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, ~~2020~~2021

☐	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 ~~2, 2020,~~1, 2021, the registrant had ~~86,824,127~~92,958,812 shares of Class A common stock and 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, in our subsequently filed Quarterly Reports on Form 10-Q, under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report and those set forth from time to time in our other filings with the ~~SEC.~~Securities and Exchange Commission (the “SEC”). 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:

●

actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States (“U.S.”) and may adversely affect our future operations;

●

the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, which ~~has~~ caused a sharp decline in economic activity in the ~~United States~~U.S. and around the world, resulting in lower demand for oil and gas, ~~oversupply and therefore lower oil and gas prices,~~ to which our exploration and production (“E&P”) customers ~~have~~ responded by cutting capital spending, leading to fewer oil and gas well completions and thus reduced demand for our services, all of which has had, ~~and will likely continue to have,~~ a negative impact on our financial results;

●

actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, ~~(“OPEC+~~“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 announced 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 potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;

●

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

●

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

●

the degree to which consolidation among our ~~customers’~~customers may affect spending on U.S. drilling and ~~completions in the near-term;~~completions;

●

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

●

our customers’ ability to complete and produce new wells;

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●

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

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freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters;

●

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

●

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~~decrease in the demand for our services in our core markets;

●

regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our ~~ability~~services;

●

new or expanded regulations that materially limit our customers’ access to ~~retain key management~~federal and ~~employees;~~state lands for oil and gas development, thereby reducing demand for our services in the affected areas;

●

growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services;

●

our ability to hire and retain key management and employees, including skilled labor;

●

~~regional impacts to our business, including our key infrastructure assets within the Bakken and 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 E&P customers may elect to operate their water-management services in-house rather than source these services from companies like us;

●

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;

●

acts of terrorism, war or political or civil unrest in the U.S. or elsewhere;

●

the ability to source certain raw materials globally on a timely basis from economically advantaged sources; and

●

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

●

the other risks identified in our most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, 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.business.

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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 our Quarterly Reports on Form 10-Q for the quarters ended March 31, ~~2020~~2021 and June 30, ~~2020,~~2021, and this Quarterly Report. 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

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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, 2020		December 31, 2019		September 30, 2021		December 31, 2020
	(unaudited)				(unaudited)
Assets
Current assets
Cash and cash equivalents	$	185,438	$	79,268	$	107,413	$	169,039
Accounts receivable trade, net of allowance for credit losses of $9,731 and $5,773, respectively		92,148		267,628
Accounts receivable trade, net of allowance for credit losses of $6,065 and $9,157, respectively						185,693		129,392
Accounts receivable, related parties		595		4,677		131		69
Inventories		34,366		37,542		37,967		33,384
Prepaid expenses and other current assets		19,815		26,486		25,052		19,621
Total current assets		332,362		415,601		356,256		351,505
Property and equipment		907,980		1,015,379		892,872		878,902
Accumulated depreciation		(538,380)		(562,986)		(549,725)		(528,537)
Property and equipment held-for-sale, net		—		885
Total property and equipment, net		369,600		453,278		343,147		350,365
Right-of-use assets, net		57,402		70,635		47,806		52,331
Goodwill		—		266,934
Other intangible assets, net		118,801		136,952		111,192		116,079
Other assets, net		2,468		4,220
Other long-term assets, net						9,731		5,079
Total assets	$	880,633	$	1,347,620	$	868,132	$	875,359
Liabilities and Equity
Current liabilities
Accounts payable	$	11,037	$	35,686	$	26,655	$	12,995
Accrued accounts payable		13,058		47,547		34,663		21,359
Accounts payable and accrued expenses, related parties		300		2,789		1,478		519
Accrued salaries and benefits		14,811		20,079		12,987		16,279
Accrued insurance		10,227		8,843		9,881		9,788
Sales tax payable		678		2,119		1,662		1,415
Accrued expenses and other current liabilities		13,296		15,375		10,571		12,077
Current operating lease liabilities		14,611		19,315		14,153		14,019
Current portion of finance lease obligations		304		128		190		307
Total current liabilities		78,322		151,881		112,240		88,758
Long-term operating lease liabilities		64,217		72,143		54,143		60,984
Other long-term liabilities		12,698		10,784		32,788		19,735
Total liabilities		155,237		234,808		199,171		169,477
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 86,824,127 shares issued and outstanding as of September 30, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and outstanding as of December 31, 2019		868		879
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of September 30, 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 September 30, 2020 and December 31, 2019		162		162
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019		—		—
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 92,056,219 shares issued and outstanding as of September 30, 2021; 350,000,000 shares authorized and 86,812,647 shares issued and outstanding as of December 31, 2020						921		868
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of September 30, 2021 and December 31, 2020						—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of September 30, 2021 and December 31, 2020						162		162
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020						—		—
Additional paid-in capital		907,832		914,699		935,742		909,278
Accumulated (deficit) retained earnings		(299,264)		21,437
Accumulated deficit						(368,965)		(317,247)
Total stockholders’ equity		609,598		937,177		567,860		593,061
Noncontrolling interests		115,798		175,635		101,101		112,821
Total equity		725,396		1,112,812		668,961		705,882
Total liabilities and equity	$	880,633	$	1,347,620	$	868,132	$	875,359

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,


2020

2019

2020

2019
Revenue





Water Services

$
54,516

$
196,782

$
259,834

$
619,388
Water Infrastructure

16,165

63,953

89,227

169,279
Oilfield Chemicals

30,561

67,932

122,705

197,762
Other

—

301

—

29,072
Total revenue

101,242

328,968

471,766

1,015,501
Costs of revenue





Water Services

52,861

153,741

235,989

472,013
Water Infrastructure

12,816

46,748

74,500

126,634
Oilfield Chemicals

28,558

57,357

110,996

170,935
Other

30

1,865

37

30,365
Depreciation and amortization

23,877

28,263

75,567

88,624
Total costs of revenue

118,142

287,974

497,089

888,571
Gross (loss) profit

(16,900)

40,994

(25,323)

126,930
Operating expenses





Selling, general and administrative

15,955

27,280

58,902

86,953
Depreciation and amortization

685

952

2,204

2,858
Impairment of goodwill and trademark

—

—

276,016

4,396
Impairment and abandonment of property and equipment

—

49

7,910

942
Lease abandonment costs

672

238

2,493

1,494
Total operating expenses

17,312

28,519

347,525

96,643
(Loss) income from operations

(34,212)

12,475

(372,848)

30,287
Other income (expense)





Gains (losses) on sales of property and equipment and divestitures, net

891

(2,033)

(1,727)

(8,233)
Interest expense, net

(789)

(438)

(1,633)

(2,370)
Foreign currency gain (loss), net

13

(59)

(6)

268
Other expense, net

(2,364)

(272)

(4,805)

(62)
(Loss) income before income tax benefit (expense)

(36,461)

9,673

(381,019)

19,890
Income tax benefit (expense)

201

(2,501)

495

(3,250)
Net (loss) income

(36,260)

7,172

(380,524)

16,640
Less: net loss (income) attributable to noncontrolling interests

5,719

(1,793)

59,823

(3,926)
Net (loss) income attributable to Select Energy Services, Inc.

$
(30,541)

$
5,379

$
(320,701)

$
12,714

Net (loss) income per share attributable to common stockholders (Note 16):

Class A—Basic

$
(0.36)

$
0.07

$
(3.76)

$
0.16
Class B—Basic

$
—

$
—

$
—

$
—

Net (loss) income per share attributable to common stockholders (Note 16):

Class A—Diluted

$
(0.36)

$
0.07

$
(3.76)

$
0.16
Class B—Diluted

$
—

$
—

$
—

$
—


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue
Water Services	$	112,474	$	54,516	$	253,348	$	259,834
Water Infrastructure		36,787		16,165		107,916		89,227
Oilfield Chemicals		55,372		30,561		148,228		122,705
Total revenue		204,633		101,242		509,492		471,766
Costs of revenue
Water Services		94,667		52,861		227,736		235,989
Water Infrastructure		28,494		12,816		81,130		74,500
Oilfield Chemicals		49,583		28,558		132,103		110,996
Other		—		30		—		37
Depreciation and amortization		22,904		23,877		65,572		75,567
Total costs of revenue		195,648		118,142		506,541		497,089
Gross profit (loss)		8,985		(16,900)		2,951		(25,323)
Operating expenses
Selling, general and administrative		22,044		15,955		57,828		58,902
Depreciation and amortization		562		685		1,835		2,204
Impairment of goodwill and trademark		—		—		—		276,016
Impairment and abandonment of property and equipment		—		—		—		7,910
Lease abandonment costs		154		672		480		2,493
Total operating expenses		22,760		17,312		60,143		347,525
Loss from operations		(13,775)		(34,212)		(57,192)		(372,848)
Other (expense) income
Gain (loss) on sales of property and equipment and divestitures, net		315		891		(1,921)		(1,727)
Interest expense, net		(419)		(789)		(1,254)		(1,633)
Foreign currency (loss) gain, net		(6)		13		1		(6)
Other expense, net		(222)		(2,364)		(956)		(4,805)
Loss before income tax benefit		(14,107)		(36,461)		(61,322)		(381,019)
Income tax benefit		32		201		211		495
Equity in losses of unconsolidated entities		(129)		—		(129)		—
Net loss		(14,204)		(36,260)		(61,240)		(380,524)
Less: net loss attributable to noncontrolling interests		2,160		5,719		9,522		59,823
Net loss attributable to Select Energy Services, Inc.	$	(12,044)	$	(30,541)	$	(51,718)	$	(320,701)

Net loss per share attributable to common stockholders (Note 15):
Class A—Basic	$	(0.14)	$	(0.36)	$	(0.60)	$	(3.76)
Class B—Basic	$	—	$	—	$	—	$	—

Net loss per share attributable to common stockholders (Note 15):
Class A—Diluted	$	(0.14)	$	(0.36)	$	(0.60)	$	(3.76)
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,


2020

2019

2020

2019
Net (loss) income

$
(36,260)

$
7,172

$
(380,524)

$
16,640
Other comprehensive (loss) income





Foreign currency translation adjustment, net of tax of $0

—

380

—

368
Comprehensive (loss) income

(36,260)

7,552

(380,524)

17,008
Less: comprehensive loss (income) attributable to noncontrolling interests

5,719

(1,888)

59,823

(4,013)
Comprehensive (loss) income attributable to Select Energy Services, Inc.

$
(30,541)

$
5,664

$
(320,701)

$
12,995


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net loss	$	(14,204)	$	(36,260)	$	(61,240)	$	(380,524)
Comprehensive loss		(14,204)		(36,260)		(61,240)		(380,524)
Less: comprehensive loss attributable to noncontrolling interests		2,160		5,719		9,522		59,823
Comprehensive loss attributable to Select Energy Services, Inc.	$	(12,044)	$	(30,541)	$	(51,718)	$	(320,701)

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 months ended September 30, ~~2020~~2021 and ~~2019~~2020

(unaudited)

(in thousands, except share data)


	Class A			Class B															Class A			Class B
	Stockholders			Stockholders					Accumulated		Accumulated								Stockholders			Stockholders
		Class A			Class B		Additional		(Deficit)		Other		Total							Class A			Class B		Additional				Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling					Common			Common		Paid-In		Accumulated		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Income		Equity		Interests		Total		Shares	Stock		Shares	Stock		Capital		Deficit		Equity		Interests		Total
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
Balance as of December 31, 2020																			86,812,647	$	868	16,221,101	$	162	$	909,278	$	(317,247)	$	593,061	$	112,821	$	705,882
ESPP shares issued	10,834		—	—		—		65		—		—		65		(6)		59	7,787		—	—		—		44		—		44		(1)		43
Equity-based compensation	—		—	—		—		3,419		—		—		3,419		639		4,058	—		—	—		—		5,290		—		5,290		958		6,248
Issuance of restricted shares	1,477,488		15	—		—		2,407		—		—		2,422		(2,422)		—	2,154,897		22	—		—		2,162		—		2,184		(2,185)		(1)
Exercise of restricted stock units	625		—	—		—		1		—		—		1		(1)		—
Other																			738		—	—		—		5		—		5		—		5
Issuance of shares for acquisitions																			3,600,000		36	—		—		20,627		—		20,663		(359)		20,304
Repurchase of common stock	(2,199,824)		(22)	—		—		(12,270)		—		—		(12,292)		1,416		(10,876)	(199,976)		(2)	—		—		(1,223)		—		(1,225)		19		(1,206)
Restricted shares forfeited	(358,521)		(4)	—		—		(527)		—		—		(531)		531		—	(319,874)		(3)	—		—		(332)		—		(335)		335		—
Noncontrolling interest in subsidiary	—		—	—		—		—		—		—		—		(133)		(133)	—		—	—		—		(140)		—		(140)		(934)		(1,074)
NCI income tax adjustment	—		—	—		—		38		—		—		38		(38)		—	—		—	—		—		31		—		31		(31)		—
Net loss	—		—	—		—		—		(320,701)		—		(320,701)		(59,823)		(380,524)	—		—	—		—		—		(51,718)		(51,718)		(9,522)		(61,240)
Balance as of September 30, 2020	86,824,127	$	868	16,221,101	$	162	$	907,832	$	(299,264)	$	—	$	609,598	$	115,798	$	725,396
Balance as of September 30, 2021																			92,056,219	$	921	16,221,101	$	162	$	935,742	$	(368,965)	$	567,860	$	101,101	$	668,961


	Class A			Class B															Class A			Class B
	Stockholders			Stockholders							Accumulated								Stockholders			Stockholders					Retained
		Class A			Class B		Additional				Other		Total							Class A			Class B		Additional		Earnings		Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling					Common			Common		Paid-In		(Accumulated		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Loss		Equity		Interests		Total		Shares	Stock		Shares	Stock		Capital		Deficit)		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	10,834		—	—		—		65		—		65		(6)		59
Equity-based compensation	—		—	—		—		9,045		—		—		9,045		2,829		11,874	—		—	—		—		3,419		—		3,419		639		4,058
Issuance of restricted shares	1,391,479		14	—		—		3,590		—		—		3,604		(3,604)		—	1,477,488		15	—		—		2,407		—		2,422		(2,422)		—
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)	(2,199,824)		(22)	—		—		(12,270)		—		(12,292)		1,416		(10,876)
Restricted shares forfeited	(10,017)		—	—		—		(36)		—		—		(36)		36		—	(358,521)		(4)	—		—		(527)		—		(531)		531		—
Distributions to noncontrolling interests, net	—		—	—		—		—		—		—		—		(349)		(349)
Noncontrolling interest in subsidiary																			—		—	—		—		—		—		—		(133)		(133)
NCI income tax adjustment	—		—	—		—		89		—		—		89		(89)		—	—		—	—		—		38		—		38		(38)		—
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																			—		—	—		—		—		(320,701)		(320,701)		(59,823)		(380,524)
Balance as of September 30, 2020																			86,824,127	$	868	16,221,101	$	162	$	907,832	$	(299,264)	$	609,598	$	115,798	$	725,396

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, ~~2020~~2021 and ~~2019~~2020

(unaudited)

(in thousands, except share data)


	Class A			Class B															Class A			Class B
	Stockholders			Stockholders					Accumulated		Accumulated								Stockholders			Stockholders
		Class A			Class B		Additional		(Deficit)		Other		Total							Class A			Class B		Additional				Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling					Common			Common		Paid-In		Accumulated		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Income		Equity		Interests		Total		Shares	Stock		Shares	Stock		Capital		Deficit		Equity		Interests		Total
Balance as of June 30, 2020	86,883,049	$	869	16,221,101	$	162	$	906,164	$	(268,723)	$	—	$	638,472	$	121,165	$	759,637
Balance as of June 30, 2021																			88,160,703	$	882	16,221,101	$	162	$	912,872	$	(356,921)	$	556,995	$	103,551	$	660,546
ESPP shares issued	3,194		—	—		—		17		—		—		17		(2)		15	2,906		—	—		—		14		—		14		—		14
Equity-based compensation	—		—	—		—		1,889		—		—		1,889		353		2,242	—		—	—		—		1,957		—		1,957		345		2,302
Repurchase of common stock	(43,923)		—	—		—		(249)		—		—		(249)		11		(238)
Issuance of restricted shares																			311,089		3	—		—		281		—		284		(285)		(1)
Issuance of shares for acquisitions																			3,600,000		36	—		—		20,627		—		20,663		(359)		20,304
Restricted shares forfeited	(18,193)		(1)	—		—		(19)		—		—		(20)		20		—	(18,479)		—	—		—		(17)		—		(17)		17		—
NCI income tax adjustment	—		—	—		—		30		—		—		30		(30)		—	—		—	—		—		8		—		8		(8)		—
Net loss	—		—	—		—		—		(30,541)		—		(30,541)		(5,719)		(36,260)	—		—	—		—		—		(12,044)		(12,044)		(2,160)		(14,204)
Balance as of September 30, 2020	86,824,127	$	868	16,221,101	$	162	$	907,832	$	(299,264)	$	—	$	609,598	$	115,798	$	725,396
Balance as of September 30, 2021																			92,056,219	$	921	16,221,101	$	162	$	935,742	$	(368,965)	$	567,860	$	101,101	$	668,961


	Class A			Class B															Class A			Class B
	Stockholders			Stockholders							Accumulated								Stockholders			Stockholders
		Class A			Class B		Additional				Other		Total							Class A			Class B		Additional				Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling					Common			Common		Paid-In		Accumulated		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Loss		Equity		Interests		Total		Shares	Stock		Shares	Stock		Capital		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)		—
Balance as of June 30, 2020																			86,883,049	$	869	16,221,101	$	162	$	906,164	$	(268,723)	$	638,472	$	121,165	$	759,637
ESPP shares issued	3,079		—	—		—		21		—		—		21		3		24	3,194		—	—		—		17		—		17		(2)		15
Equity-based compensation	—		—	—		—		2,774		—		—		2,774		792		3,566	—		—	—		—		1,889		—		1,889		353		2,242
Issuance of restricted shares	17,549		—	—		—		41		—		—		41		(41)		—
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)	(43,923)		—	—		—		(249)		—		(249)		11		(238)
Restricted shares forfeited	(1,195)		—	—		—		(13)		—		—		(13)		13		—	(18,193)		(1)	—		—		(19)		—		(20)		20		—
Distributions to noncontrolling interests, net	—		—	—		—		—		—		—		—		(124)		(124)
NCI income tax adjustment	—		—	—		—		40		—		—		40		(40)		—	—		—	—		—		30		—		30		(30)		—
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
Net loss																			—		—	—		—		—		(30,541)		(30,541)		(5,719)		(36,260)
Balance as of September 30, 2020																			86,824,127	$	868	16,221,101	$	162	$	907,832	$	(299,264)	$	609,598	$	115,798	$	725,396

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 CASH FLOWS

(unaudited)

(in thousands)

Nine months ended September 30,

2020

2019
Cash flows from operating activities

Net (loss) income

$
(380,524)

$
16,640
Adjustments to reconcile net (loss) income to net cash provided by operating activities

