●

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

●

the ~~impacts~~impact of ~~advancements~~advances or changes in ~~drilling and well service technologies;~~

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;

●

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

●

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

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under ~~“Risk~~the heading “Part I―Item 1A. Risk Factors” in ~~the Final Prospectus~~our most recent Annual Report on Form 10-K and under the heading ~~“Item~~“Part II―Item 1A. Risk Factors” in 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 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 ~~statement.~~note.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC. ~~AND SUBSIDIARIES~~

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30, 2017

December 31, 2016

(unaudited)


Assets

Current assets




Cash and cash equivalents

$
42,393

$
40,041
Accounts receivable trade, net of allowance for doubtful accounts of $2,867 and $2,144, respectively

148,372

75,892
Accounts receivable, related parties

433

135
Inventories

852

1,001
Prepaid expenses and other current assets

13,495

7,586
Total current assets

205,545

124,655
Property and equipment

815,002

739,386
Accumulated depreciation

(535,456)

(490,519)
Property and equipment, net

279,546

248,867
Goodwill

25,091

12,242
Other intangible assets, net

35,351

11,586
Other assets

7,216

7,716
Total assets

$
552,749

$
405,066
Liabilities and Equity




Current liabilities




Accounts payable

$
11,751

$
10,796
Accounts payable and accrued expenses, related parties

1,246

648
Accrued salaries and benefits

8,595

2,511
Accrued insurance

11,008

10,338
Accrued expenses and other current liabilities

39,713

22,091
Total current liabilities

72,313

46,384
Accrued lease obligations

18,100

15,946
Other long term liabilities

8,008

8,028
Long-term debt, net of current maturities

—

—
Total liabilities

98,421

70,358
Commitments and contingencies (Note 8)




Class A-1 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017; 16,100,000 shares issued and outstanding as of December 31, 2016

—

161
Class A common stock, $0.01 par value; 250,000,000 shares authorized and 30,468,249 shares issued and outstanding as of September 30, 2017; 3,802,972 shares issued and outstanding as of December 31, 2016

305

38
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 38,462,541 shares issued and outstanding as of September 30, 2017 and December 31, 2016

385

385
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016

—

—
Additional paid-in capital

206,158

113,175
Accumulated deficit

(8,207)

(1,043)
Total stockholders’ equity

198,641

112,716
Noncontrolling interests

255,687

221,992
Total equity

454,328

334,708
Total liabilities and equity

$
552,749

$
405,066


	June 30, 2019		December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	23,818	$	17,237
Accounts receivable trade, net of allowance for doubtful accounts of $4,921 and $5,329, respectively		324,918		341,711
Accounts receivable, related parties		3,105		1,119
Inventories		39,952		44,992
Prepaid expenses and other current assets		29,435		27,093
Total current assets		421,228		432,152
Property and equipment		1,069,496		1,114,378
Accumulated depreciation		(603,191)		(611,530)
Property and equipment held-for-sale, net		1,906		—
Total property and equipment, net		468,211		502,848
Right-of-use assets		75,302		—
Goodwill		266,934		273,801
Other intangible assets, net		142,438		148,377
Other assets		3,064		3,427
Total assets	$	1,377,177	$	1,360,605
Liabilities and Equity
Current liabilities
Accounts payable	$	53,107	$	53,847
Accrued accounts payable		43,311		62,536
Accounts payable and accrued expenses, related parties		3,417		5,056
Accrued salaries and benefits		16,734		22,113
Accrued insurance		15,799		14,849
Sales tax payable		1,282		5,820
Accrued expenses and other current liabilities		10,615		14,560
Current operating lease liabilities		19,553		—
Current portion of finance lease obligations		421		938
Total current liabilities		164,239		179,719
Long-term operating lease liabilities		75,169		16,752
Other long-term liabilities		10,921		8,361
Long-term debt		—		45,000
Total liabilities		250,329		249,832
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized; 80,176,078 and 78,956,555 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		802		790
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of June 30, 2019 and December 31, 2018		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized; 26,026,843 shares issued and outstanding as of June 30, 2019 and December 31, 2018		260		260
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of June 30, 2019 and December 31, 2018		—		—
Additional paid-in capital		821,968		813,599
Retained earnings		25,988		18,653
Accumulated other comprehensive deficit		(380)		(368)
Total stockholders’ equity		848,638		832,934
Noncontrolling interests		278,210		277,839
Total equity		1,126,848		1,110,773
Total liabilities and equity	$	1,377,177	$	1,360,605

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

Table of Contents

SELECT ENERGY SERVICES, INC. ~~AND SUBSIDIARIES~~

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three Months Ended September 30,

Nine Months Ended September 30,


2017

2016

2017

2016

Revenue









Water solutions

$
125,086

$
60,975

$
311,275

$
173,157

Accommodations and rentals

15,615

5,838

38,457

19,585

Wellsite completion and construction services

13,179

7,094

38,522

22,923

Total revenue

153,880

73,907

388,254

215,665

Costs of revenue









Water solutions

88,087

49,996

226,737

144,653

Accommodations and rentals

11,976

4,969

30,697

15,527

Wellsite completion and construction services

10,888

6,299

32,155

19,817

Depreciation and amortization

23,420

21,613

67,144

73,874

Total costs of revenue

134,371

82,877

356,733

253,871

Gross profit (loss)

19,509

(8,970)

31,521

(38,206)

