reconcile undiscounted cash flows to lease liabilities:
Short-term leases excluded from balance sheet		694		—		694
Imputed interest		22,260		12		22,272
Total reconciling items		22,954		12		22,966
Total liabilities per balance sheet		92,160		356		92,516


		Net Book Value of Property and
Type of sale event	Business	Equipment Sold or Divested
		(in thousands)
Business divestitures	Affirm subsidiary	$	11,275
Property and equipment sales	Affirm subsidiary		1,339
Business divestitures	Canadian operations		7,372
Property and equipment sales	Canadian operations		388
Property and equipment sales	Sand hauling operations		3,030
Total property and equipment sold and divested		$	23,404


	Oilfield		Water		Wellsite		Water		Water
	Chemicals		Solutions		Services		Services		Infrastructure		Other		Total
	(in thousands)
Balance as of December 31, 2017	$	15,637	$	245,542	$	12,242	$	—	$	—	$	—	$	273,421
Additions		—		982		—		—		—		—		982
Impairment		(12,652)		—		(5,242)		—		—		—		(17,894)
Measurement period adjustments		(2,985)		20,277		—		—		—		—		17,292
Balance as of December 31, 2018		—		266,801		7,000		—		—		—		273,801
Resegmentation		—		(266,801)		(7,000)		186,335		80,466		7,000		—
Measurement period adjustment⁽¹⁾		—		—		—		133		—		—		133
Affirm crane business divestiture		—		—		—		—		—		(2,604)		(2,604)
Affirm impairment		—		—		—		—		—		(4,396)		(4,396)
Balance as of September 30, 2019	$	—	$	—	$	—	$	186,468	$	80,466	$	—	$	266,934


	Amount
	(in thousands)
Remainder of 2019	$	2,989
2020		11,661
2021		10,478


	Three months ended September 30, 2019								Three months ended September 30, 2018
	Select Energy								Select Energy
	Services, Inc.		Class A		Class A-2		Class B		Services, Inc.		Class A		Class A-2		Class B
Numerator:
Net income	$	7,172							$	31,267
Net income attributable to noncontrolling interests		(1,793)								(8,316)
Net income attributable to Select Energy Services, Inc. — basic		5,379	$	5,379	$	—	$	—		22,951	$	22,951	$	—	$	—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock		7		7		—		—		4		4		—		—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options		1		1		—		—		15		15		—		—
Net income attributable to Select Energy Services, Inc. — diluted	$	5,387	$	5,387	$	—	$	—	$	22,970	$	22,970	$	—	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				79,468,991		—		24,513,654				78,896,373		—		27,239,419
Dilutive effect of restricted stock				339,911		—		—				55,858		—		—
Dilutive effect of stock options				28,575		—		—				188,179		—		—
Dilutive effect of ESPP				104		—		—				92		—		—
Weighted-average shares of common stock outstanding — diluted				79,837,581		—		24,513,654				79,140,502		—		27,239,419
Earnings per share:
Basic			$	0.07	$	—	$	—			$	0.29	$	—	$	—
Diluted			$	0.07	$	—	$	—			$	0.29	$	—	$	—


	Nine months ended September 30, 2019								Nine months ended September 30, 2018
	Select Energy								Select Energy
	Services, Inc.		Class A		Class A-2		Class B		Services, Inc.		Class A		Class A-2		Class B
Numerator:
Net income	$	16,640							$	72,421
Net income attributable to noncontrolling interests		(3,926)								(22,409)
Net income attributable to Select Energy Services, Inc. — basic		12,714	$	12,714	$	—	$	—		50,012	$	48,523	$	1,489	$	—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock		15		15		—		—		8		10		(2)		—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options		3		3		—		—		22		27		(5)		—
Net income attributable to Select Energy Services, Inc. — diluted	$	12,732	$	12,732	$	—	$	—	$	50,042	$	48,560	$	1,482	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				78,848,939		—		25,516,904				69,929,330		2,145,311		33,994,800
Dilutive effect of restricted stock				358,503		—		—				95,822		—		—
Dilutive effect of stock options				60,174		—		—				285,606		—		—
Dilutive effect of ESPP				299		—		—				94		—		—
Weighted-average shares of common stock outstanding — diluted				79,267,915		—		25,516,904				70,310,852		2,145,311		33,994,800
Earnings per share:
Basic			$	0.16	$	—	$	—			$	0.69	$	0.69	$	—
Diluted			$	0.16	$	—	$	—			$	0.69	$	0.69	$	—

For the nine months ended

For the three months ended

September 30, 2019

March 31, 2020

Cash received for shares issued

Shares issued