Depreciation and amortization

77,771

91,482
Net loss on disposal of property and equipment

1,316

4,971
Bad debt expense

6,108

1,764
Amortization of debt issuance costs

516

516
Inventory write-downs

787

228
Equity-based compensation

4,058

11,874
Impairment of goodwill and trademark

276,016

4,396
Impairment and abandonment of property and equipment

7,910

942
Loss on divestitures

411

3,262
Other operating items, net

158

259
Changes in operating assets and liabilities

Accounts receivable

171,700

14,835
Prepaid expenses and other assets

11,761

9,774
Accounts payable and accrued liabilities

(58,160)

(18,727)
Net cash provided by operating activities

119,828

142,216
Cash flows from investing activities

Working capital settlement

—

691
Proceeds received from divestitures

197

24,927
Purchase of property and equipment

(19,100)

(86,374)
Acquisitions, net of cash received

—

(10,400)
Proceeds received from sales of property and equipment

15,854

13,958
Net cash used in investing activities

(3,049)

(57,198)
Cash flows from financing activities

Borrowings from revolving line of credit

—

5,000
Payments on long-term debt

—

(50,000)
Payments of finance lease obligations

(189)

(743)
Proceeds from share issuance

59

110
Contributions from (distributions to) noncontrolling interests

383

(349)
Repurchase of common stock

(10,876)

(13,401)
Net cash used in financing activities

(10,623)

(59,383)
Effect of exchange rate changes on cash

14

127
Net increase in cash and cash equivalents

106,170

25,762
Cash and cash equivalents, beginning of period

79,268

17,237
Cash and cash equivalents, end of period

$
185,438

$
42,999
Supplemental cash flow disclosure:

Cash paid for interest

$
1,413

$
2,421
Cash paid for income taxes, net

$
544

$
1,675
Supplemental disclosure of noncash operating activities:

Noncash asset exchange

$
1,578

$
—
Supplemental disclosure of noncash investing activities:

Capital expenditures included in accounts payable and accrued liabilities

$
2,061

$
13,442
Noncash proceeds received from sale of interest in a formerly consolidated joint venture

$
367

$
—


	Nine months ended September 30,
	2021		2020
Cash flows from operating activities
Net loss	$	(61,240)	$	(380,524)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		67,407		77,771
Net loss on disposal of property and equipment and divestitures		1,921		1,316
Equity in losses of unconsolidated entities		129		—
Bad debt (recovery) expense		(651)		6,108
Amortization of debt issuance costs		516		516
Inventory write-downs		139		787
Equity-based compensation		6,248		4,058
Impairment of goodwill and trademark		—		276,016
Impairment and abandonment of property and equipment		—		7,910
Loss on divestitures		—		411
Unrealized loss (gain) on short-term investment		1,406		(189)
Other operating items, net		(309)		347
Changes in operating assets and liabilities
Accounts receivable		(32,509)		171,700
Prepaid expenses and other assets		(10,284)		11,761
Accounts payable and accrued liabilities		13,331		(58,160)
Net cash (used in) provided by operating activities		(13,896)		119,828
Cash flows from investing activities
Proceeds received from divestitures		—		197
Purchase of property and equipment		(29,925)		(19,100)
Investment in note receivable		(1,101)		—
Purchase of equity method investments		(2,200)		—
Distribution from cost method investment		120		—
Acquisitions, net of cash received		(18,644)		—
Proceeds received from sales of property and equipment		6,491		15,854
Net cash used in investing activities		(45,259)		(3,049)
Cash flows from financing activities
Payments of finance lease obligations		(238)		(189)
Proceeds from share issuance		43		59
(Distributions to) contributions from noncontrolling interests		(1,074)		383
Repurchase of common stock		(1,206)		(10,876)
Net cash used in financing activities		(2,475)		(10,623)
Effect of exchange rate changes on cash		4		14
Net (decrease) increase in cash and cash equivalents		(61,626)		106,170
Cash and cash equivalents, beginning of period		169,039		79,268
Cash and cash equivalents, end of period	$	107,413	$	185,438
Supplemental cash flow disclosure:
Cash paid for interest	$	1,108	$	1,413
Cash (refunds received) paid for income taxes, net	$	(927)	$	544
Supplemental disclosure of noncash operating activities:
Noncash settlement of accounts receivable	$	—	$	1,578
Supplemental disclosure of noncash investing activities:
Issuance of shares for acquisitions	$	20,304	$	—
Capital expenditures included in accounts payable and accrued liabilities	$	8,433	$	2,061
Noncash proceeds received from sale of interest in a formerly consolidated joint venture	$	—	$	367

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

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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”).

We are a leading provider of comprehensive water-management and chemical 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. ~~Through~~As a ~~combination of organic growth and acquisitions over the last decade, we have developed a leading position~~leader in the water solutions ~~industry. We believe~~industry, we ~~are~~place the ~~only company in~~utmost importance on safe, environmentally responsible management of oilfield water throughout the ~~oilfield services industry that combines comprehensive water-management services with related chemical products. Furthermore,~~lifecycle of a well. Additionally, 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 ofthat responsibly managing water resources through our operations to help conserve ~~fresh water~~ and protect the environment in the communities in which we operate is paramount to our continued success.

~~Select 144A Offering~~Class A and ~~Initial Public Offering.~~Class B Common Stock: ~~On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”)~~As of ~~16,100,000~~September 30, 2021, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of ~~Select Inc. Class A-1 common stock, par value $0.01 per share, which were converted into shares of~~our 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”), are entitled to ~~the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or~~ 1 vote per 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. Holders of Class A Common Stock~~ and ~~Class B Common Stock~~ vote together as a single class on all matters ~~subject~~presented 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 onour stockholders for 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.vote or approval.

Exchange rights:Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner ~~Holdco~~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 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 year ended December 31, 2019, a total of 9,805,742 SES Holdings LLC Units were exchanged for 9,805,742 shares of Class A~~

~~Table of Contents~~

~~Common Stock, and 9,805,742 shares of Class B Common Stock were cancelled. There were 0 exchanges during the Current Period (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 U.S. (“GAAP”) and pursuant to the rules and regulations of the ~~Securities and Exchange Commission (the “SEC”).~~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 Quarterly Report relates to the three and nine months ended September 30, ~~2020~~2021 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, ~~2019~~2020 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”) filed with the SEC on February ~~25, 2020~~24, 2021, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. 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 may not be indicative of the results to be expected for the full year, in part due to the COVID-19 ~~pandemic.~~pandemic and continued progress in the distribution and uptake of remedies such as vaccines, as well as to large variations in oil and natural gas prices during the year.

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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 in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost ~~method.~~method or other appropriate basis as applicable. As of September 30, ~~2020,~~2021, the Company had 2 equity-method investments and 1 cost-method investment. The Company also had 1 investment in notes receivable accounted for using the amortized cost basis and 1 investment in publicly traded securities accounted for using the fair value option. 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. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:


	Year				(in thousands)
Type of Investment	attained	Accounting method	Balance Sheet Location	September 30, 2021		December 31, 2020
20% minority interest	2011	Cost-method	Other long-term assets, net	$	180	$	300
Notes receivable	2020	Amortized cost basis	Other long-term assets, net		4,361		3,037
33% minority interest	2021	Equity-method	Other long-term assets, net		1,871		—
45% minority interest	2021	Equity-method	Other long-term assets, net		200		—
Publicly traded securities	2020	Fair value option	Prepaid expenses and other current assets		1,717		3,377

Segment ~~reporting:~~reporting: The Company has 3 reportable segments. 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. See “Note 16—Segment Information” for additional information.

The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business as well as the Company’s industrial solutions business.

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

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 supplying logistics for chemical applications. We develop, manufacture and apply a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines 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.completions. Given the breadth of chemicals and application expertise we provide, our ~~Oilfield Chemicals~~ customers ~~are primarily~~range from pressure pumpers ~~but also include~~to major integrated and independent oil and gas producers.

~~The results~~ This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of ~~service lines divested during 2019, including the operations of our Affirm Oilfield Services, LLC subsidiary (“Affirm”), our sand hauling operations and our Canadian operations, are combined~~water used in ~~the “Other” category.~~well completions.

~~Table of Contents~~

~~Reclassifications~~: Certain reclassifications have been made to the Company’s prior period consolidated financial information 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.

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, ~~2019,~~2020, included in the ~~2019~~2020 Form 10-K.

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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 reserve, 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 relates 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 has been incurred ~~where~~when a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. ~~The duration and severity of~~While credit losses have improved in the ~~COVID-19 pandemic and continued~~Current Period relative to the Prior Period as market ~~volatility is highly uncertain and, as such,~~conditions have recovered, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.

The ~~following table presents the changes to~~change in the allowance for ~~the Current Period:~~credit losses is as follows:


	Nine months ended September 30, 2020		Nine months ended September 30, 2021
	(in thousands)		(in thousands)
Balance at December 31, 2019	$	5,773
Increase to allowance based on a percentage of Current Period revenue		943
Balance at December 31, 2020			$	9,157
Increase to allowance based on a percentage of revenue				965
Adjustment based on aged receivable analysis		5,165		(1,445)
Charge-offs		(2,150)		(2,614)
Balance at September 30, 2020	$	9,731
Recoveries				2
Balance at September 30, 2021			$	6,065

~~Table~~The Company also has a $4.4 million note receivable resulting from an initial investment in the fourth quarter of ~~Contents~~2020 and additional investment in the Current Period, with 0 allowance for credit losses as of September 30, 2021. See “Note 12—Related-Party Transactions” for additional information.

Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to 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:

Nine months ended September 30, 2020

(in thousands)
Balance at December 31, 2019

$
1,527
Accretion expense, included in depreciation and amortization expense

92
Disposals

(219)
Payments

(163)
Balance at September 30, 2020

$
1,237

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 September 30, 2020, the Company had 2 facility leases and 15 facility subleases that are accounted for as follows:~~

Three months ended September 30,

Nine months ended September 30,


2020

2019

2020

2019


(in thousands)

(in thousands)
Category
Classification

Lessor income
Cost of sales

$
67

$
184

$
279

$
364

Sublease income
Lease abandonment costs and Cost of sales

355

393

1,091

1,155

~~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.~~

~~Operating leases:~~ Primarily due to future uncertainty stemming from the COVID-19 pandemic, certain renewal options were no longer considered reasonably certain of being exercised as of June 30, 2020. This caused a reduction of approximately $5.7 million in right of use assets and ~~lease liabilities~~ on the consolidated balance sheets during the second quarter of 2020. Additionally, the Company has successfully negotiated certain lease payment deferrals as well as lease payment reductions that are being accounted for as modifications, with no impact to straight-line lease expense from lease payment deferrals and a reduction in straight-line rent expense from lease payment reductions.

~~Defined Contribution Plan:~~ During the Current Period, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) Plan and incurred 0 match expense in the Current Period. The Company incurred $0.9 million and $3.4 million of match expense in the Prior Quarter and Prior Period, respectively.

~~Payroll Tax Deferral:~~ In the Current Period, the Company began taking advantage of the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and has deferred the payment of $3.8 million of payroll taxes as of September 30, 2020. The deferral is included in other long-term liabilities on the accompanying consolidated balance sheets. The amounts being deferred during 2020, must be repaid half by December 31, 2021 and half by December 31, 2022.

~~Recent accounting pronouncements~~~~: In June 2016,~~ ~~the FASB issued ASU 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, which amends 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 and requires a



	Nine months ended September 30, 2021
	(in thousands)
Balance at December 31, 2020	$	999
Accretion expense, included in depreciation and amortization expense		105
Acquired ARO's		10,410
Disposals		(188)
Payments		(378)
Balance at September 30, 2021	$	10,948

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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 in the first quarter of 2020 did not have a material impact to the Company’s financial statements.

~~In December 2019, the FASB issued ASU 2019-12, “~~~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes~~” (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 in the Current Quarter and elected all aspects of this standard as of the beginning of 2020. The adoption did not have a material impact to the Company’s financial statements.

~~NOTE 3—IMPAIRMENTS AND OTHER COSTS~~

Significant challenges that emerged during the Current Period, and that are expected to continue, have had and will likely continue to have a negative impact on our results of operations. The COVID-19 pandemic has caused a worldwide slowdown in economic activity, resulting in a sharp decline in global oil demand and therefore, lower oil and natural gas prices. Global oil demand is expected to remain challenged at least until the COVID-19 pandemic can be contained. In response to lower oil and gas prices, our E&P customers have cut capital spending, resulting in a sharp drop in the number of wells drilled and completed in all of our markets. Reduced demand for our services has had a material, negative impact on our Current Quarter and Current Period financial results. While oil prices and U.S. unconventional completions activity have partially recovered from the recent lows, given the continued uncertainty around the COVID-19 pandemic and the associated impact on oil demand, we are unable to predict if, when, and by how much the demand for our services and therefore our financial performance will improve.

Because the magnitude and duration of the COVID-19 pandemic is unknown, we cannot forecast with reasonable certainty its impact on our business, financial condition or near or longer-term financial or operational results. However, we currently expect that our 2020 net income will be negative. During the Current Period, we have taken actions to protect our balance sheet and maintain our liquidity, including significantly decreasing our operating expenses by reducing headcount, reducing salaries and director compensation, idling facilities, 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 the COVID-19 pandemic.

As a result of the downturn in our business, we recorded impairment expenses in the first half of 2020 related to goodwill, property and equipment and other intangible assets. There is no assurance that we will not have additional impairments in subsequent quarters.

~~A summary of impairment, severance, yard closure and lease abandonment costs for the Current Quarter, Prior Quarter, Current Period and Prior Period were as follows:~~

Three months ended September 30,

Nine months ended September 30,


2020

2019

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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Lessor Income: The Company is a lessor for a nominal number of owned facilities and also recognizes income related to multiple facility subleases that are accounted for as follows:


		Three months ended September 30,				Nine months ended September 30,
		2021		2020		2021		2020

		(in thousands)
Category	Classification
Lessor income	Costs of revenue	$	113	$	67	$	239	$	279
Sublease income	Lease abandonment costs and Costs of revenue		262		355		736		1,091

The Company also generates short-term equipment rental revenue. See “Note 4—Revenue” for a discussion of revenue recognition for the accommodations and rentals business.

Defined Contribution Plan: During the Prior Period, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) plan and the suspension continued into the first half of 2021. Effective July 1, 2021, the Company reinstated matching contributions of 50% of employee contributions, up to 4% of compensation. The Company incurred $0.1 million of match expense in both the Current Quarter and Current Period.

Payroll Tax Deferral: In 2020, the Company utilized the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and has deferred the payment of $6.0 million of payroll taxes as of December 31, 2020. The amounts deferred in 2020 must be repaid half by December 31, 2021, and half by December 31, 2022. The deferral is split evenly between accrued salaries and benefits and other long-term liabilities on the accompanying consolidated balance sheets as of September 30, 2021.

Severance: During the Current Period, the Company incurred $3.2 million of severance in connection with the termination of its former chief executive officer, which was paid in full during the first quarter of 2021. During the Prior Period, the Company incurred severance in connection with layoffs resulting from the downturn in the energy industry due in part to the COVID-19 pandemic. A summary of severance costs for the Current Quarter, Prior Quarter, Current Period and Prior Period are as follows:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)

Severance
Costs of revenue - Water services	$	—	$	—	$	—	$	2,929
Costs of revenue - Water infrastructure		—		—		—		452
Costs of revenue - Oilfield chemicals		—		—		—		626
Selling, general and administrative		—		—		3,225		3,161
Total severance expense	$	—	$	—	$	3,225	$	7,168

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Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

(in thousands)

Impairment and abandonment of property and equipment

Water Services

$
—

$
—

$
3,894

$
—

Water Infrastructure

—

—

4,016

—

Other

—

49

—

942

Total impairment and abandonment of property and equipment

$
—

$
49

$
7,910

$
942

During the Current Period, the Company recorded an impairment of $7.9 million related to certain equipment that was determined to be obsolete. During the Prior Quarter and Prior Period, the Company recorded an impairment of a nominal amount and $0.9 million, respectively, of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds at that time.

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

(in thousands)

Severance

Water Services

$
—

$
—

$
4,569

$
—

Water Infrastructure

—

—

500

—

Oilfield Chemicals

—

—

813

—

Other

—

—

1,286

1,680

Total severance expense

$
—

$
—

$
7,168

$
1,680

Yard closure costs

Water Services

$
—

$
—

$
2,645

$
—

Oilfield Chemicals

—

—

316

—

Total yard closure costs

$
—

$
—

$
2,961

$
—

Lease abandonment costs

Water Services

$
673

$
173

$
2,456

$
620

Water Infrastructure

—

—

51

—

Oilfield Chemicals

—

4

42

11

Other

(1)

61

(56)

863

Total lease abandonment costs

$
672

$
238

$
2,493

$
1,494

During the Current Quarter, the Company recorded $0.7 million of lease abandonment costs due to revised sublease income expectations on certain leases as well as accretion of expenses for previously abandoned facilities. During the Prior Quarter, the Company recorded $0.2 million of lease abandonment costs related to accretion of expenses for previously abandoned facilities.

During the Current Period, the Company recorded exit-disposal costs including $7.2 million of severance costs, with $1.1 million of accrued severance at September 30, 2020, $3.0 million in accrued yard closure costs recognized within costs of revenue on the accompanying consolidated statements of operations with $0.4 million accrued yard closure costs at September 30, 2020, and $2.5 million of lease abandonment costs. Severance costs of $4.0 million and $3.2 million are recognized within costs of revenue and selling, general and administrative expenses, respectively, on the accompanying consolidated statements of operations. During the Prior Period, the Company recorded exit-disposal costs including $1.7 million of severance recognized within selling, general and administrative expenses on the accompanying

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~~consolidated statements of operations, and $1.5 million of lease abandonment costs, both of which primarily related to the Company’s divested service lines.~~

NOTE ~~4—Acquisitions~~3—ACQUISITIONS

Business combinations

~~Well Chemical~~Complete Energy Services Acquisition

On ~~September 30, 2019,~~July 9, 2021, the Company ~~acquired a well chemical services business~~completed the acquisition (the “Complete Acquisition”) of Complete Energy Services, Inc. (“~~WCS”~~Complete”), ~~formerly a division~~an operating subsidiary of ~~Baker Hughes~~Superior Energy Services, Inc. (“Superior”) for total consideration of $34.5 million based on the closing price of the Company’s shares of Class A Common Stock on July 9, 2021. Consideration transferred consisted of 3.6 million shares of Class A Common Stock and $14.2 million in cash. The Company ~~for $10.0 million, funded with cash on hand (the “WCS Acquisition”). WCS provides advanced water treatment solutions, specialized stimulation flow assurance~~acquired substantially all of the water-related assets, liabilities and ~~integrity additives~~ongoing operations of Complete, including working capital, and ~~post-treatment monitoring service in~~is subject to standard post-closing adjustments. Superior retained certain non-core and non-water-related assets that were part of Complete as part of the ~~U.S.~~transaction. This acquisition expands the Company’s ~~service offerings~~water-related services and infrastructure footprint and strengthens the geographic footprint, particularly in ~~oilfield water treatment across~~ the ~~full lifecycle of water, from pre-fracturing treatment~~Mid-Continent, Permian and Rockies, while adding new geographic breadth through ~~reuse and recycling.~~a market leading position in the Powder River Basin.