Operating expenses









Selling, general and administrative

16,087

8,764

49,298

25,928

Depreciation and amortization

375

363

1,312

1,644

Impairment of goodwill and other intangible assets

—

—

—

138,666

Impairment of property and equipment

—

—

—

60,026

Lease abandonment costs

590

13,169

2,871

13,169

Total operating expenses

17,052

22,296

53,481

239,433

Income (loss) from operations

2,457

(31,266)

(21,960)

(277,639)

Other income (expense)









Interest expense, net

(484)

(4,343)

(1,885)

(11,792)

Other income, net

326

431

3,342

588

Income (loss) before tax expense

2,299

(35,178)

(20,503)

(288,843)

Tax benefit (expense)

294

(26)

326

(392)

Net income (loss)

2,593

(35,204)

(20,177)

(289,235)

Less: Net loss attributable to Predecessor

—

34,931

—

285,359

Less: Net (income) loss attributable to noncontrolling interests

(1,369)

273

13,013

3,876

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

$
1,224

$
—

$
(7,164)

$
—

Allocation of net income (loss) attributable to:









Class A-1 stockholders

$
—



$
(2,679)

Class A stockholders

1,224



(4,485)

Class B stockholders

—



$
1,224



$
(7,164)

Weighted average shares outstanding:







Class A-1—Basic

—



9,671,795

Class A—Basic

30,336,923



16,189,997

Class B—Basic

38,462,541



38,462,541

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







Class A-1—Basic

$
—



$
(0.28)

Class A—Basic

$
0.04



$
(0.28)

Class B—Basic

$
—



$
—

Weighted average shares outstanding:







Class A-1—Diluted

—



9,671,795

Class A—Diluted

30,357,572



16,189,997

Class B—Diluted

38,462,541



38,462,541

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







Class A-1—Diluted

$
—



$
(0.28)

Class A—Diluted

$
0.04



$
(0.28)

Class B—Diluted

$
—



$
—


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenue
Water services	$	202,011	$	233,954	$	422,606	$	452,184
Water infrastructure		51,710		55,727		105,326		109,784
Oilfield chemicals		63,001		64,807		129,830		128,437
Other		7,165		38,759		28,771		79,237
Total revenue		323,887		393,247		686,533		769,642
Costs of revenue
Water services		155,151		176,571		318,272		341,201
Water infrastructure		38,456		37,884		79,886		77,980
Oilfield chemicals		54,051		58,500		113,578		115,584
Other		7,447		33,119		28,500		68,873
Depreciation and amortization		28,843		30,445		60,361		61,327
Total costs of revenue		283,948		336,519		600,597		664,965
Gross profit		39,939		56,728		85,936		104,677
Operating expenses
Selling, general and administrative		27,297		26,871		59,673		52,552
Depreciation and amortization		906		807		1,906		1,348
Impairment of goodwill		—		—		4,396		—
Impairment of property and equipment		374		2,282		893		2,282
Impairment of cost-method investment		—		—		—		2,000
Lease abandonment costs		183		1,973		1,256		3,097
Total operating expenses		28,760		31,933		68,124		61,279
Income from operations		11,179		24,795		17,812		43,398
Other income (expense)
(Losses) gains on sales of property and equipment, net		(1,709)		2,056		(6,200)		1,502
Interest expense, net		(839)		(1,342)		(1,932)		(2,493)
Foreign currency gain (loss), net		67		(340)		327		(740)
Other (expense) income, net		(59)		4		210		100
Income before income tax expense		8,639		25,173		10,217		41,767
Income tax expense		(571)		(150)		(749)		(612)
Net income		8,068		25,023		9,468		41,155
Less: net income attributable to noncontrolling interests		(1,868)		(8,060)		(2,133)		(14,093)
Net income attributable to Select Energy Services, Inc.	$	6,200	$	16,963	$	7,335	$	27,062

Net income per share attributable to common stockholders (Note 16):
Class A—Basic	$	0.08	$	0.24	$	0.09	$	0.40
Class A-2—Basic	$	—	$	—	$	—	$	0.40
Class B—Basic	$	—	$	—	$	—	$	—

Net income per share attributable to common stockholders (Note 16):
Class A—Diluted	$	0.08	$	0.24	$	0.09	$	0.39
Class A-2—Diluted	$	—	$	—	$	—	$	0.39
Class B—Diluted	$	—	$	—	$	—	$	—

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

Table of Contents

SELECT ENERGY SERVICES, INC. ~~AND SUBSIDIARIES~~

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(unaudited)

(in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,


2017

2016

2017

2016

Net income (loss)

$
2,593

$
(35,204)

$
(20,177)

$
(289,235)

Other comprehensive income (loss)









Interest rate derivatives designated as cash flow hedges









Unrealized holding loss arising during period

—

—

—

(106)

Net amount reclassified to earnings

—

—

—

113

Net change in unrealized gain

—

—

—

7

Comprehensive income (loss)

2,593

(35,204)

(20,177)

(289,228)

Less: Comprehensive loss attributable to Predecessor

—

34,931

—

285,352

Less: Comprehensive (income) loss attributable to noncontrolling interests

(1,369)

273

13,013

3,876

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

$
1,224

$
—

$
(7,164)