The ~~WCS~~Complete 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. The Company also engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the inventory and property and equipment acquired, ~~customer relationships, and~~ current liabilities ~~were~~and long-term liabilities are preliminary and have not been finalized as of ~~December 31, 2019.~~September 30, 2021. The assets acquired and liabilities assumed are included in the Company’s Water Services and Water Infrastructure segments. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:


Preliminary purchase price allocation	Amount
Consideration transferred	(in thousands)
Class A Common Stock (3,600,000 shares)	$	20,304
Cash paid		14,180
Total consideration transferred		34,484

Less: identifiable assets acquired and liabilities assumed
Working capital		15,931
Property and equipment		27,027
Right-of-use assets		3,331
Other long-term assets		23
Long-term ARO		(9,800)
Long-term lease liabilities		(2,028)
Total identifiable net assets acquired		34,484
Fair value allocated to net assets acquired	$	34,484

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UltRecovery Acquisition

On August 2, 2021, the Company acquired UltRecovery, a provider of sustainable production enhancement applications focused on existing conventional and unconventional oil and gas wells. The Company paid consideration of $2.5 million at closing, and the selling shareholders may earn contingent consideration in the form of an earn-out. The estimated liability of the earn-out is $1.1 million and the maximum earn-out is $1.6 million, dependent on revenue generated in the first and second 12-month periods following the acquisition, beginning on October 1, 2021.

The UltRecovery acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions and valuation of the inventory, property and equipment and intellectual property acquired have not been finalized as of September 30, 2021. The assets acquired 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
Consideration transferred

(in thousands)
Cash paid

$
10,000
Total consideration transferred

10,000
Less: identifiable assets acquired and liabilities assumed

Inventory

5,221
Property and equipment

4,473
Customer relationships

476
Current liabilities

(170)
Total identifiable net assets acquired

10,000
Fair value allocated to net assets acquired

$
10,000


Preliminary purchase price allocation	Amount
Consideration transferred and estimated earn-out liability	(in thousands)
Cash paid	$	2,500
Estimated earn-out liability assumed		1,058
Total purchase price		3,558
Less: identifiable assets acquired
Inventory		13
Property and equipment		514
Patents and other intellectual property		3,031
Total identifiable net assets acquired		3,558
Fair value allocated to net assets acquired	$	3,558

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NOTE 5—4—REVENUE

The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606), for most revenue recognition, which 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 only 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 accommodations and rentals revenue iscontinues to be guided by ASC 842 – Leases,. which is discussed further below.

The following factors are applicable to all 3 of the Company’s segments for the ~~first nine months of 2020~~Current Period and ~~2019,~~Prior Period, 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 services rendered and 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 rendered reflected as accounts receivable trade, net of allowance for 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~~Mobilization and demobilization are factored into the pricing for services. Billings and costs related to mobilization and demobilization isare not material for customer agreements that start in one period and end in another. As of September 30, ~~2020,~~2021, the Company had ~~five~~six contracts in place for these segments lasting over one year.

In The Company has recorded an $8.2 million contract liability associated with one of the ~~Oilfield Chemicals segment,~~six long-term contracts as of September 30, 2021, recognized in other long-term liabilities in the ~~typical performance obligation is to provide a specific quantity of chemicals to customers in accordance with the customer agreement in an amount the~~accompanying consolidated balance sheets. The Company expects this contract liability to ~~collect.~~be converted to revenue under the terms of the contract as it is earned.

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Accommodations and rentals revenue is included in the Water Services segment and 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, 2021, there were no material rental agreements in effect lasting more than one year. During the Current Quarter, Prior Quarter, Current Period and Prior Period, approximately $8.1 million, $3.5 million $21.0 million and $23.3 million of accommodations and rentals revenue was accounted for under ASC 842 lease guidance, with the remainder accounted for under ASC 606 revenue guidance.

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. 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 credit losses. Customer returns are rare and immaterial and there were no material in-process customer agreements for this segment as of September 30, ~~2020,~~2021, 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, 2020, no material rental agreements lasted more than one 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 September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(in thousands)								(in thousands)
Geographic Region
Permian Basin	$	38,804	$	158,609	$	213,440	$	469,391	$	93,976	$	38,804	$	248,535	$	213,440
Eagle Ford		10,089		44,694		56,425		124,453		27,827		10,089		73,181		56,425
Haynesville/E. Texas		21,096		18,322		54,819		53,918		18,404		21,096		53,972		54,819
MidCon		11,579		45,522		44,277		152,500
Marcellus/Utica		11,021		21,330		44,111		79,781		17,956		11,021		42,874		44,111
Rockies		4,488		21,045		30,284		64,981		25,412		4,488		44,630		30,284
Mid-Continent										18,925		11,579		36,928		44,277
Bakken		4,938		20,052		30,040		66,195		3,209		4,938		13,976		30,040
All other/eliminations		(773)		(606)		(1,630)		4,282
Eliminations and other regions										(1,076)		(773)		(4,604)		(1,630)
Total	$	101,242	$	328,968	$	471,766	$	1,015,501	$	204,633	$	101,242	$	509,492	$	471,766

In the Water Services segment, the top 34 revenue-producing regions are the Permian Basin, Eagle Ford, Marcellus/Utica and ~~Marcellus/Utica,~~Rockies, which collectively comprised ~~66%~~85%, ~~72%~~73%, ~~71%~~86% and ~~72%~~79% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Water Infrastructure segment, the top 23 revenue-producing regions are the Permian Basin, Eagle Ford and Bakken, which collectively comprised ~~87%~~92%, ~~84%~~96%, ~~86%~~95% and ~~83%~~97% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Oilfield Chemicals segment, the top 3 revenue-producing regions are the Permian Basin, Haynesville/E. Texas and ~~MidCon,~~Mid-Continent, which collectively comprised 81%, 96%, ~~90%,~~ 84% and86% ~~and 88%~~ of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.

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NOTE 6—5—INVENTORIES

Inventories, which are comprised of blended chemicals and raw 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, 2020		December 31, 2019		September 30, 2021		December 31, 2020

	(in thousands)				(in thousands)
Raw materials	$	16,898	$	12,365	$	19,597	$	16,701
Finished goods		17,468		24,724		17,993		16,683
Materials and supplies		—		453
Consumables						377		—
Total	$	34,366	$	37,542	$	37,967	$	33,384

During the Current Quarter, Prior Quarter, Current Period and Prior Period, the Company recorded charges to the reserve for excess and obsolete inventory for $0.1 million, $0.2 million, a ~~nominal~~ ~~amount, $0.8~~$0.1 million and ~~$0.2~~$0.8 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The Company’s inventory reserve was ~~$4.2 million and $4.1~~$3.9 million as of September 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. 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—6—PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation. Depreciation (and amortization of finance lease assets) is calculated on a straight-line basis over the estimated useful life of each asset. Property and equipment consists of the following as of September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:



	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020

	(in thousands)				(in thousands)
Machinery and equipment					$	597,151	$	596,441
Buildings and leasehold improvements						100,060		93,236
Pipelines						72,829		72,458
Disposal wells						47,711		48,097
Vehicles and equipment						28,717		30,975
Land	$	14,013	$	16,030		15,210		13,497
Buildings and leasehold improvements		92,232		97,426
Vehicles and equipment		31,665		53,819
Computer equipment and software						5,527		7,127
Office furniture and equipment						887		892
Machinery and equipment - finance lease						544		537
Vehicles and equipment - finance lease		784		1,291		371		475
Machinery and equipment		617,066		659,835
Machinery and equipment - finance lease		612		162
Pipelines		72,111		69,327
Computer equipment and software		6,697		8,051
Computer equipment and software - finance lease		356		356		412		356
Office furniture and equipment		962		1,157
Disposal wells		49,965		64,149
Other		—		497
Construction in progress		21,517		43,279		23,453		14,811
		907,980		1,015,379		892,872		878,902
Less accumulated depreciation⁽¹⁾		(538,380)		(562,986)		(549,725)		(528,537)
Property and equipment held-for-sale, net		—		885
Total property and equipment, net	$	369,600	$	453,278	$	343,147	$	350,365

(1)

Includes ~~$1.4 million and $1.6~~$1.1 million of accumulated depreciation related to finance leases as of both September 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020.

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~~“Note 7—Goodwill and Other Intangible Assets” is as follows:

Three months ended September 30,

Nine months ended September 30,


2020

2019

2020

2019


(in thousands)
Category

Depreciation expense from property and equipment

$
21,449

$
26,163

$
68,720

$
81,698

Amortization expense from finance leases

123

54

239

791

Amortization expense from intangible assets

2,960

2,969

8,939

8,907

Accretion expense from asset retirement obligations

30

29

(127)

86

Total depreciation and amortization

$
24,562

$
29,215

$
77,771

$
91,482

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. See Note 3 for impairment and abandonment of property and equipment during the Current Quarter and Prior Quarter.

During the Current Period, the Company sold the remaining Canadian assets that were previously designated as held for sale at a loss of $0.1 million recognized within gains (losses) on sales of property, equipment and divestitures, net on the accompanying consolidated statements of operations.


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Category
Depreciation expense from property and equipment	$	20,612	$	21,449	$	59,216	$	68,720
Amortization expense from finance leases		64		123		167		239
Amortization expense from intangible assets		2,686		2,960		7,919		8,939
Accretion expense from asset retirement obligations		104		30		105		(127)
Total depreciation and amortization	$	23,466	$	24,562	$	67,407	$	77,771

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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 Prior Period, the Company determined that certain equipment was obsolete, and recorded the following impairment charges:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Impairment and abandonment of property and equipment
Water Services	$	—	$	—	$	—	$	3,894
Water Infrastructure		—		—		—		4,016
Total impairment and abandonment of property and equipment	$	—	$	—	$	—	$	7,910

NOTE 8—7—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)~~“Note 11—Fair Value Measurement”). During the first quarter of 2020, the Company had triggering events ~~in connection with~~related to the ~~resulting~~ significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil and the related global economic impacts resulting from the OPEC+ disputes 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. Given the volatile and challenging market environment atas of March 31, 2020, the Company utilized third-party valuation advisors to assist with these evaluations. These evaluations included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on our weighted-average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset. The Company performed quantitative tests for reporting units in both the 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, 2020 and December 31, 2019 are as follows:~~

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 September 30, 2020

$
—

$
—

$
—

segments totaling $266.9 million.

The components of other intangible assets, net as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:


	As of September 30, 2020								As of December 31, 2019						As of September 30, 2021						As of December 31, 2020
	Gross				Accumulated		Net		Gross		Accumulated		Net		Gross		Accumulated		Net		Gross				Accumulated		Net
	Value		Impairment		Amortization		Value		Value		Amortization		Value		Value		Amortization		Value		Value		Impairment		Amortization		Value

	(in thousands)								(in thousands)						(in thousands)						(in thousands)
Definite-lived
Customer relationships	$	116,554	$	—	$	(27,036)	$	89,518	$	116,554	$	(20,233)	$	96,321	$	116,554	$	(36,103)	$	80,451	$	116,554	$	—	$	(29,302)	$	87,252
Patents		9,741		—		(2,923)		6,818		10,110		(2,420)		7,690
Patents and other intellectual property																12,772		(3,966)		8,806		9,741		—		(3,166)		6,575
Other		7,234		—		(6,160)		1,074		7,234		(4,766)		2,468		7,234		(6,690)		544		7,234		—		(6,373)		861
Total definite-lived		133,529		—		(36,119)		97,410		133,898		(27,419)		106,479		136,560		(46,759)		89,801		133,529		—		(38,841)		94,688
Indefinite-lived
Water rights		7,031		—		—		7,031		7,031		—		7,031		7,031		—		7,031		7,031		—		—		7,031
Trademarks		23,442		(9,082)		—		14,360		23,442		—		23,442		14,360		—		14,360		23,442		(9,082)		—		14,360
Total indefinite-lived		30,473		(9,082)		—		21,391		30,473		—		30,473		21,391		—		21,391		30,473		(9,082)		—		21,391

Total other intangible assets, net	$	164,002	$	(9,082)	$	(36,119)	$	118,801	$	164,371	$	(27,419)	$	136,952	$	157,951	$	(46,759)	$	111,192	$	164,002	$	(9,082)	$	(38,841)	$	116,079

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Due to the triggering events discussed above, the Company also tested ~~all~~indefinite-lived intangible assets for impairment during the first quarter of 2020. These evaluations included significant judgment, including discount rates based on our weighted-average cost of capital and the royalty rate. This resulted in $9.1 million of impairment to trademarks using the relief from royalty method, which was recorded in the Oilfield Chemicals segment. Further, the Company tested all other long-lived assets for impairment, including definite-lived intangible assets, using an undiscounted test for recoverability at the asset group level which resulted in no additional impairments.

~~Table of Contents~~

The weighted-average amortization period for customer relationships, patents and other ~~definite lived~~intellectual property, and other definite-lived assets was ~~9.9~~8.9 years, ~~7.0~~6.7 years, and ~~2.6~~2.3 years, respectively, as of September 30, ~~2020.~~2021. See ~~Note 7~~“Note 6—Property and Equipment” for the amortization expense during the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The ~~indefinite lived~~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		Amount
	(in thousands)		(in thousands)
Remainder of 2020	$	2,722
Year ending December 31, 2021		10,466
Remainder of 2021			$	2,720
Year ending December 31, 2022		10,252		10,666
Year ending December 31, 2023		10,180		10,594
Year ending December 31, 2024		10,111		10,525
Year ending December 31, 2025				10,362
Thereafter		53,679		44,934
Total	$	97,410	$	89,801

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NOTE 9—8—DEBT

Credit facility and revolving line of credit

On November 1, 2017, SES Holdings and Select Energy Services, LLC (“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	Average Excess Availability	Base Rate Margin	Eurocurrency Rate Margin

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

~~Table of Contents~~

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.

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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% 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 ~~13—~~12—Related-Party ~~Transactions”~~Transactions—Tax Receivable Agreements” 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 outstanding under the Credit Agreement as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the borrowing base under the Credit Agreement was ~~$63.6~~$140.4 million and ~~$214.6~~$96.4 million, respectively. The significant reduction in our borrowing base since December 31, 2019 was driven primarily by the meaningful reductions during the Current Period in our accounts receivable, which represent the primary collateral for the borrowing base. The borrowing capacity under the Credit Agreement was reduced by outstanding letters of credit of $15.6 million ~~and $19.9 million~~ as of both September 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. 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 ~~$48.0~~$124.8 million as of September 30, ~~2020.~~2021.

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, ~~2020~~2021 and December 31, ~~2019,~~2020, were ~~$1.4~~$0.7 million and ~~$2.0~~$1.3 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 the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.

The Company was in compliance with all debt covenants as of September 30, ~~2020.~~2021.

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NOTE ~~10—~~9—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.

~~As previously disclosed, certain subsidiaries~~On April 20, 2021, an entity acquired in the 2017 merger (the “Rockwater Merger”) with Rockwater ~~merger are under investigation by~~Energy Solutions, Inc. (“Rockwater”) formally pled guilty to violations of the Clean Air Act that occurred prior to the Rockwater Merger and entered a plea agreement before the U.S. ~~Attorney's Office~~District Court for the Middle District of ~~Pennsylvania and~~Pennsylvania. Entry into this plea agreement has resolved the ~~U.S. Environmental Protection Agency. It is alleged that certain employees at some of the facilities altered~~government’s prosecution related to Rockwater’s altering emissions controls systems on less than 5% of the vehicles in ~~the fleet in violation of the Clean Air Act.~~its fleet. The Company ~~is continuing to cooperate with~~made final payments in April totaling $2.6 million, which was the ~~relevant authorities to resolve the matter,~~amount accrued as of both March 31, 2021 and ~~while at this time no administrative, civil~~December 31, 2020, and did not incur additional monetary penalties or ~~criminal charges have been brought against the Company, the Company accrued $4.3 million related to the~~fines. The total amount paid in settlement of this investigation prior to the Current Quarter and made an initial payment of $1.2 million related to this accrual during the Current Quarter. The Company does not believe that the ultimate resolution of this matter ~~will be material to the Company’s financial statements.~~was $4.3 million.

Self-Insured Reserves

We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters and ~~effective June 1, 2020,~~ health insurance. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.

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NOTE ~~11—~~10—EQUITY-BASED COMPENSATION

The SES Holdings 2011 Equity Incentive Plan ~~(“2011~~(the “2011 Plan”) was approved by the board of managers of SES Holdings in April 2011. In conjunction with the ~~Select~~private placement of 16,100,000 shares of the Company’s Class A Common Stock on December 20, 2016 (the “Select 144A ~~Offering,~~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,~~May 8, 2020, the Company’s ~~board of directors~~stockholders approved ~~the First Amendment~~an amendment to the 2016 Plan (the “ First Equity Plan Amendment”), which clarified the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater 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 First 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. Stockholders holding a majority of the Company’s outstanding common stock approved the First Equity Plan Amendment on July 18, 2017, and such amendment became effective on November 1, 2017 upon the consummation of the Rockwater merger.

~~On February 28, 2020, the Company’s board of directors approved the Second Amendment to the 2016 Plan (the “Second Equity Plan Amendment”), which increases~~increase the number of shares of the Company’s Class A Common Stock that may be issued under the 2016 Plan by 4,000,000 ~~shares.~~shares and to make certain other administrative changes. The ~~effectiveness~~2016 Plan includes share recycling provisions that allow shares subject to an award that expires or is cancelled, forfeited or otherwise terminated without actual delivery of the ~~Second Equity Plan Amendment was subject~~underlying shares of Class A Common Stock to ~~approval by~~be considered not delivered and thus available to be granted as new awards under the Company's stockholders. Stockholders holding a majority of the Company’s outstanding common stock approved the Second Equity Plan Amendment on May 8, 2020, and such amendment became immediately effective.2016 Plan.

Currently, the maximum number of shares reserved for issuance under the 2016 Plan ~~taking into account the Second Equity Plan Amendment,~~ is approximately 13.3 million ~~shares.~~shares, with approximately 2.8 million shares available to be issued as of September 30, 2021. 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. Certain 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 Period.~~

~~Table of Contents~~

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, 2020						For the nine months ended September 30, 2021
				Weighted-average						Weighted-average
		Weighted-average		Grant Date Value	Aggregate Intrinsic			Weighted-average		Grant Date Value	Aggregate Intrinsic
	Stock Options	Exercise Price		Term (Years)	Value (in thousands) ^(a)		Stock Options	Exercise Price		Term (Years)	Value (in thousands) ^(a)
Beginning balance, outstanding	3,797,319	$	15.95	4.2	$	509	3,519,159	$	16.11	3.3	$	—
Forfeited	(22,437)		18.52
Expired	(238,104)		14.05				(1,413,194)		14.89
Ending balance, outstanding	3,536,778	$	16.06	3.6	$	—	2,105,965	$	16.93	4.6	$	—
Ending balance, exercisable	3,533,403	$	16.06	3.6	$	—	2,105,965	$	16.93	4.6	$	—
Nonvested at September 30, 2020	3,375	$	22.22
Nonvested at September 30, 2021							—	$	—

^(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 ~~$3.84~~$5.19 and ~~$9.28~~$4.10 as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The Company recognized a ~~nominal~~ ~~amount, $1.0 million, $0.2 million and $3.4 million of~~0 compensation expense related to stock options during the Current Quarter, a nominal amount of compensation expense during the Prior Quarter and the Current Period and $0.2 million of compensation expense in the Prior ~~Period, respectively.~~Period. As of September 30, ~~2020, there was a nominal amount of unrecognized~~2021, all equity-based compensation expense ~~remaining~~ related to ~~nonvested~~ stock ~~options.~~options had been recognized.