$
—


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net income	$	8,068	$	25,023	$	9,468	$	41,155
Other comprehensive income
Foreign currency translation adjustment, net of tax of $0		(66)		(191)		(12)		(450)
Comprehensive income		8,002		24,832		9,456		40,705
Less: comprehensive income attributable to noncontrolling interests		(1,853)		(7,998)		(2,130)		(13,939)
Comprehensive income attributable to Select Energy Services, Inc.	$	6,149	$	16,834	$	7,326	$	26,766

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

Table of Contents

SELECT ENERGY SERVICES, INC. ~~AND SUBSIDIARIES~~

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

~~(unaudited)~~For the six months ended June 30, 2019 and 2018

(unaudited)

(in thousands, except share data)

Class A-1

Class A

Class B

Preferred

Stockholders

Stockholders

Stockholders

Stockholders

Class A-1

Class A

Class B

Additional

Total

Common

Common

Common

Preferred

Paid-In

Accumulated

Stockholders’

Noncontrolling


Shares

Stock

Shares

Stock

Shares

Stock

Shares

Stock

Capital

Deficit

Equity

Interests

Total
Balance as of December 31, 2016

16,100,000

$
161

3,802,972

$
38

38,462,541

$
385

—

$
—

$
113,175

$
(1,043)

$
112,716

$
221,992

$
334,708
Conversion of Class A-1 to Class A

(16,100,000)

(161)

16,100,000

161

—

—

—

—

—

—

—

—

—
Issuance of shares for acquisitions

—

—

560,277

6

—

—

—

—

4,360

—

4,366

5,514

9,880
Issuance of shares for initial public offering

—

—

10,005,000

100

—

—

—

—

87,835

—

87,935

40,569

128,504
Equity-based compensation

—

—

—

—

—

—

—

—

788

—

788

993

1,781
Noncontrolling interest in subsidiary

—

—

—

—

—

—

—

—

—

—

—

(368)

(368)
Net loss

—

—

—

—

—

—

—

—

—

(7,164)

(7,164)

(13,013)

(20,177)
Balance as of September 30, 2017

—

$
—

30,468,249

$
305

38,462,541

$
385

—

$
—

$
206,158

$
(8,207)

$
198,641

$
255,687

$
454,328


	Class A			Class A-2			Class B			Preferred			��					Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders								Other
		Class A			Class A-2			Class B						Additional				Comprehensive		Total
		Common			Common			Common			Preferred			Paid-In		Retained		Income		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock			Capital		Earnings		(Deficit)		Equity		Interests		Total
Balance as of December 31, 2018	78,956,555	$	790	—	$	—	26,026,843	$	260	—	$	—		$	813,599	$	18,653	$	(368)	$	832,934	$	277,839	$	1,110,773
ESPP shares issued	5,667		—	—		—	—		—	—		—			58		—		—		58		(2)		56
Equity-based compensation	—		—	—		—	—		—	—		—			6,271		—		—		6,271		2,037		8,308
Issuance of restricted shares	1,373,930		14	—		—	—		—	—		—			3,549		—		—		3,563		(3,563)		—
Exercise of restricted stock units	1,250		—	—		—	—		—	—		—			4		—		—		4		(4)		—
Repurchase of common stock	(152,502)		(2)	—		—	—		—	—		—			(1,539)		—		—		(1,541)		25		(1,516)
Restricted shares forfeited	(8,822)		—	—		—	—		—	—		—			(23)		—		—		(23)		23		—
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—			—		—		—		—		(225)		(225)
NCI income tax adjustment	—		—	—		—	—		—	—		—			49		—		—		49		(49)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—			—		—		(12)		(12)		(4)		(16)
Net income	—		—	—		—	—		—	—		—			—		7,335		—		7,335		2,133		9,468
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


	Class A			Class A-2			Class B			Preferred							Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders					Retained		Other
		Class A			Class A-2			Class B					Additional		Earnings		Comprehensive		Total		��
		Common			Common			Common			Preferred		Paid-In		(Accumulated		Income		Stockholders’			Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit)		(Deficit)		Equity			Interests		Total
Balance as of December 31, 2017	59,182,176	$	592	6,731,845	$	67	40,331,989	$	404	—	$	—	$	673,141	$	(17,859)	$	302	$	656,647		$	406,722	$	1,063,369
Conversion of Class A-2 to Class A	6,731,839		67	(6,731,839)		(67)	—		—	—		—		—		—		—		—			—		—
Conversion of Class B to Class A	10,948,669		110	—		—	(10,948,669)		(110)	—		—		111,803		—		—		111,803			(111,803)		—
ESPP shares issued	3,986		—	—		—	—		—	—		—		50		—		—		50			4		54
Equity-based compensation	—		—	—		—	—		—	—		—		3,617		—		—		3,617			1,848		5,465
Issuance of restricted shares	430,595		4	—		—	—		—	—		—		2,261		—		—		2,265			(2,265)		—
Exercise of restricted stock units	27,860		—	—		—	—		—	—		—		104		—		—		104			(104)		—
Stock options exercised	37,209		—	—		—	—		—	—		—		376		—		—		376			1		377
Repurchase of common stock	(45,034)		—	(6)		—	—		—	—		—		(583)		—		—		(583)			(74)		(657)
Restricted shares forfeited	(18,640)		—	—		—	—		—	—		—		(70)		—		—		(70)			70		—
Noncontrolling interest in subsidiary	—		—	—		—	—		—	—		—		—		—		—		—			(280)		(280)
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		(450)		(450)			(221)		(671)
Net income	—		—	—		—	—		—	—		—		—		27,062		—		27,062			14,093		41,155
Balance as of June 30, 2018	77,298,660	$	773	—	$	—	29,383,320	$	294	—	$	—	$	790,699	$	9,203	$	(148)	$	800,821		$	307,991	$	1,108,812

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

Table of Contents

NOTE 5—LEASES

As of ~~September~~June 30, ~~2017,~~2019, the Company was the lessee for approximately 580 operating leases with durations greater than a year, approximately 14 subleases, approximately 65 finance leases, and is the lessor for three owned properties. Most of the operating leases either have renewal options of between one and five years or convert to month-to-month agreements at the end of the specified lease term. In addition to normal lease activity, the four Affirm and Canadian divestitures occurring in the Current Period included the assignment of leases to the buyers. The assigned leases impacted expenses during the Current Period, but were not included in the June 30, 2019 consolidated balance sheet.

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

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

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

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


Balance Sheet	Classification	As of June 30, 2019
		(in thousands)
Assets
ROU Assets⁽¹⁾	Long-term right-of-use assets	$	75,302
Finance lease assets⁽²⁾	Property and equipment		422
Liabilities
Operating lease liabilities ― ST	Current operating lease liabilities	$	19,553
Operating lease liabilities ― LT⁽³⁾	Long-term operating lease liabilities		75,169
Finance lease liabilities ― ST	Current portion of finance lease obligations		421
Finance lease liabilities ― LT	Other long term liabilities		129

(1)

Net of impairment of $17.9 million.

(2)

Net of accumulated amortization of $1.7 million.

(3)

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

1618

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Statements of Operations and Cash Flows	Classification	Three months ended June 30, 2019		Six months ended June 30, 2019
		(in thousands)
Operating lease cost:
Operating lease cost ― fixed	Cost of revenue and Selling, general and administrative	$	7,091	$	15,150
Lease abandonment costs	Lease abandonment costs		183		1,256

Short-term agreements:	Cost of revenue	$	24,914	$	47,812

Finance lease cost:
Amortization of leased assets	Depreciation and amortization	$	523	$	737
Interest on lease liabilities	Interest expense, net		3		7

Lessor income:
Sublease income	Cost of sales and lease abandonment costs	$	390	$	762
Lessor income	Cost of sales		69		180

Statement of cash flows
Cash paid for operating leases	Operating cash flows	$	7,606	$	15,957
Cash paid for finance leases lease interest	Operating cash flows		3		7
Cash paid for finance leases	Financing cash flows		264		549


Long Term and Discount Rate	As of June 30, 2019
Weighted-average remaining lease term (years)
Operating leases	4.8
Finance leases	1.3
Weighted-average discount rate
Operating leases	5.3	%
Finance leases	5.2	%

~~facilities through~~Table of Contents

The Company has the ~~year ended 2027.~~following operating and finance lease commitments as of June 30, 2019:


Period	Operating Leases⁽¹⁾		Finance Leases		Total
	(in thousands)
July 2019 through December 2019	$	14,874	$	371	$	15,245
2020		21,852		135		21,987
2021		15,113		89		15,202
2022		11,745		—		11,745
2023		9,985		—		9,985
Thereafter		47,911		—		47,911
Total minimum lease payments	$	121,480	$	595	$	122,075

Less reconciling items to reconcile undiscounted cash flows to lease liabilities:
Leases commencing in the future		(621)		—		(621)
Short-term leases excluded from balance sheet		(2,785)		—		(2,785)
Imputed interest		(23,352)		(45)		(23,397)
Total reconciling items		(26,758)		(45)		(26,803)
Total liabilities per balance sheet		94,722		550		95,272

(1)

This table excludes sublease income of $0.7 million from July 2019 to December 2019, $0.9 million during 2020 and $0.2 million during 2021.

NOTE 6—INVENTORIES

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


	June 30, 2019		December 31, 2018
	(in thousands)
Raw materials	$	16,685	$	15,219
Finished goods		22,570		28,540
Materials and supplies		697		1,233
	$	39,952	$	44,992

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, $0.1 million, $0.2 million and $0.4 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The reserve for excess and obsolete inventories is determined based on the Company’s ~~abandonment~~historical usage of ~~these facilities is not a part~~inventory on hand, as well as future expectations, and the amount necessary to reduce the cost of ~~a formalized exit plan.~~the inventory to its estimated net realizable value.

Provision during  the

Usage during the

Balance as of

nine months ended

nine months ended

Balance as of

December 31, 2016

September 30, 2017

September 30, 2017

September 30, 2017

(in thousands)
Lease obligations and terminations

$
18,000

$
2,871

$
2,153

$
18,718
Reclassification of deferred rent

1,069





1,254
Total

$
19,069





$
19,972

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NOTE 5—7—PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:


	June 30, 2019		December 31, 2018
	(in thousands)
Land	$	16,030	$	17,799
Buildings and leasehold improvements		105,220		106,626
Vehicles and equipment		62,046		83,435
Vehicles and equipment - finance lease		1,599		1,833
Machinery and equipment		724,500		758,528
Machinery and equipment - finance lease		202		532
Computer equipment and software		17,044		15,775
Computer equipment and software - finance lease		356		356
Office furniture and equipment		4,614		4,612
Disposal wells		64,321		64,038
Other		497		497
Construction in progress		73,067		60,347
		1,069,496		1,114,378
Less accumulated depreciation⁽¹⁾		(603,191)		(611,530)
Property and equipment held-for-sale		1,906		—
Total property and equipment, net	$	468,211	$	502,848

September 30, 2017

December 31, 2016

(in thousands)
Land

$
7,106

$
8,593
Buildings and leasehold improvements

83,328

83,352
Vehicles and equipment

38,547

24,114
Machinery and equipment

564,741

534,303
Computer equipment and software

11,438

11,102
Office furniture and equipment

3,709

4,275
Disposal wells

67,778

67,566
Helicopters

497

497
Construction in progress

37,858

5,584

815,002

739,386
Less accumulated depreciation and impairment

(535,456)

(490,519)
Total property and equipment, net

$
279,546

$
248,867

(1)

Includes $1.7 million of accumulated depreciation related to finance leases.