Restricted Stock Awards ~~and Restricted Stock Units~~

The value of the restricted stock awards ~~and restricted stock units~~ granted 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 $2.4 million, $2.1 million, ~~$2.3 million, $5.8~~$5.4 million and ~~$6.3~~$5.8 million related to the restricted stock awards ~~and restricted stock units~~ for the Current Quarter, Prior Quarter,

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Current Period and Prior Period, respectively. As of September 30, ~~2020,~~2021, there was ~~$8.9~~$13.2 million of unrecognized compensation expense with a weighted-average remaining life of 1.9 years related to unvested restricted stock awards.

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


	For the nine months ended September 30, 2020			For the nine months ended September 30, 2021
		Weighted-average			Weighted-average
	Restricted Stock Awards	Grant Date Fair Value		Restricted Stock Awards	Grant Date Fair Value
Nonvested at December 31, 2019	1,518,193	$	10.08
Nonvested at December 31, 2020				2,003,072	$	6.97
Granted	1,477,488		5.80	2,154,897		7.02
Vested	(578,281)		11.79	(693,582)		7.92
Forfeited	(398,550)		7.50	(319,874)		6.41
Nonvested at September 30, 2020	2,018,850	$	6.97
Nonvested at September 30, 2021				3,144,513	$	6.85

~~Table of Contents~~

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

For the nine months ended September 30, 2020

Weighted-average

Restricted Stock Units

Grant Date Fair Value
Nonvested at December 31, 2019

1,250

$
19.00
Vested

(625)

20.00
Forfeited

(625)

18.00
Nonvested at September 30, 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 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%

All PSUs granted in 2018 did not achieve the performance-based vesting conditions and were forfeited. Also, during 2020, the Company revised the estimates for the PSUs granted in 2019, which are not expected to achieve the performance-based vesting conditions.

During 2020 and 2021, 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 applicable period from either January 1, 2020 through December 31, ~~2022.~~2022 or January 1, 2021 through December 31, 2023. During the Current Period, the Company also approved grants of PSUs subject to both performance-based and service-based vesting conditions based on adjusted earnings before taxes and depreciation (“Adjusted EBITDA”) as defined in the agreement.

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The target number of shares of Class A Common Stock subject to each PSU granted in 2020 and 2021 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, 2023 for the 2020 PSU grants and June 30, 2024 for the 2021 PSU grants, assuming the applicable minimum performance metrics are achieved.

~~Table of Contents~~

The target PSUs granted in 2020 that become earned connected with the 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, but only if the Company’s Average Return on Assets is equal to or greater than 5% during the performance ~~period:~~period. The target PSUs granted in 2021 removed the 5% minimum ROA for the Company and added that the Company must have a positive Total Shareholder Return (as defined in the applicable PSU agreement) over the performance period. As a result of this market condition being added, the 2021 PSUs will be valued each reporting period utilizing a Black-Scholes model.


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

The 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 target PSUs granted in 2021 connected with Adjusted EBITDA can only vest at 100% if the minimum Adjusted EBITDA threshold is met. Failure to meet this threshold would result in 0% vesting.

The fair value on the date the PSUs were granted during 2021, 2020, and 2019 ~~and 2018~~ was $4.7 million, $4.4 million, $7.0 ~~million and $5.9~~ 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~~measurement date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. ~~During the Current Period, the Company revised the estimates for the PSUs granted in 2018 and 2019 and expected to vest to 0%.~~ The Company recognized a credit to compensation expense of $0.1 million, compensation expense of $0.2 million ~~compensation expense of $0.1~~and $0.8 million, and a ~~reduction~~credit to compensation expense of $2.0 ~~million and compensation expense of $1.8~~ million related to the PSUs for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.

As of September 30, ~~2020,~~2021, the unrecognized compensation cost related to our unvested PSUs is estimated to be ~~$2.3~~$3.0 million and is expected to be recognized over a weighted-average period of ~~2.3~~1.9 years. However, this compensation cost will be adjusted as appropriate throughout the applicable performance periods.

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The following table summarizes the information about the performance share units outstanding as of September 30, ~~2020:~~2021:


		Performance Share Units
Nonvested as of December 31, ~~2019~~2020		~~1,014,990~~1,763,909
Target shares granted		~~753,378~~689,551
Target shares forfeited		(247,856)
Target shares outstanding as of September 30, ~~2020~~2021		~~1,768,368~~2,205,604

~~Stock-Settled Incentive Awards~~

Effective May 17, 2018, the Company approved grants of stock-settled incentive awards to certain key employees under the 2016 Plan that were subject to both market-based and service-based vesting provisions. These awards vested after a two-year service period and, if earned, would have settled in shares of Class A Common Stock. The ultimate amount earned was based on the achievement of the market metrics, which was 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 was forfeited. The target amount that became earned during the performance period was determined in accordance with the following table:

~~Table of Contents~~


~~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 equaled 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 was in shares of Class A Common Stock with a fair market value equal to the earned amount, which could have ranged from 0% to 200% of the target amount depending on the stock price at vesting date. The earned amount was 0% and 0 shares of Class A Common Stock were issued.

Compensation expense associated with the stock-settled incentive awards was 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 related to stock-settled incentive awards of $0.1 million, $0.1 million and $0.4 million in the Prior Quarter, Current Period and Prior Period, respectively.

~~The following table summarizes the information about the stock-settled incentive awards as of June 30, 2020:~~

Award Value

Value at Target

Being Recognized
Nonvested as of December 31, 2019

$
2,937

$
1,122
Forfeited during 2020

(410)

(157)
Awards earned and forfeited as market condition not satisfied as of vesting date

(2,527)

—
Cumulative expense recognized

$
—

$
965

Employee Stock Purchase Plan (ESPP)

The Company has 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 per year 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.

~~Table of Contents~~

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

Share Repurchases

During the ~~Current~~Prior Quarter, ~~and~~the Company repurchased 43,923 shares in connection with employee minimum tax withholding requirements.

During the Current Period, the Company repurchased ~~0 and 1,989,440~~ 199,976shares ~~respectively, of Class A Common Stock in the open market and repurchased 43,923 and 210,384 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 ~~Quarter, the repurchases were accounted for as a decrease to paid-in-capital of $0.2 million and a decrease to Class A Common Stock of approximately $400. During the Current~~ Period, the repurchases were accounted for as a decrease to paid-in-capital of ~~$10.9~~$1.2 million and a decrease to Class A Common Stock of approximately ~~$22,000. In~~$2,000. During the Prior ~~Quarter,~~Period, the Company repurchased ~~1,443,409~~1,989,440 shares in the open market and repurchased ~~1,239 shares in connection with employee minimum tax withholding requirements. In the Prior Period, the Company repurchased 1,525,501 shares in the open market and repurchased 71,649~~210,384 shares in connection with employee minimum tax withholding requirements.

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NOTE ~~12—~~11—FAIR VALUE MEASUREMENT

The Company utilizes fair value measurements to measure assets and liabilities in a business combination, or assess impairment and abandonment of property and equipment, intangible assets and ~~goodwill.~~goodwill or to measure the value of securities marked to market. 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 the 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 months ended September 30, ~~2020~~2021 or the year ended December 31, ~~2019.~~ 2020.

The following table presents information about the Company’s assets measured at fair value on a recurring ~~and non-recurring~~ basis as of ~~March 31, 2020, June 30, 2020 and~~ September 30, ~~2020:~~2021:


			Fair Value												Fair Value
			Measurements Using						Carrying						Measurements Using						Carrying
	Frequency	Measurement Date	Level 1		Level 2		Level 3		Value⁽¹⁾		Impairment		Frequency	Measurement Date	Level 1		Level 2		Level 3		Value⁽¹⁾		Impairment

			(in thousands)												(in thousands)

Nine Months Ended September 30, 2020
Goodwill	Non-recurring	March 31	$	—	$	—	$	—	$	266,934	$	266,934
Trademark	Non-recurring	March 31		—		—		14,360		23,442		9,082
Property and equipment	Non-recurring	March 31		—		—		176		3,360		3,184
Property and equipment	Non-recurring	June 30		—		—		—		4,726		4,726
Prepaid expenses and other current assets	Recurring	September 30		—		1,768		—		1,768		—
Nine months ended September 30, 2021
Investments													Recurring	March 31	$	1,546	$	—	$	—	$	1,546	$	—
Investments													Recurring	June 30		2,208		—		—		2,208		—
Investments													Recurring	September 30		1,717		—		—		1,717		—

(1)

Amount represents carrying value at the date of assessment.

~~See Note 3 – Impairments and Other Costs, for a discussion of the impairment to goodwill, trademark and property and equipment presented in the table above.~~

Other fair value considerations

The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade ~~short-term investments~~ and accounts payable, approximate their fair value as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, due to the short-term ~~maturity~~nature of these instruments. The Company did not have any bank debt

~~Table of Contents~~

as of September 30, ~~2020~~2021 or December 31, ~~2019.~~2020. 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.

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Nonmonetary transaction: During the ~~Current~~Prior Quarter, the Company had a nonmonetary exchange with a customer whereby the customer settled a $1.6 million accounts receivable balance using its restricted common stock, warrants and other privately traded securities. All securities received in the exchange are now publicly traded and free of restrictions. The Company ~~elected the fair value option with the value~~sold a portion of ~~the restricted stock~~these securities for $0.3 million and warrants derived from quoted active market pricing of unrestricted, publicly traded, common stock and warrants and the value of the other privately traded securities was derived from a correlation with observable market data. The Company recorded a ~~$0.2 million unrealized~~nominal realized gain onduring the ~~nonmonetary exchange based on the value of the equity at September 30, 2020~~Current Quarter recognized within other ~~expense,~~income (expense), net on the accompanying consolidated statements of operations. The Company ~~expects~~uses the ~~registration statement registering~~fair value option to account for its remaining investment with the ~~restricted common stock, warrants~~fair value derived from quoted active market pricing of the unrestricted, publicly traded equity. The Company chose the fair value option because it represents the period-end value of the securities, which the Company has the ability to sell. The Company recorded a $0.2 million and $1.4 million unrealized loss on the securities during the Current Quarter and Current Period, respectively, based on the value of the equity as of September 30, 2021, recognized within other ~~privately traded securities received to be declared effective in either~~income (expense), net on the ~~fourth quarter~~accompanying consolidated statements of ~~2020 or first quarter of 2021, and can sell the common stock and related securities once registered.~~operations. The ~~$1.8~~$1.7 million of remaining common stock and related securities was included in prepaid expenses and other current assets on the accompanying consolidated balance sheets as of September 30, ~~2020.~~2021.

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NOTE ~~13—~~12��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, an investment in a company that is significantly influenced by another related party, and ~~an unconsolidated joint venture.~~cost-method and equity-method investees. 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 2020 Annual Meeting of Stockholders filed with the SEC on March 27, 2020.

During the Current Quarter, sales to related parties were $0.2 million and purchases from related-party vendors were $1.5 million. These purchases consisted of $1.7 million relating to the rental of certain equipment or other services used in operations and a credit of $0.2 million relating to management, consulting and other services.

During the Prior Quarter, sales to related parties were $0.2 million and purchases from related-party vendors were $0.5 million. These purchases consisted of $0.4 million relating to the rental of certain equipment or other services used in operations, ~~and~~ $0.1 million relating to management, consulting and other services.

During the ~~Prior Quarter,~~Current Period, sales to related parties were ~~$3.5~~$0.8 million and purchases from related-party vendors were ~~$3.2~~$5.0 million. These purchases consisted of ~~$2.3~~$4.1 million relating to the rental of certain equipment or other services used in operations, ~~$0.6 million relating to purchases of property and equipment and $0.3~~$0.7 million relating to management, consulting and other ~~services.~~services and $0.2 million related to purchases of property and equipment.

During the ~~Current~~Prior Period, sales to related parties were $2.7 million and purchases from related-party vendors were $6.2 million. These purchases consisted of $5.5 million relating to the rental of certain equipment or other services used in operations, $0.3 million relating to purchases of property and equipment, $0.3 million relating to management, consulting and other services and $0.1 million ~~related~~relating to inventory and consumables.

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

Tax Receivable Agreements

In connection with the Select 144A Offering, the Company entered into two tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the ~~Tax Receivable Agreements with~~then holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder,” and together, the ~~TRA Holders.~~“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

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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~~Owner Holdco 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 Company has not recognized a liability associated with the Tax Receivable Agreements ~~revising the definition~~as of ~~a “change of control” for purposes of the Tax Receivable Agreements and acknowledging that the Rockwater merger would not result in such a change of control.~~September 30, 2021 or December 31, 2020.

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NOTE ~~14—~~13—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 September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(in thousands)								(in thousands)
Current income tax (benefit) expense	$	(157)	$	2,115	$	(836)	$	2,698
Current income tax expense (benefit)									$	63	$	(157)	$	(122)	$	(836)
Deferred income tax (benefit) expense		(44)		386		341		552		(95)		(44)		(89)		341
Total income tax (benefit) expense	$	(201)	$	2,501	$	(495)	$	3,250
Total income tax benefit									$	(32)	$	(201)	$	(211)	$	(495)
Effective Tax Rate		0.6%		25.9%		0.1%		16.3%		0.2%		0.6%		0.3%		0.1%

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 $0.5 million during the ~~Current~~Prior Period, as a result of the net operating loss carryback and interest expense limitation provisions of the CARES Act.

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NOTE ~~15—~~14—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, 2020		December 31, 2019		September 30, 2021		December 31, 2020

	(in thousands)				(in thousands)
Noncontrolling interests attributable to joint ventures formed for water-related services	$	1,908	$	2,674	$	1,040	$	2,002
Noncontrolling interests attributable to holders of Class B Common Stock		113,890		172,961		100,061		110,819
Total noncontrolling interests	$	115,798	$	175,635	$	101,101	$	112,821

~~For all periods presented, there were no changes to Select’s~~During the Current Period, the Company initiated the dissolution of one of its water-related services joint ventures and increased its ownership interest in another joint venture, which, combined, eliminated $0.9 million of noncontrolling interest. During the Prior Period, the Company sold a 50% interest in one of its water-related services joint ventures, ~~formed for water-related services, with the exception of a divestiture of a 50% owned joint venture during the Current Period that~~which eliminated $0.1 million of noncontrolling interest. Additionally, for all periods presented, there were changes in ~~Select’s~~Select Inc.’s ownership interest in SES Holdings LLC. The effects of the changes in ~~Select’s~~Select Inc.’s ownership interest in SES Holdings LLC are as follows:


	For the nine months ended September 30,				Nine months ended September 30,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
Net (loss) income attributable to Select Energy Services, Inc.	$	(320,701)	$	12,714
Transfers (to) from noncontrolling interests:
Increase in additional paid-in capital as a result of stock option exercises		—		54
Net loss attributable to Select Energy Services, Inc.					$	(51,718)	$	(320,701)
Transfers from (to) noncontrolling interests:
Increase in additional paid-in capital as a result of issuing shares for a business combination						359		—
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures		1,891		3,568		1,850		1,891
Increase in additional paid-in capital as a result of issuance of common stock due to vesting of restricted stock units		1		4		—		1
Decrease in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units		(1,416)		(2,501)		(19)		(1,416)
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
Increase (decrease) in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued		6		(1)
Change to equity from net (loss) income attributable to Select Energy Services, Inc. and transfers from noncontrolling interests	$	(320,219)	$	96,544
Increase in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued						1		6
Change to equity from net loss attributable to Select Energy Services, Inc. and transfers from noncontrolling interests					$	(49,527)	$	(320,219)

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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 stockholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 3,536,778, 2,956,610, 3,536,778 and 2,956,837 shares of Class A Common Stock 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 (loss) 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, 2020

Three months ended September 30, 2019

Select Energy

Select Energy


Services, Inc.

Class A

Class B

Services, Inc.

Class A

Class B
Numerator:

Net (loss) income

$
(36,260)

$
7,172

Net loss (income) attributable to noncontrolling interests

5,719

(1,793)

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

(30,541)

$
(30,541)

$
—

5,379

$
5,379

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

—

—

—

7

7

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

—

—

—

1

1

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

$
(30,541)

$
(30,541)

$
—

$
5,387

$
5,387

$
—
Denominator:

Weighted-average shares of common stock outstanding — basic

84,794,286

16,221,101

79,468,991

24,513,654
Dilutive effect of restricted stock

—

—

339,911

—
Dilutive effect of stock options

—

—

28,575

—
Dilutive effect of ESPP

—

—

104

—
Weighted-average shares of common stock outstanding — diluted

84,794,286

16,221,101

79,837,581

24,513,654
(Loss) earnings per share:

Basic

$
(0.36)

$
—

$
0.07

$
—
Diluted

$
(0.36)

$
—

$
0.07

$
—

~~Table of Contents~~

Nine months ended September 30, 2020

Nine months ended September 30, 2019

Select Energy

Select Energy


Services, Inc.

Class A

Class B

Services, Inc.

Class A

Class B
Numerator:

Net (loss) income

$
(380,524)

$
16,640

Net loss (income) attributable to noncontrolling interests

59,823

(3,926)

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

(320,701)

$
(320,701)

$
—

12,714

$
12,714

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

—

—

—

15

15

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

—

—

—

3

3

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

$
(320,701)

$
(320,701)

$
—

$
12,732

$
12,732

$
—
Denominator:

Weighted-average shares of common stock outstanding — basic

85,276,951

16,221,101

78,848,939

25,516,904
Dilutive effect of restricted stock

—

—

358,503

—
Dilutive effect of stock options

—

—

60,174

—
Dilutive effect of ESPP

—

—

299

—
Weighted-average shares of common stock outstanding — diluted

85,276,951

16,221,101

79,267,915

25,516,904
(Loss) earnings per share:

Basic

$
(3.76)

$
—

$
0.16

$
—
Diluted

$
(3.76)

$
—

$
0.16

$
—

NOTE 15—LOSS PER SHARE

Loss per share is based on the amount of loss allocated to the stockholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 2,105,965, 3,536,778, 2,105,965 and 3,536,778 shares of Class A Common Stock 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 their effect is antidilutive.

The following tables present the Company’s calculation of basic and diluted loss 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, 2021						Three months ended September 30, 2020
	Select Energy						Select Energy
	Services, Inc.		Class A		Class B		Services, Inc.		Class A		Class B
Numerator:
Net loss	$	(14,204)					$	(36,260)
Net loss attributable to noncontrolling interests		2,160						5,719
Net loss attributable to Select Energy Services, Inc. — basic	$	(12,044)	$	(12,044)	$	—	$	(30,541)	$	(30,541)	$	—
Net loss attributable to Select Energy Services, Inc. — diluted	$	(12,044)	$	(12,044)	$	—	$	(30,541)	$	(30,541)	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				88,596,736		16,221,101				84,794,286		16,221,101
Weighted-average shares of common stock outstanding — diluted				88,596,736		16,221,101				84,794,286		16,221,101
Loss per share:
Basic			$	(0.14)	$	—			$	(0.36)	$	—
Diluted			$	(0.14)	$	—			$	(0.36)	$	—


	Nine months ended September 30, 2021						Nine months ended September 30, 2020
	Select Energy						Select Energy
	Services, Inc.		Class A		Class B		Services, Inc.		Class A		Class B
Numerator:
Net loss	$	(61,240)					$	(380,524)
Net loss attributable to noncontrolling interests		9,522						59,823
Net loss attributable to Select Energy Services, Inc. — basic	$	(51,718)	$	(51,718)	$	—		(320,701)	$	(320,701)	$	—
Net loss attributable to Select Energy Services, Inc. — diluted	$	(51,718)	$	(51,718)	$	—	$	(320,701)	$	(320,701)	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				86,290,886		16,221,101				85,276,951		16,221,101
Weighted-average shares of common stock outstanding — diluted				86,290,886		16,221,101				85,276,951		16,221,101
Loss per share:
Basic			$	(0.60)	$	—			$	(3.76)	$	—
Diluted			$	(0.60)	$	—			$	(3.76)	$	—

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NOTE ~~17—~~16—SEGMENT INFORMATION

Select Inc. is a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the U.S. The Company’s services are offered through 3 reportable segments. 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.