During the Current Quarter, Prior Quarter, Current Period and Prior Period, depreciation expense was $26.8 million, $27.9 million, $56.3 million and $55.4 million, respectively. Depreciation of assets held under finance leases for the Current Quarter, Prior Quarter, Current Period and Prior Period was $0.5 million, $0.3 million, $0.7 million and $0.7 million, respectively, and is included in the totals above and in depreciation and amortization expense in the accompanying consolidated statements of operations.

~~Long‑lived~~Property and Equipment Held-for-Sale and Impairments

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

~~The~~ During the first quarter of 2019, the Company ~~had no capital lease obligations~~made the decision to sell and wind down certain operations within its former Wellsite Services segment, including the operations of its Affirm subsidiary, its sand hauling operations and its Canadian operations. This decision led us to classify the property and equipment of these business as held-for-sale. All operations have been wound down, with $1.9 million remaining in held-for-sale as of ~~September~~June 30, ~~2017~~2019. The table below shows the property and ~~December 31, 2016.~~equipment sold and divested as follows:


Type of sale event	Business	Net Book Value of Property and Equipment Sold or Divested
		(in thousands)
Business divestitures	Affirm subsidiary	$	11,275
Property and equipment sales	Affirm subsidiary		1,339
Business divestitures	Canadian operations		7,372
Property and equipment sales	Canadian operations		351
Property and equipment sales	Sand hauling operations		2,301
Total property and equipment sold and divested		$	22,638

During the Current Period, the Company recorded an impairment of $0.9 million of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds. In addition, during the Current Period, the net loss on divestitures and sales of property and equipment held-for-sale was $2.8 million.

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NOTE 6—8—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is evaluated for impairment on at least an annual basis, ~~as of December 31,~~ or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 ~~inputs.~~inputs (see Note 12). During the first quarter of 2019, the Affirm goodwill was reduced to zero from the crane divestiture and impairment. The $4.4 million of goodwill impairment was based on the expected proceeds from selling and winding down the rest of the Affirm business. Also, in connection with the Company’s segment realignment, the Company reallocated goodwill from reporting units in the 2018 Water Solutions segment to reporting units in the 2019 Water Services and Water Infrastructure segments. The changes in the carrying

~~Table of Contents~~

amounts of goodwill by reportable segment ~~for the nine months ended September~~as of June 30, ~~2017~~2019 and ~~the year ended~~ December 31, ~~2016~~2018 are as follows:


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

Wellsite Completion




Water

and Construction

Accommodations

Solutions

Services

and Rentals

Total

(in thousands)
Balance as of December 31, 2015

$
137,534

$
12,242

$
995

$
150,771
Impairment

(137,534)

—

(995)

(138,529)
Balance as of December 31, 2016

—

12,242

—

12,242
Additions

12,849

—

—

12,849
Balance as of September 30, 2017

$
12,849

$
12,242

$
—

$
25,091

(1)

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

The components of other intangible assets, net as of June 30, 2019 and December 31, 2018 are as follows:

September 30, 2017


Gross

Accumulated

Net

Value

Amortization

Value

(in thousands)
Customer relationships

$
80,131

$
54,987

$
25,144
Other

13,222

3,015

10,207
Total other intangible assets

$
93,353

$
58,002

$
35,351


	December 31, 2016
	Gross		Accumulated		Net
	Value		Amortization		Value
	(in thousands)

							As of June 30, 2019						As of December 31, 2018
							Gross		Accumulated		Net		Gross		Accumulated		Net
							Value		Amortization		Value		Value		Amortization		Value
							(in thousands)						(in thousands)
Definite-lived
Customer relationships	$	56,826	$	48,236	$	8,590	$	116,078	$	15,723	$	100,355	$	171,245	$	66,402	$	104,843
Patents								10,110		1,918		8,192		10,110		1,417		8,693
Other		5,491		2,495		2,996		7,516		4,098		3,418		7,234		2,866		4,368
Total other intangible assets	$	62,317	$	50,731	$	11,586
Total definite-lived								133,704		21,739		111,965		188,589		70,685		117,904
Indefinite-lived
Water rights								7,031		—		7,031		7,031		—		7,031
Trademarks								23,442		—		23,442		23,442		—		23,442
Total indefinite-lived								30,473		—		30,473		30,473		—		30,473

Total other intangible assets, net							$	164,177	$	21,739	$	142,438	$	219,062	$	70,685	$	148,377

Intangibles obtained through acquisitions are initially recorded at estimated fair value based on preliminary information that is subject to change until final valuations are obtained. Customer relationships and non‑compete agreements are being amortized over estimated useful lives ranging from five to seven years and three to five years, respectively. Other intangible assets primarily relate to certain water rights that are amortized over estimated useful lives ranging from three to eight years. Intangible assets obtained in the GRR Acquisition consisted

Table of customer relationships and non-compete agreements that will be amortized over estimated useful lives of thirteen and five years, respectively, with a weighted-average estimated useful life of 12.5 years. As a result of the GRR Acquisition, the Company also obtained water rights totaling $3.7 million that have indefinite lives and will be evaluated periodically for impairment. Intangible assets obtained in the Resource Water Acquisition consisted of customer relationships and non-compete agreements that will be amortized over estimated useful lives of ten and three years, respectively, with a weighted-average estimated useful life of 8.6 years. The Company acquired patents of $1.9 million as part of the DAWS Acquisition, which are being amortized over the estimated useful lives of ten years. See Note 3 – Acquisitions for further discussion.Contents

Amortization expense was ~~$2.6~~$2.9 million, $3.3 million, $5.9 million and ~~$2.1~~$7.2 million for the ~~three months ended September 30, 2017~~Current Quarter, Prior Quarter, Current Period and ~~2016, respectively, and $7.3 million and $6.7 million~~Prior Period, respectively. Annual amortization of intangible assets for the ~~nine months ended September 30, 2017~~next five years and ~~2016, respectively.~~beyond is as follows:


	Amount
	(in thousands)
Remainder of 2019	$	5,927
2020		11,561
2021		10,378
2022		10,163
2023		10,092
Thereafter		63,844
	$	111,965

~~Table of Contents~~

NOTE 7—9—DEBT

Credit ~~Facility term loans~~facility and revolving line of credit

On November 1, 2017, SES Holdings and Select ~~Energy Services’~~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 ~~Facility, originally executed in May 2011,~~Agreement also has ~~been amended over time. Effective December 20, 2016,~~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 ~~amended its~~has the option to increase the maximum amount under the Credit ~~Facility to extend~~Agreement by $150.0 million during the first three years following the closing. The maturity date ~~from February 28, 2018~~of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to ~~February 28, 2020 and reduce~~Section 2.1(b) of Article VII of the ~~revolving line~~Credit Agreement.

The Credit Agreement permits extensions of credit up to ~~$100.0 million. The agreement also amended certain financial covenants~~the lesser of $300.0 million and ~~restrictions and outlined~~ a ~~new pricing grid~~borrowing base that is ~~effective after receipt~~determined by calculating the amount equal to the sum of (i) 85% of the third quarter 2017 compliance certificate. Accrued interest is payable at the end of each quarter. The Credit Facility has a variable interest rate that ranges from either (i) the London interbank rate (“LIBOR”) plus a margin for Eurodollar advances or (ii) the applicable base rate plus a margin for base rate advances based on the Company’s Leverage RatioEligible Billed Receivables (as defined in the Credit ~~Facility) falling between 2.00%~~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 ~~4.00% as outlined below. In addition,~~(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 ~~commitment fee related~~monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the ~~revolving line of credit is payable at the end of each calendar quarter based on a rate of 0.500% per annum on any unused portion of the commitment~~Administrative Agent.

Borrowings under the Credit ~~Facility. Effective June 13, 2017,~~Agreement bear interest, at Select LLC’s election, at either the ~~Company amended its~~(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 ~~Facility to permanently waive~~Agreement. During the continuance of a bankruptcy event of default, ~~associated with~~automatically and during the ~~DAWS Acquisition. This waiver is specifically for such acquisition and does not remedy~~continuance of any other ~~present~~default, upon the Administrative Agent’s or ~~future defaults associated with~~the required lenders’ election, all outstanding amounts under the Credit ~~Facility.~~

Leverage Ratio Before Receipt of Fourth Quarter 2017

Eurodollar

Base Rate

Compliance Certificate

Advances

Advances

< 4.00

4.00
%
3.00
%
≥ 4.00

4.50
%
3.50
%

Leverage Ratio After Receipt of Fouth Quarter 2017

Eurodollar

Base Rate

Compliance Certificate

Advances

Advances

< 2.00

3.00
%
2.00
%
≥ 2.00 < 2.50

3.25
%
2.25
%
≥ 2.50 < 3.00

3.50
%
2.50
%
≥ 3.00 < 3.50

3.75
%
2.75
%
≥ 3.50 < 4.00

4.00
%
3.00
%
≥ 4.00

4.50
%
3.50
%

Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.

Table of Contents


Level	Average Excess Availability	Base Rate Margin	Eurocurrency Rate Margin

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


Level	Average Revolver Usage	Unused Line Fee Percentage

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

The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select ~~Energy Services had no debt~~LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.

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 ~~revolving line~~Credit Agreement to be immediately due and payable.

In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of ~~credit~~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—Related Party Transactions for further discussion of the Tax Receivable Agreements.

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

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

The Company had no borrowings and $45.0 million outstanding under the Credit Agreement as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018, respectively. The weighted-average interest rate of outstanding borrowings under the Credit Agreement was 4.256% as of December 31, 2018. As of June 30, 2019 and December 31, 2018, the borrowing base under the Credit Agreement was $256.4 million and $270.5 million, respectively. The borrowing capacity under the ~~revolving line of credit~~Credit Agreement was reduced by outstanding letters of credit of ~~$14.1~~$16.4 million and $20.8 million as of ~~September~~June 30, ~~2017.~~2019 and December 31, 2018, respectively. The Company’s letters of credit have a variable interest rate between ~~3.00%~~1.50% and ~~4.50%~~

Table of Contents

2.00% based on the Company’s ~~Leverage Ratio~~average excess availability as outlined above. The unused portion of the available borrowings under the ~~revolving line~~Credit Agreement was $240.0 million as of ~~credit was $85.9 million at September~~June 30, ~~2017.~~2019.