The Company’s CODM assesses performance and allocates resources on the basis of the following ~~three~~3 reportable segments:

Water Services — The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business as well as the Company’s industrial solutions business.

Water Infrastructure — The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and saltwater 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 supplying logistics for chemical applications. We develop, manufacture and apply a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well ~~completion~~completions. Given the breadth of chemicals 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 byapplication expertise we provide, 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 ~~but also include~~to major integrated and independent oil and gas producers.

~~The results~~ This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of ~~our service lines divested during 2019, including the operations of our Affirm subsidiary, our sand hauling operations and our Canadian operations, are combined~~water used in ~~the “Other” category.~~well completions.

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, 2020								For the three months ended September 30, 2021
			Loss		Depreciation and		Capital				(Loss) Income		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures		Revenue		before taxes		Amortization		Expenditures

	(in thousands)								(in thousands)
Water Services	$	54,665	$	(18,682)	$	14,888	$	332	$	113,564	$	(1,622)	$	13,698	$	7,847
Water Infrastructure		16,255		(4,843)		6,556		149		36,787		(544)		6,860		8,578
Oilfield Chemicals		31,064		(2,951)		2,433		1,796		55,538		(39)		2,346		2,066
Other		—		(21)		—		1		—		(2)		—		378
Eliminations		(742)		—		—		—		(1,256)		—		—		—
Loss from operations				(26,497)								(2,207)
Corporate		—		(7,715)		685		—		—		(11,568)		562		—
Interest expense, net		—		(789)		—		—		—		(419)		—		—
Other expense, net		—		(1,460)		—		—
Other income, net										—		87		—		—
	$	101,242	$	(36,461)	$	24,562	$	2,278	$	204,633	$	(14,107)	$	23,466	$	18,869

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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 expense, net

—

(2,364)

—

—

$
328,968

$
9,673

$
29,215

$
27,096

For the nine months ended September 30, 2020




Loss

Depreciation and

Capital

Revenue

before taxes

Amortization

Expenditures

(in thousands)
Water Services

$
260,907

$
(237,100)

$
47,924

$
1,551
Water Infrastructure

89,578

(97,957)

20,608

2,512
Oilfield Chemicals

123,266

(13,063)

7,035

6,300
Other

—

(34)

—

326
Eliminations

(1,985)

—

—

—
Loss from operations

(348,154)

Corporate

—

(24,694)

2,204

—
Interest expense, net

—

(1,633)

—

—
Other expense, net

—

(6,538)

—

—

$
471,766

$
(381,019)

$
77,771

$
10,689

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 expense, net

—

(8,027)

—

—

$
1,015,501

$
19,890

$
91,482

$
81,907

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	For the three months ended September 30, 2020
			Loss		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures

	(in thousands)
Water Services	$	54,665	$	(18,682)	$	14,888	$	332
Water Infrastructure		16,255		(4,843)		6,556		149
Oilfield Chemicals		31,064		(2,951)		2,433		1,796
Other		—		(21)		—		1
Eliminations		(742)		—		—		—
Loss from operations				(26,497)
Corporate		—		(7,715)		685		—
Interest expense, net		—		(789)		—		—
Other expense, net		—		(1,460)		—		—
	$	101,242	$	(36,461)	$	24,562	$	2,278


	For the nine months ended September 30, 2021
			Loss		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures

	(in thousands)
Water Services	$	257,511	$	(24,834)	$	39,091	$	10,820
Water Infrastructure		107,922		228		19,561		18,160
Oilfield Chemicals		148,817		(291)		6,920		3,266
Other		—		(18)		—		379
Eliminations		(4,758)		—		—		—
Loss from operations				(24,915)
Corporate		—		(32,277)		1,835		—
Interest expense, net		—		(1,254)		—		—
Other expense, net		—		(2,876)		—		—
	$	509,492	$	(61,322)	$	67,407	$	32,625


	For the nine months ended September 30, 2020
			Loss		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures

	(in thousands)
Water Services	$	260,907	$	(237,100)	$	47,924	$	1,551
Water Infrastructure		89,578		(97,957)		20,608		2,512
Oilfield Chemicals		123,266		(13,063)		7,035		6,300
Other		—		(34)		—		326
Eliminations		(1,985)		—		—		—
Loss from operations				(348,154)
Corporate		—		(24,694)		2,204		—
Interest expense, net		—		(1,633)		—		—
Other expense, net		—		(6,538)		—		—
	$	471,766	$	(381,019)	$	77,771	$	10,689

Total assets by segment as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, is as follows:


	As of		As of		As of		As of
	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020

	(in thousands)				(in thousands)
Water Services	$	548,652	$	831,123	$	483,854	$	515,856
Water Infrastructure		178,967		314,026		207,192		204,995
Oilfield Chemicals		145,069		192,224		169,240		147,612
Other		7,945		10,247		7,846		6,896
	$	880,633	$	1,347,620	$	868,132	$	875,359

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NOTE 17—SUBSEQUENT EVENTS

On October 1, 2021, the Company completed the acquisition of substantially all of the assets of Agua Libre Midstream, LLC (“Agua Libre”) and other water-related assets, operations and assumed liabilities from Basic Energy Services, Inc. (“Basic”) for total consideration of $19.9 million, consisting of $15.2 million in cash, 902,593 shares of the Company’s Class A Common Stock based on the closing price of the Company’s shares of Class A Common Stock of $5.19 per share on September 30, 2021, and certain assumed liabilities. The preliminary acquisition price is subject to standard post-closing working capital adjustments. The assets and operations acquired will be integrated into the Company’s Water Services and Water Infrastructure segments.

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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 Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the Securities and Exchange Commission on February ~~25, 2020~~24, 2021 (our ~~“2019~~“2020 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” and other cautionary statements described under the heading “Risk Factors” included in our ~~2019~~2020 Form 10-K, ~~and~~ under the heading “Part II—Item 1A. Risk Factors” in our Quarterly ~~Reports~~Report on Form 10-Q for the quarters ended March 31, ~~2020 and~~2021, June 30, ~~2020,~~2021, and this Quarterly Report. We assume no obligation to update any of these forward-looking statements.

This discussion relates to the three and nine months ended September 30, ~~2020~~2021 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, ~~2019~~2020 (the “Prior Quarter” and the “Prior Period”, respectively).

Overview

We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical products for use in oil and gas well completion and production operations. As ~~an industry~~a 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.

Environmental Consciousness

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 exploration and production (“E&P&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~~Through our expertise in chemical technologies and our FluidMatch™ design solutions, we provide water profiling and fluid assessment services for our customers to ~~optimize~~support the optimization of their fluid systems, ~~to economically enable~~enabling the economic 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.~~systems, which are supported by extensive monitoring and automation technology solutions that provide safer and more efficient water resource management. These solutions significantly reduce the demand for trucking operations, thereby reducing ~~gasoline and~~ diesel exhaust emissions, increasing safety and decreasing traffic congestion in nearby communities.

We are one of the few large public oilfield services companies whose primary focus is on the management of water and water logistics in the oil and gas industry. Accordingly, the importance of responsibly managing water resources through both our operations and recycling efforts to help conserve water and protect the environment is paramount to our continued success. We view our unique position as an opportunity to transform water management by leveraging our oilfield chemicals business to develop produced water management solutions that increase our customers’ ability to reuse this produced water and add value to their operations. As for management of water logistics, our Company was founded with a focus on water transfer through temporary and permanent pipeline, which substantially reduces the industry’s use of traditional trucking services for water transfer operations, thereby significantly reducing

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emissions generated by semi-trucks moving water and reducing the level of truck traffic on the roads in the areas in which we operate. We estimate that we eliminate over 3,800 truckloads that would have been necessary to deliver water during a single well completion job using our temporary and permanent pipeline. In 2020 alone, we estimate Select Inc. reduced CO2 emissions by more than 48,000 metric tons by displacing 1.6 million truckloads from the roads. We also work diligently to implement “green” initiatives when possible that reduce our environmental footprint. For example, we continue to reduce emissions through efficiency gains from our investments in automation technology and are deploying specialized flowback and production technology dedicated to capturing and reducing methane emissions on-site. Additionally, we already deploy solar panels on the majority of our automation fleet, and we continue to look for ways to replace diesel with natural gas, electric or solar-powered solutions.

Separate from our water solutions business, our oilfield chemicals business utilizes environmentally conscious chemistry when possible, such as using non-detectable solvents, replacing nonylphenol ethoxylates with alcohol ethoxylates, and replacing crude oil-derived raw materials with cleaner, natural gas derived materials. The chemistries we have developed allow for extended use of produced water and the reuse of produced water without the need for extensive reconditioning measures. We have made significant changes in our operations to improve our water management and chemical solutions to support environmental protection, and while we are proud of what we have accomplished, we are constantly striving to improve in these areas. We regularly interact with local, state, and federal governments in order to promote compliance with applicable laws and regulations, and we aim to develop partnerships with officials to enhance the responsible use of natural resources as unconventional oil and gas development matures.

We have surveyed our raw materials vendors to understand the status of environmental, social and corporate governance (“ESG”) compliance within their organizations. We prioritize partnering with vendors that have fully implemented or are in the process of implementing an accredited ESG program. With respect to raw materials vendors that do not have an ESG program in place, we are working with them to promote the development of such a program.

Recent Developments

~~Significant challenges that emerged during~~The recent Complete Acquisition strengthened our financial results in the Current Period, and that are expected to continue, have had and will likely continue to have a negative impact on our results of operations. The COVID-19 pandemic has caused significant disruptions in global oil demand and impacted economic growth in the U.S.Quarter, as well as, internationally. In response, volatility in financial markets has also significantly increased, making it more difficult for companies to access capital at a reasonable cost. As a result of these market disruptions, oilfield activity has declined significantly, andwe believe, our Current Quarter and Current Period results have been negatively impacted. With continued production cuts from the Organization of the Petroleum Exporting Countries (“OPEC”), combined with some recovery in oil demand during the Current Quarter, the average WTI price per barrel increased from $27.96 during the second quarter of 2020 to an average price of $40.89 per barrelcompetitive positioning in the ~~Current Quarter. In conjunction with improved prices, we believe the activity levels of~~water solutions market. This acquisition expanded our customers and the demand for our services appear to have already reached their lowest points for the time being, and we began to see some activity recovery in the Current Quarter. However, we do not anticipate an immediate recovery to levels seen in the Prior Period, and can make no assurance that any further recovery will continuegeographic footprint, most notably into the ~~future.~~Powder River Basin, provided access to additional customer relationships and employee expertise, and opportunities to expand our growing water recycling business into new areas.

~~Table~~Subsequent to the end of ~~Contents~~

the quarter, we acquired substantially all of the assets of Agua Libre, as well as Basic Energy Services Inc.’s U.S. water-related logistics assets outside the state of California. We believe, but cannot be certain, that the benefits of this acquisition will be accretive to our financial results.

The ongoing effects of the COVID-19 pandemic on our operations have had ~~and will likely continue to have,~~ a material negative impact on our financial ~~results,~~results. While we have seen economic recovery and higher oil prices through the Current Period, such negative impact may continue well beyond the containment of the pandemic until ~~economies,~~global GDP levels, associated oil demand and resulting oilfield activity ~~recovers. We believe~~all fully rebound. While we have seen activity improve considerably since the low point experienced in 2020, there remains uncertainty, but global ~~oil~~inventories have rapidly normalized with continued demand is expected to remain challenged at least until the COVID-19 pandemic can be contained, and any material increases to oil supply in the near-term could further challenge oil prices and subsequently the activity levels of our customers and the resulting demand for our services. Wegrowth. Even with this recent recovery however, we cannot ~~assure you~~provide assurance 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~~recent elevated volatility 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 ultimate duration of the COVID-19 pandemic is also uncertain. Therefore, we cannot estimate ~~the~~its impact on our business, financial condition or near- or longer-term financial or operational results with ~~reasonable~~ certainty. However, at this time, we expect a net loss for 2020. We have taken further actions to protect our balance sheet and maintain our liquidity, including significantly decreasing our operating expenses by reducing headcount, reducing salaries and director compensation, closing yard locations, idling facilities, 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 the COVID-19 pandemic. 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.~~actions to decrease operating and capital expenses, and defer other expenses in accordance with the provisions of the CARES Act. To protect our workforce during the COVID-19 pandemic, we have taken steps to ~~keep~~support our people ~~safe~~who are affected by ~~supporting those affected, managing~~the virus, manage work-from-home scheduling as appropriate, ~~limiting~~limit on-site visitors, and ~~monitoring~~monitor and consistently ~~communicating~~communicate with those who are required to be at a work location, while also providing these employees with additional personal protective equipment.

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Based on our current cash ~~position, lack of bank debt,~~and cash equivalents balance, operating cash flow, available ~~borrowing capacity~~borrowings under our Credit Agreement and the ongoing actions discussed above, 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~~through the next twelve months, prior to giving effect to any future financing that may occur.

As a result of reduced oil inventories driven by economic recovery and oil demand growth in much of the world, oil and gas prices improved notably in the Current Quarter. During the Current Quarter, the average spot price of West Texas Intermediate ~~(“WTI”) (Cushing)~~ crude oil was ~~$40.89~~ $70.62versus an average price of ~~$56.34~~$40.89 for the Prior Quarter. The average Henry Hub natural gas spot price during the Current Quarter was ~~$2.00~~$4.36 versus an average of ~~$2.38~~$2.00 for the Prior Quarter. ~~The significant decline in oil~~These price levels are supportive of our customers’ drilling and ~~gas prices~~completion programs 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 decreased demand due to the COVID-19 pandemic, as well as increased utilization of existing storage capacity, which has resulted in many of our E&P customers being forced to shut-in production for some time period. Much of this shut-in production has since come back online during the second quarter of 2020 and the Current Quarter.major shale basins.

Many of our customers have ~~also pledged~~demonstrated their resolve to ~~prioritize managing~~manage their capital spending to within budgets and cash flow from operations ~~with some targeting reinvestment rates below 80%~~and increase redemptions of ~~their 2019 budgets, and this trend may extend beyond 2020. Consolidation~~debt and/or returns of capital to investors. Additionally, consolidation among our ~~customers’ and decreases in our customers’ capital budgeting~~customers can ~~impact the size of~~disrupt our market in the ~~near term~~near-term and the resulting demand for our services. ~~Additionally, both debt and equity capital markets do not appear favorably disposed towards raising new capital for~~Overall however, the financial health of the oil and gas industry ~~at this time. In light of these factors, combined with the downward revisions made to~~and many of our ~~customers’ respective annual~~customers specifically, as reflected in debt metrics, recent capital ~~budgets~~raises, and ~~financial outlooks, we do not anticipate large incremental sums of capital entering~~equity valuations, has greatly improved over the market to create higher demand for our services for the remainder of 2020, which has led to decreased activity for us relative to prior year levels. Additionally, this lack of available capital in 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. While we see no immediate need for additional capital given our liquidity position, this difficulty in accessing capital markets may negatively impact some of our highly leveraged customers and competitors.Current Period.

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 leading-edge lateral lengths and

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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.~~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~~fracturing efficiency and the use of ~~lower cost~~lower-cost in-basin sand ~~all of which~~ has 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 over the long-term. 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 for certain of our services utilizing day-rate pricing models.

The trend of increased use of produced water ~~may~~will require additional chemical treatment solutions, ~~which~~and we ~~are well positioned~~have a dedicated team of specialists focused every day on developing and deploying innovative water treatment and reuse services for our customers. Our FluidMatch™ design solutions enable our customers to ~~provide given~~economically use these alternative sources to optimize their fluid systems by providing water profiling and fluid assessment services working towards real time. With our water treatment capabilities, our ~~WCS acquisition~~Well Chemical Services team and our knowledge base within our Oilfield Chemicals ~~segment. Additionally, this~~segment, we are well-positioned to advance these solutions. This trend also 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 that are able to economically compete with alternative historical solutions. Ultimately, we intend to play an important role in the advancement of water and chemical solutions that are designed to meet the sustainability goals of all stakeholders.

~~Regardless~~Our water logistics, treatment, and chemical application expertise, in combination with advanced technology solutions, are applicable to other industries beyond oil and gas, and we are working to further commercialize our services in other industrial businesses.

Permian Basin and Rockies Recycling Facility Projects

In the first half of 2021, we were awarded contracts underwriting the construction of three new produced water recycling facilities serving key customers in the Permian Basin, with two located in the Midland Basin and one located in the Delaware Basin. Once completed, these ~~operational trends,~~state-of-the-art facilities will allow us to leverage our expertise in fracturing chemistry and fluid optimization and provide customers with sustainable recycling solutions that deliver a

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consistent water quality standard for use in completion activities, thereby decreasing both fresh water usage and waste disposal. We also signed a multi-year agreement with a large customer in the ~~current environment is~~Rockies with a dedicated pipeline from its property to our water treatment facility. We will receive, treat and recycle water and have the ability to dispose excess water for this customer. The facility will have a throughput capacity to receive and treat 15,000 barrels per day with the ability to upgrade to 30,000 barrels per day. This agreement includes a minimum volume commitment and operations are expected to commence early in the fourth quarter.

In support of this growing Permian water infrastructure network, we also acquired infrastructure from an existing customer with one million barrels of storage capacity and are in the ~~most challenging~~process of upgrading our previously announced Midland Basin produced water recycling facility to meet additional commercial demand from customers adjacent to the facility. We commenced construction on the two new Midland Basin fixed infrastructure produced water recycling facilities during the second quarter of 2021. Both projects are supported by long-term contracts with private operators in ~~decades~~the Midland Basin for the ~~oilfield services industry due~~purchase and delivery of recycled produced water. Each facility will support the recycling of up to the large and sudden decline in oil demand and consequent decline in oil prices. Many operators are prioritizing decreasing their activity levels and pursuing near-term cost savings, which negatively impacts the demand and pricing for our services. While we enjoy an advantaged position relative to many other oilfield services companies due to our cash position and absence40,000 barrels of ~~debt on the balance sheet~~water per day while providing approximately 1.3 million barrels of adjacent recycled water storage capacity. Operations commenced at the end of the Current Quarter for one of the two projects with operations for the other project expected to commence during October 2021.