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~~June 30, ~~2017~~2019 and December 31, 2018 were ~~$3.0 million.~~$2.3 million and $2.6 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 ~~sheet.~~sheets. Amortization expense related to debt issuance costs was $0.2 million, $0.2 million, $0.3 million and $0.3 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.

The Company’s obligations under its Credit Facility are secured by substantially all of its assets. The Credit Facility contains customary events of default and covenants and limits its ability to incur additional indebtedness, pay dividends or make other distributions, create liens and sell assets. The Company was in compliance with all debt covenants as of ~~September~~June 30, ~~2017.~~2019.

~~Table of Contents~~

NOTE 8—10—COMMITMENTS AND CONTINGENCIES

Litigation

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

Certain subsidiaries acquired in the ~~ordinary course~~Rockwater Merger are under investigation by the U.S. Attorney's Office for the Middle District of ~~business.~~Pennsylvania and the U.S. Environmental Protection Agency (the “EPA”). It is alleged that certain employees at some of the facilities altered emissions controls systems on 4% of the vehicles in the fleet in violation of the Clean Air Act. The ~~legal proceedings are at different stages; however,~~Company is cooperating with the relevant authorities to resolve the matter. At this time no administrative, civil or criminal charges have been brought against the Company ~~does not believe~~and the ~~resolution~~Company cannot estimate the possible fines and penalties that may be levied against the Company.

Self-Insured Reserves

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

Table of ~~any of these proceedings would be material to its financial position or results of operations.~~Contents

~~General Business Risk~~

As discussed in Note 1, the substantial majority of the Company’s customers are in the oil and gas industry. The oil and gas industry is currently facing unique challenges due to the continued volatility and depressed state of oil and gas prices.

NOTE ~~9—EQUITY‑BASED~~11—EQUITY-BASED COMPENSATION

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

On July 18, 2017, the Select ~~Energy Services~~Inc. board of directors approved the First Amendment to the 2016 Plan (the “Equity Plan Amendment”), which clarifies the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater Merger ~~(as defined in Note 17 below))~~which occurred on November 1, 2017) and ~~allows~~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 ~~Select~~the Company’s Class A Common Stock is listed. The effectiveness of the Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement ~~(as defined in Note 17 below).~~for the Rockwater Merger. The Company’s consenting stockholders, who ~~hold~~held a majority of the outstanding common stock of ~~Select Energy Services,~~the Company, approved the Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment became effective on November 1, 2017 upon the consummation of the Rockwater Merger.

~~The~~ Currently, the maximum number of shares ~~initially~~ reserved for issuance under the 2016 Plan, ~~was 5,400,400 shares of Select Class A Common Stock, subject to adjustment in~~taking into account the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. Stock options are granted with terms not to exceed ten years. After giving effect to the Equity Plan Amendment, the maximum number of shares of Select Class A Common Stock reserved for issuance under the 2016 Plan is equal to (i) 5,400,400 shares plus (ii) 1,011,087 shares that became available on account of the assumptionimpact of the Rockwater ~~Equity Plan, subject to adjustment in~~Merger, is approximately 9.3 million shares. For all share-based compensation award types, the ~~event of recapitalization or reorganization, or related to~~Company accounts for forfeitures or the expiration of awards. The maximum number of shares described in the preceding sentence does not take into account 2,887,048 shares of Select Class A Common Stock related to substitute awards that were granted under the 2016 Plan following the conversion of outstanding equity awards originally granted under the Rockwater Equity Plan in accordance with the Merger Agreement. For additional information on such substitute awards, please see Note 17 below.as they occur.

Phantom unit awards granted under the 2011 Plan, upon vesting, entitled each participant with the right to receive an amount of cash based in part on the fair market value of a share of Select Class A Common Stock on the date of the IPO. Based on the fair market value of a share of Select Class A Common Stock of $14.00 on the date of the IPO, each participant received a cash payment equal to $5.53 for each phantom unit on May 5, 2017. Refer to “Phantom Unit Awards” for details related to the payments made in respect of outstanding phantom units in connection with the IPO.

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Stock option awards

Stock options were granted with an exercise price equal to or greater than the fair market value of a share of ~~Select~~ Class A Common Stock as of the date of grant. ~~The~~Prior to the Company’s initial public offering on April 26, 2017, the Company historically valued ~~Select~~ Class A Common Stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. ~~The~~This fair value measurement ~~relies~~relied on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certain awards ~~that were~~ 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 ~~utilizes~~utilized the ~~Black‑Scholes~~Monte Carlo option pricing model to determine fair value of the options granted during 2018, which incorporates assumptions to value ~~equity‑based~~equity-based awards. The ~~risk‑free~~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. At the time of grant, there was no public market for the Company’s equity. Therefore, the Company considered the historic volatility of publicly traded peer companies when determining the volatility factor. The expected life of the options was based on ~~a formula considering~~ the vesting period and term of the options awarded, which is ~~generally seven to~~ ten years.