Additionally, we expanded our ~~full year 2020 financial results~~previously announced Midland Basin produced water recycling facility serving Martin and Midland Counties, Texas and installed a bi-directional pipeline infrastructure to connect the facility to nearby operators to meet increasing demand from our anchor customer as well as from nearby third-party operators. These upgrades are ~~likely~~expected to increase the throughput capacity of the facility by 30% to 65,000 barrels of produced water per day and increase the nearby recycled water storage capacity by 40% to 2.7 million barrels. The new pipeline is capable of transporting approximately 58,000 barrels of water per day to and from the facility. These upgrades were completed and became operational at the end of the Current Quarter, and are expected to be ~~materially worse than those~~accretive financially given the existing infrastructure already in place.

We also completed construction and commenced operations on a third facility during the Current Quarter, which is a centralized produced water recycling facility for a major integrated operator in the Delaware Basin. This facility is designed to recycle up to 30,000 barrels of ~~recent years.~~produced water per day and will be supported by one million barrels of adjacent recycled water storage capacity.

These projects supplement our sizable existing footprint of water storage, distribution and recycling infrastructure in the Permian Basin and represent our entry with recycling solutions into the Rockies. In aggregate, we expect to spend approximately $9.5 million to construct the three new recycling facilities, to purchase the existing storage infrastructure, and to upgrade the existing produced water treatment facilities in the Midland Basin. Once fully operational, these projects will bring our total centralized produced water recycling capacity in the Permian Basin to approximately 375,000 barrels of water per day, which is supplemented by our mobile recycling technologies and capabilities that are currently supporting nearly 150,000 barrels per day of active produced water recycling projects.

February 2021 Severe Weather

Severe winter weather in February 2021 negatively impacted our Current Period results, equating to approximately one lost week of operations across most of our locations, with extended raw material shortages that impacted our Oilfield Chemicals segment into March. We estimate that this negatively impacted Current Period revenue by an amount ranging from $9 million to $12 million.

Our Segments

Our services are offered through three 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, water containment and water network automation,

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primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business as well as the Company’s industrial solutions business.

●

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

●

Oilfield Chemicals. The Oilfield Chemicals segment provides technical solutions and 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~~apply a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completions. Given the breadth of chemicals and application expertise we provide, our customers range from pressure pumpers 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.

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How We Generate Revenue

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

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, vehicle and 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 incurred 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~~comprise the ~~most significant~~largest portion of our costs of ~~our~~doing business. We incurred labor and labor-related costs of $74.2 million, $44.8 million, ~~$116.7 million, $193.0~~$191.8 million and ~~$375.7~~$193.0 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, 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 Period to reduce operating and equipment costs,~~headquarters, as well as ~~selling, general~~for third-party support, licensing and ~~administrative costs, to proactively manage these expenses as a percentage of revenue.~~services.

We incur significant vehicle and equipment costs in connection with the ~~operation of our business,~~services we provide, including depreciation, repairs and maintenance, rental and leasing costs. We incurred vehicle and equipment costs of $43.0 million, $33.5 million, ~~$62.4 million, $122.4~~$113.6 million and ~~$191.2~~$122.4 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Due to current market conditions and the decreased demand for our services, we have taken significant direct action during the Current Period to reduce ongoing rental and leasing costs and will continue to evaluate further reductions to these costs in the coming quarters.

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We incur ~~significant~~variable transportation costs associated with our service lines, ~~including~~predominately fuel and freight. We incurred fuel and freight costs of $15.8 million, $5.9 million, ~~$20.3 million, $28.1~~$39.8 million and ~~$62.8~~$28.1 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. ~~Fuel~~Rising fuel prices impact our transportation costs, which ~~affect~~affects the pricing and demand for our services and, ~~have an impact on~~therefore, 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 $55.3 million, $25.2 million, ~~$71.2 million, $115.3~~$145.8 million and ~~$207.5~~$115.3 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. Rising raw materials prices during the Current Period had a negative impact on our Oilfield Chemicals margins, prior to our expectation of passing these increased costs on to our customers.

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;

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●

Gross Profit;

●

Gross Margins;

●

EBITDA; and

●

Adjusted EBITDA.

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 reportable segments to identify potential areas for improvement, as well as to determine whether segment performance is 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 the 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.

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, nor pursue higher gross margins 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

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EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to accounting principles generally accepted in the U.S. (“GAAP”), plus non-cash losses on the sale of assets or subsidiaries, ~~non-recurring~~nonrecurring compensation expense, non-cash compensation expense, and ~~non-recurring~~nonrecurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, ~~and~~ plus/(minus) foreign currency losses/(gains). and plus/(minus) losses/(gains) on unconsolidated entities. The adjustments to EBITDA are generally consistent with such adjustments described in our Credit ~~Facility.~~Agreement. 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 and those described in “—~~Industry Overview”~~Recent Developments” above.

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Acquisition and Divestiture Activity

As described above, we are continuously evaluating potential ~~investments.~~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~~Complete Energy Services Acquisition

On ~~September 30, 2019, we completed our acquisition~~July 9, 2021, the Company acquired Complete Energy Services, Inc. (“Complete”), an operating subsidiary of ~~WCS.~~Superior Energy Services, Inc. Our historical financial statements for periods prior to ~~September 30, 2019~~July 9, 2021 do not include the results of operations of ~~WCS.~~Complete.

~~Affirm Divestitures~~UltRecovery Acquisition

~~We sold~~On August 2, 2021, the ~~Affirm crane~~Company acquired UltRecovery, a provider of sustainable production enhancement applications focused on existing conventional and ~~field services businesses on February 26, 2019~~unconventional oil and ~~June 28, 2019, respectively. Affirm accounted~~gas wells. Our historical financial statements for ~~$21.8 million of revenue during 2019. Following~~periods prior to August 2, 2021 do not include the ~~two divestitures, the divested operations were not included in the consolidated~~ results of ~~operations.~~operations of UltRecovery.

~~Canadian Operations Divestitures~~

~~On March 19, 2019, we sold over half of our Canadian operations~~and on April 1, 2019, we sold and wound down the rest of the Canadian operations. Canadian operations accounted for $8.2 million of annual revenue during 2019. Following the divestitures, the divested Canadian operations were not included in the consolidated results of operations.

~~Sand Hauling Wind-Down~~

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

~~Proceeds received from Divestitures and Wind-Down~~

~~During 2019, we received $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.~~

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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 September 30,				Change
	2020		2019		Dollars		Percentage		2021		2020		Dollars		Percentage

		(in thousands)								(in thousands)
Revenue
Water Services	$	54,516	$	196,782	$	(142,266)	(72.3)	%	$	112,474	$	54,516	$	57,958	106.3	%
Water Infrastructure		16,165		63,953		(47,788)	(74.7)	%		36,787		16,165		20,622	127.6	%
Oilfield Chemicals		30,561		67,932		(37,371)	(55.0)	%		55,372		30,561		24,811	81.2	%
Other		—		301		(301)	(100.0)	%
Total revenue		101,242		328,968		(227,726)	(69.2)	%		204,633		101,242		103,391	102.1	%

Costs of revenue
Water Services		52,861		153,741		(100,880)	(65.6)	%		94,667		52,861		41,806	79.1	%
Water Infrastructure		12,816		46,748		(33,932)	(72.6)	%		28,494		12,816		15,678	122.3	%
Oilfield Chemicals		28,558		57,357		(28,799)	(50.2)	%		49,583		28,558		21,025	73.6	%
Other		30		1,865		(1,835)	(98.4)	%		—		30		(30)	NM
Depreciation and amortization		23,877		28,263		(4,386)	(15.5)	%		22,904		23,877		(973)	(4.1)	%
Total costs of revenue		118,142		287,974		(169,832)	(59.0)	%		195,648		118,142		77,506	65.6	%
Gross (loss) profit		(16,900)		40,994		(57,894)	(141.2)	%
Gross profit (loss)										8,985		(16,900)		25,885	153.2	%

Operating expenses
Selling, general and administrative		15,955		27,280		(11,325)	(41.5)	%		22,044		15,955		6,089	38.2	%
Depreciation and amortization		685		952		(267)	(28.0)	%		562		685		(123)	(18.0)	%
Impairment and abandonment of property and equipment		—		49		(49)	NM
Lease abandonment costs		672		238		434	NM			154		672		(518)	NM
Total operating expenses		17,312		28,519		(11,207)	(39.3)	%		22,760		17,312		5,448	31.5	%
(Loss) income from operations		(34,212)		12,475		(46,687)	NM
Loss from operations										(13,775)		(34,212)		20,437	59.7	%

Other income (expense)
Gains (losses) on sales of property and equipment and divestitures, net		891		(2,033)		2,924	(143.8)	%
Other (expense) income
Gain on sales of property and equipment and divestitures, net										315		891		(576)	(64.6)	%
Interest expense, net		(789)		(438)		(351)	80.1	%		(419)		(789)		370	(46.9)	%
Foreign currency gain (loss), net		13		(59)		72	NM
Foreign currency (loss) gain, net										(6)		13		(19)	NM
Other expense, net		(2,364)		(272)		(2,092)	NM			(222)		(2,364)		2,142	NM
(Loss) income before income tax benefit (expense)		(36,461)		9,673		(46,134)	NM
Income tax benefit (expense)		201		(2,501)		2,702	NM
Net (loss) income	$	(36,260)	$	7,172	$	(43,432)	NM
Loss before income tax benefit										(14,107)		(36,461)		22,354	61.3	%
Income tax benefit										32		201		(169)	NM
Equity in losses of unconsolidated entities										(129)		—		(129)	NM
Net loss									$	(14,204)	$	(36,260)	$	22,056	60.8	%

Revenue

Our revenue ~~decreased $227.7~~increased $103.4 million, or ~~69.2%~~102.1%, to ~~$101.2~~$204.6 million for the Current Quarter compared to ~~$329.0~~$101.2 million for the Prior Quarter. ~~The decrease~~This increase was ~~driven by~~composed of a ~~$142.3~~$58.0 million ~~decline~~increase in Water Services revenue, a ~~$47.8~~$20.6 million ~~decline~~increase in Water Infrastructure revenue and a ~~$37.4~~$24.8 million ~~decline~~increase in Oilfield Chemicals revenue. These ~~declines~~increases were driven primarily ~~due to lower~~by higher demand for our services ~~resulting from~~in comparison to the Prior Quarter, which was impacted by a significant reduction in drilling and completions activity ~~lower oil prices and~~following the onset of the COVID-19 ~~pandemic, as well as reduced pricing for some of our services.~~pandemic. Included in the increases in Water Services and Water Infrastructure were revenue contributions from Complete, acquired on July 9, 2021. For the Current Quarter, our Water Services, Water Infrastructure and Oilfield

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Chemicals constituted ~~53.8%~~55.0%, ~~16.0%~~18.0% and ~~30.2%~~27.1% of our total revenue, respectively, compared to ~~59.8%~~53.8%, ~~19.4~~16.0% and ~~20.7%~~30.2%, respectively, for the Prior Quarter. The revenue changes by reportable segment are as follows:

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Water Services. Revenue ~~decreased $142.3~~increased $58.0 million, or ~~72.3%~~106.3%, to ~~$54.5~~$112.5 million for the Current Quarter compared to ~~$196.8~~$54.5 million for the Prior Quarter. The ~~decrease~~increase was primarily attributable to ~~lower~~higher demand for our services ~~resulting from~~in comparison to the Prior Quarter, which was impacted by a significant reduction in drilling and completions activity ~~lower oil prices and~~following the onset of the COVID-19 ~~pandemic, as well as reduced pricing for some of our services.~~pandemic. The increase was also impacted by incremental revenue contributed by Complete.

Water Infrastructure. Revenue ~~decreased~~increased by ~~$47.8~~$20.6 million, or ~~74.7%~~127.6%, to ~~$16.2~~$36.8 million for the Current Quarter compared to ~~$64.0~~$16.2 million for the Prior Quarter. The ~~decrease~~increase was primarily attributable to ~~lower~~higher demand for our services ~~resulting from~~in comparison to the Prior Quarter, which was impacted by a significant reduction in drilling and completions activity ~~lower oil prices and~~following the onset of the COVID-19 pandemic. The increase was also modestly impacted by incremental revenue contributed by Complete.

Oilfield Chemicals. Revenue ~~decreased $37.4~~increased $24.8 million, or ~~55.0%~~81.2%, to ~~$30.6~~$55.4 million for the Current Quarter compared to ~~$67.9~~$30.6 million for the Prior Quarter. The ~~decrease~~increase was primarily attributable to ~~lower~~higher demand for our services ~~resulting from~~in comparison to the Prior Quarter, which was impacted by a significant reduction in drilling and completions activity ~~lower oil prices and~~following the onset of the COVID-19 ~~pandemic, as well as reduced pricing for some of our services, partially offset by incremental revenue from the WCS acquisition.~~pandemic.

Costs of Revenue

Costs of revenue ~~decreased $169.8~~increased $77.5 million, or ~~59.0%~~65.6%, to ~~$118.1~~$195.6 million for the Current Quarter compared to ~~$288.0~~$118.1 million for the Prior Quarter. The ~~decrease~~increase was primarily ~~due to~~composed of a ~~$100.9~~$41.8 million ~~decline~~increase in Water Services costs, a ~~$33.9~~$15.7 million ~~decline~~increase in Water Infrastructure costs, and a ~~$28.8~~$21.0 million ~~decline~~increase in Oilfield Chemicals costs due to ~~lower~~supporting higher revenue producing activity discussed above. ~~Also, depreciation and amortization expense decreased by $4.4 million, primarily due to lower capital expenditures in the Current Period.~~

Water Services. ~~Cost~~Costs of revenue ~~decreased $100.9~~increased $41.8 million, or ~~65.6%~~79.1%, to ~~$52.9~~$94.7 million for the Current Quarter compared to ~~$153.7~~$52.9 million for the Prior Quarter. Cost of revenue as a percent of revenue ~~increased~~decreased from ~~78.1%~~97.0% to ~~97.0%~~84.2% due to a gradual increase in demand for our services after June 30, 2020, which spread fixed costs over a larger revenue base. The Prior Quarter was negatively impacted by a significant ~~reductions~~reduction in ~~revenue-generating activity and pricing reductions we could not fully offset with cost reductions.~~demand for our services following the onset of the COVID-19 pandemic.

Water Infrastructure. ~~Cost~~Costs of revenue ~~decreased $33.9~~increased $15.7 million, or ~~72.6%~~122.3%, to ~~$12.8~~$28.5 million for the Current Quarter compared to ~~$46.7~~$12.8 million for the Prior Quarter. Cost of revenue as a percent of revenue ~~increased~~decreased from ~~73.1%~~79.3% to ~~79.3%~~77.5% primarily due to ~~significant reductions in revenue-generating activity we could not fully offset with cost reductions.~~a higher relative contribution from high-margin pipeline revenue.

Oilfield Chemicals. Costs of revenue ~~decreased $28.8~~increased $21.0 million, or ~~50.2%~~73.6%, to ~~$28.6~~$49.6 million for the Current Quarter compared to ~~$57.4~~$28.6 million for the Prior Quarter. Cost of revenue as a percent of revenue ~~increased~~decreased from ~~84.4%~~93.4% to ~~93.4%~~89.5% primarily due to a gradual increase in demand for our services after June 30, 2020, which spread fixed costs over a larger revenue base. The Prior Quarter was negatively impacted by a significant ~~reductions~~reduction in ~~revenue-generating activity we could not fully offset with cost reductions.~~demand for our services following the onset of the COVID-19 pandemic.

Depreciation and Amortization. Depreciation and amortization expense decreased ~~$4.4~~$1.0 million, or ~~15.5%~~4.1%, to ~~$23.9~~$22.9 million for the Current Quarter compared to ~~$28.3~~$23.9 million for the Prior Quarter, primarily due to a ~~significant reduction in capital expenditures during recent quarters.~~lower fixed asset base.

Gross Profit (Loss) ~~Profit~~

Gross profit ~~decreased by $57.9~~was $9.0 million ~~or 141.2%,~~for the Current Quarter compared to a gross loss of $16.9 million for the ~~Current Quarter compared to a gross profit of $41.0 million for the~~ Prior Quarter primarily due to ~~lower~~higher revenue in all three segments resulting from ~~decreased~~increased activity ~~levels combined with decreased pricing that could not be fully offset with reductions in cost.~~levels. Gross profit ~~decreased~~increased by ~~$41.4~~$16.2 million, ~~$13.9~~$4.9 million and ~~$8.6~~$3.8 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. ~~This~~Also impacting the increase in gross profit was ~~partially offset by~~ a ~~$4.4~~$1.0 million decrease in depreciation and amortization expense. Gross margin as a percent of revenue was 4.4% and (16.7%) ~~and 12.5%~~ in the Current Quarter and Prior Quarter, respectively.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~decreased $11.3~~increased $6.1 million, or ~~41.5%~~38.2%, to ~~$16.0~~$22.0 million for the Current Quarter compared to ~~$27.3~~ $16.0 million for the Prior Quarter. The ~~decrease~~increase was primarily due to ~~$4.4~~a $2.4 million ~~lower~~contribution from Complete. Excluding Complete, this was also impacted by $2.1 million higher legal and professional services in connection with work on realized and considered transactions, $0.9 million higher wages and associated payroll taxes, ~~reductions~~$0.5 million higher subscription costs, increases of ~~$2.5 million in incentive compensation costs, $1.3 million in equity-based compensation costs, $1.2~~$0.4 million in travel, meals and entertainment costs, ~~$0.8~~$0.4 million in ~~professional fees,~~higher information technology costs, and ~~$1.9~~$1.0 million from a combination of other ~~expense reductions from cost-cutting measures in response to lower oil prices~~expenses. This was partially offset by a ~~$0.8~~$1.6 million ~~increase~~net decrease in bad debt expense.

Lease Abandonment Costs

Lease abandonment costs were ~~$0.7~~$0.2 million and ~~$0.2~~$0.7 million in the Current Quarter and Prior Quarter, respectively. During the Current Quarter, lease abandonment costs primarily related to ~~leased facilities abandoned in the first half of 2020, including updated sublease expectations~~expenses associated with ~~realignment and combining operational activity on fewer leased properties.~~facilities previously abandoned. The Prior Quarter costs were primarily due to leases abandoned during the ~~wind-down~~first half of ~~impaired right-of-use assets from previously abandoned~~2020 associated with realignment and combining activity on fewer leased properties.

Net Interest Expense

Net interest expense ~~increased~~decreased by $0.4 million, or ~~80.1%~~46.9%, to ~~$0.8~~$0.4 million ~~during~~for the Current Quarter compared to ~~$0.4~~$0.8 million in the Prior Quarter primarily due to ~~Current~~Prior Quarter interest payments related to sales tax audits covering prior ~~years.~~years.

Other Expense

Other expense was $0.2 million in the Current Quarter compared to other expense of $2.4 million in the Prior Quarter. During the Current Quarter, other income primarily related to the mark-to-market of equities using the fair value option. During the Prior Quarter, other expenses primarily related to sales tax audits and a legal accrual related to certain acquired subsidiaries.

Net ~~(Loss) Income~~Loss

Net ~~income~~loss decreased by ~~$43.4~~$22.1 million, to a net loss of $14.2 million for the Current Quarter compared to a net loss of $36.3 million for the ~~Current Quarter compared to net income of $7.2 million for the~~ Prior Quarter, driven primarily by increased revenue due to ~~lower gross profit due to lower revenue, partially offset~~a gradual increase in demand for our services after June 30, 2020. The Prior Quarter was negatively impacted by ~~lower selling, general and administrative costs.~~a significant reduction in demand for our services following the onset of the COVID-19 pandemic.

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Current Period Compared to the Prior Period


	Nine months ended September 30,				Change				Nine months ended September 30,				Change
	2020		2019		Dollars		Percentage		2021		2020		Dollars		Percentage

		(in thousands)								(in thousands)
Revenue
Water Services	$	259,834	$	619,388	$	(359,554)	(58.0)	%	$	253,348	$	259,834	$	(6,486)	(2.5)	%
Water Infrastructure		89,227		169,279		(80,052)	(47.3)	%		107,916		89,227		18,689	20.9	%
Oilfield Chemicals		122,705		197,762		(75,057)	(38.0)	%		148,228		122,705		25,523	20.8	%
Other		—		29,072		(29,072)	(100.0)	%
Total revenue		471,766		1,015,501		(543,735)	(53.5)	%		509,492		471,766		37,726	8.0	%

Costs of revenue
Water Services		235,989		472,013		(236,024)	(50.0)	%		227,736		235,989		(8,253)	(3.5)	%
Water Infrastructure		74,500		126,634		(52,134)	(41.2)	%		81,130		74,500		6,630	8.9	%
Oilfield Chemicals		110,996		170,935		(59,939)	(35.1)	%		132,103		110,996		21,107	19.0	%
Other		37		30,365		(30,328)	(99.9)	%		—		37		(37)	NM
Depreciation and amortization		75,567		88,624		(13,057)	(14.7)	%		65,572		75,567		(9,995)	(13.2)	%
Total costs of revenue		497,089		888,571		(391,482)	(44.1)	%		506,541		497,089		9,452	1.9	%
Gross (loss) profit		(25,323)		126,930		(152,253)	(120.0)	%
Gross profit (loss)										2,951		(25,323)		28,274	111.7	%

Operating expenses
Selling, general and administrative		58,902		86,953		(28,051)	(32.3)	%		57,828		58,902		(1,074)	(1.8)	%
Depreciation and amortization		2,204		2,858		(654)	(22.9)	%		1,835		2,204		(369)	(16.7)	%
Impairment of goodwill and trademark		276,016		4,396		271,620	NM			—		276,016		(276,016)	NM
Impairment and abandonment of property and equipment		7,910		942		6,968	NM			—		7,910		(7,910)	NM
Lease abandonment costs		2,493		1,494		999	NM			480		2,493		(2,013)	NM
Total operating expenses		347,525		96,643		250,882	NM			60,143		347,525		(287,382)	NM
(Loss) income from operations		(372,848)		30,287		(403,135)	NM
Loss from operations										(57,192)		(372,848)		315,656	NM

Other expense
Other (expense) income
Losses on sales of property and equipment and divestitures, net		(1,727)		(8,233)		6,506	(79.0)	%		(1,921)		(1,727)		(194)	11.2	%
Interest expense, net		(1,633)		(2,370)		737	(31.1)	%		(1,254)		(1,633)		379	(23.2)	%
Foreign currency (loss) gain, net		(6)		268		(274)	NM
Foreign currency gain (loss), net										1		(6)		7	NM
Other expense, net		(4,805)		(62)		(4,743)	NM			(956)		(4,805)		3,849	NM
(Loss) income before income tax benefit (expense)		(381,019)		19,890		(400,909)	NM
Income tax benefit (expense)		495		(3,250)		3,745	NM
Net (loss) income	$	(380,524)	$	16,640	$	(397,164)	NM
Loss before income tax benefit										(61,322)		(381,019)		319,697	NM
Income tax benefit										211		495		(284)	NM
Equity in losses of unconsolidated entities										(129)		—		(129)	NM
Net loss									$	(61,240)	$	(380,524)	$	319,284	NM

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Revenue

Our revenue ~~decreased $543.7~~increased $37.7 million, or ~~53.5%~~8.0%, to ~~$471.8~~$509.5 million for the Current Period compared to ~~$1.0 billion~~$471.8 million for the Prior Period. The ~~decrease~~increase was ~~driven~~composed of a $25.5 million increase in Oilfield Chemicals revenue and an $18.7 million increase in Water Infrastructure revenue, partially offset by a ~~$359.6~~$6.5 million decline in Water Services ~~revenue,~~ ~~a $80.1 million decline in Water Infrastructure revenue, and a $75.1 million decline in Oilfield Chemicals~~ revenue. These declines were primarily due to lower demand for our services resulting from a reduction in drilling and completions activity, lower oil prices and the COVID-19 pandemic, as well as reduced pricing for some of our services. Also impacting the decline was $29.1 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 2019. For the Current Period, our Water Services, Water Infrastructure and Oilfield Chemicals constituted 49.7%, 21.2% and ~~Other segments constituted 55.1%, 18.9%, 26.0% and 0.0%~~29.1% of our total revenue, respectively, compared to ~~61.0%~~55.1%, ~~16.6~~18.9% and~~, 19.5% and 2.9%~~ 26.0%, respectively, for the Prior Period. The revenue changes by reportable segment are as follows:

Water Services. Revenue decreased ~~$359.6~~$6.5 million, or ~~58.0%~~2.5%, to ~~$259.8~~$253.3 million for the Current Period compared to ~~$619.4~~$259.8 million for the Prior Period. ~~The~~This was primarily due to the comparative decrease in the first quarter of 2021 versus the first quarter of 2020 as the majority of the first quarter of 2020 revenue activity occurred before the onset of the COVID-19 pandemic. Also impacting the comparative decrease was ~~primarily attributable to lower demand for our services resulting from a reduction~~severe weather in ~~drilling and completions activity, lower oil prices and~~ the ~~COVID-19 pandemic, as well as reduced pricing for some~~Current Period.

Table of ~~our services.~~Contents

Water Infrastructure. Revenue ~~decreased~~increased by ~~$80.1~~$18.7 million, or ~~47.3%~~20.9%, to ~~$89.2~~$107.9 million for the Current Period compared to ~~$169.3~~$89.2 million for the Prior Period. The ~~decrease~~increase was primarily attributable to ~~lower~~higher demand for our services ~~resulting from~~in comparison to the Prior Period, which was impacted by a significant reduction in drilling and completions activity ~~lower oil prices and~~following the onset of the COVID-19 pandemic. This was partially offset by comparative decreases in the first quarter of 2021 versus the first quarter of 2020 as the majority of the first quarter of 2020 revenue activity occurred before the onset of the COVID-19 pandemic. Also offsetting the comparative increase was severe weather in the Current Period.

Oilfield Chemicals. Revenue ~~decreased $75.1~~increased $25.5 million, or ~~38.0%~~20.8%, to ~~$122.7~~$148.2 million for the Current Period compared to ~~$197.8~~$122.7 million for the Prior Period. The ~~decrease~~increase was primarily attributable to ~~lower~~higher demand for our ~~products and~~ services ~~resulting from~~in comparison to the Prior Period, which was impacted by a significant reduction in drilling and completions activity ~~lower oil prices and~~following the onset of the COVID-19 ~~pandemic, as well as reduced pricing for some of our services,~~pandemic. This was partially offset by ~~incremental~~comparative decreases in the first quarter of 2021 versus the first quarter of 2020 as the majority of the first quarter of 2020 revenue ~~from~~activity occurred before the ~~WCS acquisition.~~

~~Other.~~ ~~There~~onset of the COVID-19 pandemic. Also offsetting the comparative increase was ~~no Other revenue for~~severe weather in the Current ~~Period compared to $29.1 million in the Prior Period as our Affirm subsidiary, sand hauling operations and Canadian operations were divested and wound down during 2019.~~Period.

Costs of Revenue

Costs of revenue ~~decreased $391.5~~increased $9.5 million, or ~~44.1%~~1.9%, to ~~$497.1~~$506.5 million for the Current Period compared to ~~$888.6~~$497.1 million for the Prior Period. The ~~decrease~~increase was primarily due to a ~~$236.0~~$6.6 million increase in Water Infrastructure costs and $21.1 million increase in Oilfield Chemicals costs partially offset by an $8.3 million decline in Water Services ~~costs, an $52.1 million decline in Water Infrastructure costs, and a $59.9 million decline in Oilfield Chemicals costs due to lower revenue discussed above.~~costs. Also, contributing to the decline was $30.3 million lower combined costs from our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during 2019. Further, depreciation and amortization expense decreased by ~~$13.1~~$10.0 million, primarily due to a lower fixed asset base prior to the ~~2019 divestitures and lower capital expenditures in the Current Period.~~Complete Acquisition.

Water Services. ~~Cost~~Costs of revenue decreased ~~$236.0~~$8.3 million, or ~~50.0%~~3.5%, to ~~$236.0~~$227.7 million for the Current Period compared to $472.0 million for the Prior Period. Cost of revenue decreased due to reduced customer drilling and completions activity levels in the Current Period. Costs of revenue as a percent of revenue increased from 76.2% to 90.8% due to significant reductions in revenue-generating activity and pricing reductions we could not fully offset with cost reductions as well as yard closure costs in connection with our efforts to reduce and consolidate operational yards. Additionally, in conjunction with certain cost savings measures that were implemented during the Current Period in response to current market conditions, costs of revenue were impacted during the Current Period by certain one-time costs totaling $5.6 million, including severance and yard closure costs.

~~Water Infrastructure~~~~. Cost of revenue decreased $52.1 million, or 41.2%, to $74.5 million for the Current Period compared to $126.6~~$236.0 million for the Prior Period. Cost of revenue as a percent of revenue ~~increased~~decreased from ~~74.8%~~90.8% to ~~83.5% primarily~~89.9% due to ~~decreased pricing on non-pipeline water sources as well as the acceleration of certain prepaid expenses relating to water rights secured~~a gradual increase in demand for our services after June 30, 2020, which spread fixed costs over a ~~customer, due to the bankruptcy of such customer.~~larger revenue base. Additionally, ~~in conjunction with certain cost savings measures that were implemented during the Current Period in response to current~~

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~~market conditions,~~ costs of revenue were impacted during the ~~Current~~Prior Period by certain ~~one-time costs totaling $0.5 million, including~~nonrecurring severance and yard closure ~~costs.~~costs totaling $5.6 million.

~~Oilfield Chemicals~~Water Infrastructure. Costs of revenue ~~decreased $59.9~~increased $6.6 million, or ~~35.1%~~8.9%, to ~~$111.0~~$81.1 million for the Current Period compared to ~~$170.9~~$74.5 million for the Prior Period. Cost of revenue as a percent of revenue ~~increased~~decreased from ~~86.4%~~83.5% to ~~90.5%~~75.2% primarily due to ~~significant reductions~~a higher relative contribution from high-margin pipeline revenue as well as a discrete cost in ~~revenue-generating activity we could not fully offset with cost reductions.~~the Prior Period related to a customer bankruptcy. Additionally, ~~in conjunction with certain cost savings measures that were implemented during the Current Period in response to current market conditions,~~ costs of revenue were impacted during the Prior Period by certain nonrecurring severance and yard closure costs totaling $0.5 million.

Oilfield Chemicals. Costs of revenue increased $21.1 million, or 19.0%, to $132.1 million for the Current Period compared to $111.0 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 90.5% to 89.1%. Additionally, costs of revenue were impacted during the Prior Period by inventory adjustments and reserve additions of $0.6 million, ~~non-recurring~~nonrecurring severance costs of $0.6 million, and yard closure and equipment rental return costs of $0.5 million, including costs associated with idling our Tyler manufacturing facility to consolidate production in Midland.

~~Other.~~ ~~Other~~ Current Period costs were ~~nominal for~~impacted by the ~~Current Period compared to $30.4 million~~severe winter weather in ~~the Prior Period, primarily due to the 2019 divestitures discussed above.~~February and rising raw materials costs.

Depreciation and Amortization. Depreciation and amortization expense decreased ~~$13.1~~$10.0 million, or ~~14.7%~~13.2%, to ~~$75.6~~$65.6 million for the Current Period compared to ~~$88.6~~$75.6 million for the Prior Period, primarily due to a ~~significant reduction in capital expenditures during recent quarters as well as a $1.7 million decrease related~~lower fixed asset base for the majority of the Current Period prior to the ~~2019 divestitures discussed above.~~Complete Acquisition.

Gross Profit (Loss) ~~Profit~~

Gross profit ~~decreased by $152.3~~was $3.0 million ~~or 120.0%,~~for the Current Period compared to a gross loss of $25.3 million for the ~~Current Period compared to a gross profit of $126.9 million for the~~ Prior ~~Period primarily due to lower revenue in all three segments resulting from decreased activity levels combined with decreased pricing that could not be fully offset with reductions in costs.~~Period. Gross profit ~~decreased~~increased by ~~$123.5 million, $27.9 million and $15.1~~$1.8 million in our Water Services segment, $12.1 million in our Water Infrastructure segment and $4.4 million in our Oilfield Chemicals ~~segments, respectively. This was partially offset by a $13.1 million decrease in depreciation~~segment. Depreciation and amortization ~~expense.~~expense also decreased by $10.0 million. Gross margin as a percent of revenue was 0.6% and (5.4%) ~~and 12.5%~~ in the Current Period and Prior Period, respectively.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased ~~$28.1~~$1.1 million, or ~~32.3%~~1.8%, to ~~$58.9~~$57.8 million for the Current Period compared to ~~$87.0~~ $58.9 million for the Prior Period. The decrease was primarily due to ~~reductions of $7.8~~a $6.8 million net decrease in ~~equity-based compensation costs, $7.2 million in incentive compensation costs, $7.1~~bad debt expense, $2.4 million lower wages and associated payroll taxes, $3.3 million in travel, meals and entertainment costs, $3.2 million in professional fees and $7.0 million of other expense reductions from cost cutting measures in response to lower oil prices. The decrease was partially offset by a ~~$4.3~~$2.4 million contribution from Complete, a $2.2 million increase in ~~bad debt expense~~equity-based compensation costs, $1.9 million in higher legal and ~~$3.2~~ professional fees in connection with work on realized and considered transactions, and $1.6 million from a combination of ~~severance expense associated with cost savings measures implemented in response to current market conditions.~~other expenses.

Impairment

Goodwill and trademark impairment costs were $276.0 million ~~and $4.4 million in~~for the ~~Current Period and~~ Prior ~~Period, respectively.~~Period. During the ~~Current~~Prior Period, all of our goodwill was impaired due to the significant decline in oil prices ~~during the first quarter of 2020, coupled with~~and the uncertainty associated with the future recovery. We also recorded a $9.1 million partial impairment of our Rockwater trademark. ~~During the Prior Period, we incurred $4.4 million of goodwill impairment in connection with divesting Affirm.~~

Impairment and abandonment of property and equipment costs were $7.9 million ~~and $0.9 million~~ in the ~~Current Period and~~ Prior ~~Period, respectively. Current~~Period. Prior Period impairment costs were comprised of leasehold improvements related to abandoned facilities, abandonment of certain saltwater and ~~fresh water~~freshwater wells and obsolete machinery and equipment. ~~Prior Period impairment costs related to the divestiture of our Canadian operations.~~

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Lease Abandonment Costs

Lease abandonment costs were ~~$2.5~~$0.5 million and ~~$1.5~~$2.5 million in the Current Period and Prior Period, respectively. During the Current Period, lease abandonment costs ~~were~~ primarily related to ~~newly abandoned properties~~expenses associated with ~~realignment and combining operational activity on fewer leased properties.~~facilities previously abandoned. The Prior Period costs were primarily due to ~~early lease terminations in connection~~leases abandoned during the Prior Period associated with ~~the wind-down~~realignment and ~~divestiture of Canadian operations.~~combining activity on fewer leased properties.

~~Net Interest~~Other Expense

~~Net interest~~Other expense ~~decreased by $0.7~~costs were $1.0 million ~~or 31.1%, to $1.6~~and $4.8 million ~~during~~in the Current Period ~~compared~~and Prior Period, respectively. During the Current Period, other expenses primarily related to ~~$2.4 million in~~the mark-to-market of equities using the fair value option. During the Prior Period, other expenses primarily ~~due~~related to ~~lower average borrowings resulting from the repayment of all remaining borrowings on our credit facility since the Prior Period, partially offset by interest payments relating to~~a legal accrual and sales tax audits ~~covering prior years.~~related to certain acquired subsidiaries.

Net ~~(Loss) Income~~Loss

Net ~~income~~loss decreased by ~~$397.2~~$319.3 million, to a net loss of $61.2 million for the Current Period compared to a net loss of $380.5 million for the ~~Current~~Prior Period, ~~compared to net income of $16.6~~driven primarily by the $276.0 million ~~for~~in goodwill and trademark impairment costs in the Prior Period, ~~primarily due to goodwill, trademark~~$7.9 million in impairment and ~~fixed asset impairments~~abandonment of property and ~~lower gross profit. This was partially offset by lower~~equipment costs in the Prior Period, a decrease in selling, general and administrative costs ~~lower losses on sales~~ of ~~property~~$1.1 million and ~~equipment and lower interest expense.~~a gradual increase in demand for our services after June 30, 2020.

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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~~nonrecurring compensation expense, non-cash compensation expense, and ~~non-recurring~~nonrecurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, ~~and~~ plus/(minus) foreign currency losses/(gains). and plus/(minus) losses/(gains) on unconsolidated entities. The adjustments to EBITDA are generally consistent with such adjustments described in our Credit ~~Facility.~~Agreement. 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.

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 the 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 ~~2019~~2020 Form 10-K.

The following table ~~presents a~~sets forth our reconciliation of EBITDA and Adjusted EBITDA to our net ~~(loss) income,~~loss, 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 September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(in thousands)								(in thousands)
Net (loss) income	$	(36,260)	$	7,172	$	(380,524)	$	16,640
Net loss									$	(14,204)	$	(36,260)	$	(61,240)	$	(380,524)
Interest expense, net		789		438		1,633		2,370		419		789		1,254		1,633
Income tax (benefit) expense		(201)		2,501		(495)		3,250
Income tax benefit										(32)		(201)		(211)		(495)
Depreciation and amortization		24,562		29,215		77,771		91,482		23,466		24,562		67,407		77,771
EBITDA		(11,110)		39,326		(301,615)		113,742		9,649		(11,110)		7,210		(301,615)
Impairment of goodwill and trademark⁽¹⁾		—		—		276,016		4,396
Non-recurring severance expenses⁽¹⁾		—		—		7,168		1,680
Impairment and abandonment of property and equipment⁽¹⁾		—		49		7,910		942
Yard closure costs related to consolidating operations⁽¹⁾		—		—		2,961		—
Non-cash compensation expenses										2,302		2,242		6,248		4,058
Nonrecurring severance expenses⁽¹⁾										—		—		3,225		7,168
Non-cash loss on sale of assets or subsidiaries⁽²⁾		1,400		3,648		6,901		16,868		189		1,400		3,036		6,901
Lease abandonment costs⁽¹⁾		672		238		2,493		1,494
Non-cash compensation expenses		2,242		3,566		4,058		11,874
Foreign currency (gain) loss, net		(13)		59		6		(268)
Non-recurring transaction costs⁽³⁾		527		2,025		3,150		3,099
Other non-recurring charges⁽³⁾		1,622		—		1,622		75
Nonrecurring transaction costs⁽³⁾										2,709		527		3,270		3,150
Lease abandonment costs⁽⁴⁾										154		672		480		2,493
Impairment of goodwill and trademark⁽⁴⁾										—		—		—		276,016
Impairment and abandonment of property and equipment⁽⁴⁾										—		—		—		7,910
Yard closure costs related to consolidating operations⁽⁴⁾										—		—		—		2,961
Other nonrecurring charges⁽³⁾										—		1,622		—		1,622
Equity in losses of unconsolidated entities										129		—		129		—
Foreign currency loss (gain), net										6		(13)		(1)		6
Adjusted EBITDA	$	(4,660)	$	48,911	$	10,670	$	153,902	$	15,138	$	(4,660)	$	23,597	$	10,670

(1)	For the Current Period, these costs related to severance costs associated with our former CEO. For the Prior Period, these costs related to severance due to the significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil.

(2)	For all periods presented, the losses were primarily due to sales of real estate and underutilized or obsolete property and equipment.

(3)	For the Current Quarter and Current Period, these costs were primarily legal-related due diligence costs as well as costs related to certain acquired subsidiaries. For the Prior Quarter and Prior Period, these costs were primarily due to a legal accrual related to certain acquired subsidiaries.

(4)

For the Prior Quarter and Prior Period, these costs were due to 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 and Prior Period, these costs were due primarily to the dissolution of our divested service lines.~~

~~(2)~~

For the Current Quarter and Current Period, the losses were primarily due to sales of underutilized or obsolete property and equipment. For the Prior Quarter and Prior Period, these costs primarily related to losses on divestitures and related sales of property and equipment in connection with the wind-down of former service lines.

~~(3)~~

For the Current Quarter and Current Period, these costs were primarily related to certain subsidiaries acquired in the Rockwater merger. For the Prior Quarter and Prior Period, these costs primarily related to the dissolution of our divested service lines as well as certain rebranding costs.

EBITDA was ($11.1) million for the Current Quarter compared to $39.3 million for the Prior Quarter. The $50.4 million decrease in EBITDA was primarily driven by a decrease of $62.3 million in gross profit offset by a $11.3

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EBITDA was $9.6 million ~~decrease~~for the Current Quarter compared to ($11.1) million for the Prior Quarter. The $20.7 million increase in EBITDA was driven primarily by an increase of $24.9 million in gross profit partially offset by a $6.1 million increase in selling, general and administrative costs. Adjusted EBITDA was ~~($4.7)~~$15.1 million for the Current Quarter compared to ~~$48.9~~($4.7) million for the Prior Quarter. The ~~$53.6~~$19.8 million ~~decrease~~increase is primarily attributable to the items discussed above.

EBITDA was ~~($301.6)~~$7.2 million for the Current Period compared to ~~$113.7~~($301.6) million for the Prior Period. The ~~$415.3~~$308.8 million ~~decrease~~increase in EBITDA was driven primarily ~~driven~~ by ~~a $271.6~~the $276.0 million ~~increase~~ in goodwill and trademark impairment costs ~~a decrease of $165.3 million~~ in ~~gross profit, an increase of $7.0~~the Prior Period, $7.9 million in impairment and abandonment of property and equipment costs ~~and a $2.6 million accrual related to certain subsidiaries acquired~~ in the ~~Rockwater merger offset by a $28.1 million decrease in selling, general~~Prior Period and ~~administrative costs and a $6.5 million decrease in loss on sale~~higher gross profit of ~~property and equipment.~~$18.3 million. Adjusted EBITDA was ~~$10.7~~$23.6 million for the Current Period compared to ~~$153.9~~$10.7 million for the Prior Period. The ~~$143.2~~$12.9 million ~~decrease~~increase is primarily attributable to the items discussed above.

Liquidity and Capital Resources

Overview

The impacts of the COVID-19 pandemic on oil prices and the resulting sharp decline in U.S. onshore drilling and completion activity, and the uncertainty about the ~~timing~~duration and extent of a recovery, have ~~already~~ had ~~and will likely continue to have,~~ a negative impact on our financial ~~results in the coming quarters. We have taken~~results. During 2020, we took and we continue to take actions to manage costs and cash, including but not limited to significantly reducing headcount from pre-COVID-19 pandemic levels, cutting salaries, closing operational yards, reducing ~~forecasted~~ capital expenditures, streamlining operational and back-office functions and selling excess ~~equipment, deferring~~equipment. During 2020, we also deferred $6.0 million of payroll tax payments ~~for the rest of 2020~~ in accordance with the CARES Act, ~~and deferring applicable lease payments.~~which are required to be fully paid by December 31, 2022.

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

As of September 30, ~~2020,~~2021, 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 on hand, 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, ~~2020,~~2021, cash and cash equivalents totaled ~~$185.4~~$107.4 million, and we had approximately ~~$48.0~~$124.8 million of available borrowing capacity under our Credit Agreement. As of September 30, ~~2020,~~2021, the borrowing base under the Credit Agreement was ~~$63.6~~$140.4 million, we had no outstanding borrowings and outstanding letters of credit ~~totaling~~totaled $15.6 million. The significant reduction in our borrowing base since December 31, 2019 was primarily driven by the meaningful reductions in our accounts receivable, which represent the primary collateral for the borrowing base, during the Current Period, due to largely successful collections efforts combined with significantly reduced revenue levels. As of November ~~2, 2020,~~1, 2021, we had no outstanding borrowings, the borrowing base under the Credit Agreement was ~~$73.3~~$144.8 million, the outstanding letters of credit totaled $15.6 million, and the available borrowing capacity under the Credit Agreement was ~~$57.7~~$129.2 million.

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Cash Flows

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


	Nine months ended September 30,				Change				Nine months ended September 30,				Change
	2020		2019		Dollars		Percentage		2021		2020		Dollars		Percentage

	(in thousands)								(in thousands)
Net cash provided by operating activities	$	119,828	$	142,216	$	(22,388)	(15.7)	%
Net cash (used in) provided by operating activities									$	(13,896)	$	119,828	$	(133,724)	(111.6)	%
Net cash used in investing activities		(3,049)		(57,198)		54,149	94.7	%		(45,259)		(3,049)		(42,210)	(1384.4)	%
Net cash used in financing activities		(10,623)		(59,383)		48,760	82.1	%		(2,475)		(10,623)		8,148	76.7	%
Subtotal		106,156		25,635						(61,630)		106,156
Effect of exchange rate changes on cash and cash equivalents		14		127		(113)	NM			4		14		(10)	NM
Net increase in cash and cash equivalents	$	106,170	$	25,762
Net (decrease) increase in cash and cash equivalents									$	(61,626)	$	106,170

Analysis of Cash Flow Changes between the Nine Months Ended September 30, ~~2020~~2021 and ~~2019~~2020

Operating Activities. Net cash ~~provided by~~used in operating activities was ~~$119.8~~$13.9 million for the Current Period, compared to ~~$142.2~~$119.8 million ~~for~~provided by operating activities in the Prior Period. The ~~$22.4~~$133.7 million decrease ~~in net~~is primarily due to $154.8 million lower cash ~~provided by operating activities related primarily to decreased net income resulting~~ from ~~the adverse change to the demand for the Company’s services in connection with~~ a ~~significant decline~~non-recurrence of harvesting substantial working capital in the ~~price~~Prior Period, as well as the current timing of ~~oil, partially offset by increased cash inflows from reduced working capital balances.~~collecting receivables connected with increasing revenue and integrating an acquisition in the Current Period.

Investing Activities. Net cash used in investing activities was ~~$3.0~~$45.3 million for the Current Period, compared to ~~$57.2~~$3.0 million for the Prior Period. The ~~$54.1~~$42.2 million ~~decrease~~increase in net cash used in investing activities was primarily due to $18.6 million in acquisition costs during the Current Period, a ~~$67.3~~$10.8 million ~~reduction~~increase in purchases of property and equipment, a ~~$10.4~~$9.4 million ~~reduction in acquisitions and a $1.9 million increase~~decrease in proceeds received from sales of property and equipment ~~partially offset by~~and a ~~$24.7~~$3.3 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 $0.7 million working capital settlement~~increase in ~~the Prior Period.~~investments.

Financing Activities. Net cash used in financing activities was ~~$10.6~~$2.5 million for the Current Period compared to ~~$59.4~~$10.6 million for the Prior Period. The $8.1 million decrease in cash used in financing activities was primarily due to ~~$45.0 million of net debt repayments in the Prior Period compared to zero in the Current Period and~~ a ~~$2.5~~$9.7 million decrease in repurchases of shares of Class A Common Stock during the Current ~~Period.~~Period compared to the Prior Period partially offset by a net $1.5 million increase in distributions to noncontrolling interests in water-related services joint ventures.

Credit Agreement

On November 1, 2017, ~~in connection with the closing of the Rockwater 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. It is our intention to either extend the current Credit Agreement or enter into a new Credit Agreement prior to the termination of the current 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

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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 amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to

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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.

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, ~~2020.~~2021.

Contractual Obligations

Our contractual obligations include, among other things, our Credit Agreement and operating leases. Refer to ~~Note 5—Leases~~“Note 6—Leases” in our ~~2019~~2020 Form 10-K for operating lease obligations as of December 31, ~~2019~~2020 and ~~Note 9—Debt~~“Note 8—Debt” in Part I, Item 1 of this Quarterly Report for an update to our Credit Agreement as of September 30, ~~2020.~~2021.

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Critical Accounting Policies and Estimates

There were no changes to our critical accounting policies from those disclosed in our ~~2019~~2020 Form 10-K.

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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.None.

Off-Balance-Sheet Arrangements

As of September 30, ~~2020,~~2021, 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 drilling and completion activity ~~for~~in the U.S. oil and gas industry. ~~Industry conditions are~~The level of drilling and completion activity is influenced by numerous factors over which we have no control, including, but not limited to: global ~~epidemics or pandemics,~~health events, including the COVID-19 pandemic; the supply of and demand for oil and gas; current ~~prices~~price levels as well as expectations about future prices of oil and gas; the magnitude and timing of capital spending by our customers; the cost of exploring for, developing, producing and delivering oil and gas; the ~~expected~~extent to which our E&P customers choose to drill and complete new wells to offset decline ~~in rates of current~~from their existing wells; the extent to which our E&P customers choose to invest to grow production; discoveries 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~~in alternative forms of energy ~~consumption;~~(e.g. wind and solar electricity, electric vehicles) that encourage substitution for or displacement of oil and gas consumption in end-use markets; 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~~acquisition activity ~~among oil~~ and ~~gas producers.~~consolidation in our industry, and other factors.

~~The level~~Any combination of ~~activity~~these factors that results 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. Sustainedsustained low oil and gas prices ~~have affected,~~ and, ~~will likely continue to affect, oil~~therefore, lower capital spending and ~~gas~~/ or reduced drilling and completion activity ~~and therefore, demand for~~by our ~~services. Sustained low oil and gas prices or U.S. activity levels could~~customers, would likely have a material adverse effect on our business, financial condition, results of operations and cash ~~flows, and we are currently experiencing the significant negative effects of the severe disruption in the oil and gas industry from the COVID-19 pandemic and other factors.~~flows.

Interest Rate Risk

As of September 30, ~~2020,~~2021, we had no outstanding borrowings under our Credit Agreement. As of November ~~2, 2020,~~1, 2021, we had no outstanding borrowings and approximately ~~$57.7~~$129.2 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 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.

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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, ~~2020.~~2021.

Changes in Internal Control over Financial Reporting

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, ~~2020~~2021 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 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 and these discussions are ongoing. During the Current Quarter, we made an initial payment of $1.2 million and at this time, we do not believe the ultimate resolution of this matter will be material to the Company. ~~See Note 10—Commitments and Contingencies in Part I, Item 1 of this Quarterly Report for further discussion of this investigation.~~

Item 1A. Risk Factors

~~Other than the risk factors set forth below, there~~There have been no material changes ~~from~~to the ~~risk factors~~Risk Factors disclosed in ~~“Item 1A. Risk Factors” in our most recent Annual Report on~~the 2020 Form 10-K and in our Quarterly Reports for the quarters ended March 31, 2020 and June 30, 2020. 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 and our Quarterly Reports for the quarters ended March 31, 2020 and June 30, 2020, 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, relative to prior year levels, due to the impacts of the COVID-19 pandemic 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 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 the COVID-19 pandemic. 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 at which it sells oil and announced plans to increase production. These events, combined with the COVID-19 pandemic, contributed to a sharp drop in prices for oil in the first quarter of 2020 continuing into the second quarter of 2020. In April 2020, OPEC (which includes Saudi Arabia), Russia (together with OPEC and other allied producing countries, “OPEC+”) agreed to curtail

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oil production by approximately 10 million barrels per day. Further, some U.S. producers chose to shut-in or choke back production on specific wells to reduce production but the impact of these cuts on the market price for oil and natural gas remains uncertain. During the quarter ended September 30, 2020, the average WTI spot price was $40.89, versus an average price of $56.33 for the quarter ended September 30, 2019. While oil prices have improved since their lows in April 2020, closing at $40.05 on September 30, 2020, the continued impact of the COVID-19 pandemic and the associated impacts to oil demand will result in continued uncertainty around the near-term price of oil.

If oil and gas prices remain at current levels or continue to decline, our customers may further 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, multiple leading international and national oil companies, as well as public and private independent oil and gas producers, have reduced 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. Any of these conditions or events could adversely affect our operating results, and they currently are doing so. 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 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;

●

~~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 pandemic;~~

●

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 the COVID-19 pandemic, 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 the COVID-19 pandemic, may cause disruptions to our business and operational plans, which may include (i) shortages of qualified employees in a given area, (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 pandemic 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 the COVID-19 pandemic, we temporarily closed our corporate offices and restricted all non-critical personnel to work remotely for a period of time, 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 the COVID-19 pandemic 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. Additionally, a significant majority of states as well as local jurisdictions have imposed, and others in the future may impose, "stay-at-home" orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions, and the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects.

The extent of the impact of the COVID-19 pandemic 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 general mobility, 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 experienced the negative impacts of such disruption since March 2020.10-K.

Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds.~~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. The shares were repurchased to satisfy tax withholding obligations related to restricted stock previously awarded to certain of our current and former employees.

Total Number of

Weighted-Average Price
Period

Shares Purchased

Paid Per Share
July 1, 2020 to July 31, 2020

—

$
—
August 1, 2020 to August 31, 2020

—

$
—
September 1, 2020 to September 30, 2020

43,923

$
5.41
Total

43,923

$
5.41


	Total Number of	Weighted-Average Price
Period	Shares Purchased	Paid Per Share
July 1, 2021 to July 31, 2021	—	$	—
August 1, 2021 to August 31, 2021	—	$	—
September 1, 2021 to September 30, 2021	—	$	—
Total	—	$	—

Item 3. Defaults Upon Senior ~~Securities.~~Securities

None.

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Item 4. Mine Safety ~~Disclosures.~~Disclosures

Not applicable.

Item 5. Other ~~Information.~~Information

None.

Item 6. Exhibits

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

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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		~~Separation and Consulting Agreement by and between Select Energy Services, LLC and Mitchell M. Shauf, dated August 31, 2020.~~

*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~~The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flow, and (vi) Notes to Consolidated Financial Statements.

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

*Filed herewith

**Furnished herewith

†Management contract or compensatory plan or arrangement.

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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 ~~4, 2020~~3, 2021	By:	/s/ ~~Holli Ladhani~~John D. Schmitz
		~~Holli Ladhani~~John D. Schmitz
		Chairman, President and Chief Executive Officer


Date: November ~~4, 2020~~3, 2021	By:	/s/ Nick Swyka
		Nick Swyka
		Senior Vice President and Chief Financial Officer

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		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	56

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4439

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6257

Item 4.	Controls and Procedures	6357

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	6459

Item 1A.	Risk Factors	6459

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6659

Item 3.	Defaults ~~upon~~Upon Senior Securities	6659

Item 4.	Mine Safety Disclosures	6759

Item 5.	Other Information	6759

Item 6.	Exhibits	6759


Purchase price allocation	Amount
Consideration transferred	(in thousands)
Cash paid	$	10,000
Total consideration transferred		10,000
Less: identifiable assets acquired and liabilities assumed
Inventory		5,221
Property and equipment		4,473
Customer relationships		476
Current liabilities		(170)
Total identifiable net assets acquired		10,000
Fair value allocated to net assets acquired	$	10,000


	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 September 30, 2020	$	—	$	—	$	—


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


			Award Value
	Value at Target		Being Recognized
Nonvested as of December 31, 2019	$	2,937	$	1,122
Forfeited during 2020		(410)		(157)
Awards earned and forfeited as market condition not satisfied as of vesting date		(2,527)		—
Cumulative expense recognized	$	—	$	965


	Three months ended September 30, 2020						Three months ended September 30, 2019
	Select Energy						Select Energy
	Services, Inc.		Class A		Class B		Services, Inc.		Class A		Class B
Numerator:
Net (loss) income	$	(36,260)					$	7,172
Net loss (income) attributable to noncontrolling interests		5,719						(1,793)
Net (loss) income attributable to Select Energy Services, Inc. — basic		(30,541)	$	(30,541)	$	—		5,379	$	5,379	$	—
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of restricted stock		—		—		—		7		7		—
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of stock options		—		—		—		1		1		—
Net (loss) income attributable to Select Energy Services, Inc. — diluted	$	(30,541)	$	(30,541)	$	—	$	5,387	$	5,387	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				84,794,286		16,221,101				79,468,991		24,513,654
Dilutive effect of restricted stock				—		—				339,911		—
Dilutive effect of stock options				—		—				28,575		—
Dilutive effect of ESPP				—		—				104		—
Weighted-average shares of common stock outstanding — diluted				84,794,286		16,221,101				79,837,581		24,513,654
(Loss) earnings per share:
Basic			$	(0.36)	$	—			$	0.07	$	—
Diluted			$	(0.36)	$	—			$	0.07	$	—


	Nine months ended September 30, 2020						Nine months ended September 30, 2019
	Select Energy						Select Energy
	Services, Inc.		Class A		Class B		Services, Inc.		Class A		Class B
Numerator:
Net (loss) income	$	(380,524)					$	16,640
Net loss (income) attributable to noncontrolling interests		59,823						(3,926)
Net (loss) income attributable to Select Energy Services, Inc. — basic		(320,701)	$	(320,701)	$	—		12,714	$	12,714	$	—
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of restricted stock		—		—		—		15		15		—
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of stock options		—		—		—		3		3		—
Net (loss) income attributable to Select Energy Services, Inc. — diluted	$	(320,701)	$	(320,701)	$	—	$	12,732	$	12,732	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				85,276,951		16,221,101				78,848,939		25,516,904
Dilutive effect of restricted stock				—		—				358,503		—
Dilutive effect of stock options				—		—				60,174		—
Dilutive effect of ESPP				—		—				299		—
Weighted-average shares of common stock outstanding — diluted				85,276,951		16,221,101				79,267,915		25,516,904
(Loss) earnings per share:
Basic			$	(3.76)	$	—			$	0.16	$	—
Diluted			$	(3.76)	$	—			$	0.16	$	—


	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 expense, net		—		(2,364)		—		—
	$	328,968	$	9,673	$	29,215	$	27,096

For the nine months ended

For the nine months ended

September 30, 2020

September 30, 2021

Cash received for shares issued

Shares issued