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A summary of the Company’s stock option activity and related information as of and for the ~~nine months ended September 30, 2017~~Current Period is as follows:


	For the six months ended June 30, 2019
				Weighted-average
		Weighted-average		Remaining Contractual	Aggregate Intrinsic
	Stock Options	Exercise Price		Term (Years)	Value (in thousands) ^(a)
Beginning balance, outstanding	3,865,678	$	16.00	4.9	$	19
Granted	—		—
Exercised	—		—
Forfeited	(12,459)		17.83
Expired	(27,303)		22.21
Ending balance, outstanding	3,825,916	$	15.95	4.7	$	2,516
Ending balance, exercisable	3,373,046	$	15.26	4.3	$	2,189
Nonvested at end of period	452,870	$	21.06

For the nine months ended September 30, 2017

Weighted-average

Equity Options

Exercise Price
Beginning balance

620,721

$
16.50
Granted

455,130

20.00
Forfeited

(98,499)

20.00
Ending balance

977,352

$
17.78

~~The weighted‑average grant date fair~~^(a)Aggregate intrinsic value ~~of stock options granted during the nine months ended September 30, 2017 was $7.85. The relevant assumptions~~ for stock options ~~granted during~~is based on the ~~period are~~difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $11.61 and $6.32 as ~~follows:~~

$20.00 Strike

Underlying Equity

$
20.00

Strike Price

$
20.00

Dividend Yield (%)

0.0
%
Risk free rate (%)

1.68 - 2.00
%
Volatility (%)

46.6 - 46.8
%
Expected Term (Years)

4-6

of June 28, 2019 and December 31, 2018, respectively.

~~There was no vested stock option activity, or exercise~~The Company recognized $1.0 million, $1.4 million, $2.3 million and $2.7 million of ~~vested~~compensation expense related to stock options during the ~~nine months ended September~~Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of June 30, ~~2017.~~2019, there was $2.2 million of unrecognized equity-based compensation expense related to nonvested stock options. This cost is expected to be recognized over a weighted-average period of one year.

Restricted Stock Awards and Restricted Stock Units

The value of the restricted stock awards and restricted stock units issued was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of $2.2 million, $1.2 million, $4.0 million and $2.1 million related to the restricted stock awards and restricted stock units for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of June 30, 2019, there was $13.6 million of unrecognized compensation expense with a weighted-average remaining life of 1.6 years related to unvested restricted stock awards and restricted stock units.

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


	For the six months ended June 30, 2019
		Weighted-average
	Restricted Stock Awards	Grant Date Fair Value
Nonvested at December 31, 2018	496,945	$	19.02
Granted	1,373,930		8.77
Vested	(255,582)		18.80
Forfeited	(8,822)		19.79
Nonvested at June 30, 2019	1,606,471	$	10.28

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A summary of the Company’s restricted stock unit activity and related information for the ~~nine months ended September 30, 2017~~Current Period is as follows:

For the nine months ended September 30, 2017

Weighted-average

Restricted Stock

Grant Date Fair Value

Beginning balance

—

$
—

Granted

41,117

19.91

Forfeited

(10,757)

20.00

Ending balance

30,360

$
19.88


	For the six months ended June 30, 2019
		Weighted-average
	Restricted Stock Units	Grant Date Fair Value
Nonvested at December 31, 2018	2,500	$	19.00
Granted	—		—
Vested	(1,250)		19.00
Nonvested at June 30, 2019	1,250	$	19.00

Performance Share Units (PSUs)

~~Table~~During 2018 and 2019, the Company approved grants of ~~Contents~~

performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The ~~Company recognized approximately $0.6 million and $0.0 million~~number of ~~compensation expense related to stock options and restricted stock unit awards during the three months ended September 30, 2017 and 2016, respectively. The Company recognized approximately $1.~~8 ~~million and $0.3 million~~shares of ~~compensation expense related to stock options and restricted stock unit awards during the nine months ended September 30, 2017 and 2016, respectively.~~

~~Phantom unit awards~~

The Company’s phantom unit awards were cash settled awards that were contingent upon meeting certain equity returns and a liquidation event. The settlement amount was based on the fair market value of a share of Select Class A Common Stock ~~on the date of completion~~issued to a recipient upon vesting of the ~~IPO, which constituted a liquidation event with respect to such phantom unit awards. As a result of the cash‑settlement feature of these awards, the Company considered these awards to~~PSU will be ~~liability awards, which are measured at fair value at each reporting date and the pro rata vested portion of the award is recognized as a liability~~calculated based on performance against certain metrics that relate to the ~~extent that~~Company’s return on asset performance over the January 1, 2018 through December 31, 2020 and January 1, 2019 through December 31, 2021 performance ~~condition is deemed probable. On May 5, 2017, the Company settled its outstanding phantom unit awards for an aggregate amount equal to $7.8 million as a result~~periods, respectively.

The target number of ~~the completion~~shares of ~~its IPO, which constituted a liquidity event with respect to such phantom unit awards. Based on the fair market value of a share of Select~~ Class A Common Stock subject to each PSU is one; however, based on the ~~date~~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 zero to 1.75 times the target number. The PSUs become earned at the end of the ~~IPO~~performance period after the attainment of ~~$14.00,~~ the ~~cash payment~~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 ~~respect~~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%

The grant date fair value of PSUs granted during 2018 was $5.9 million and the grant fair value of PSUs granted during the first half of 2019 was $6.9 million. Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest, by the measurement-date (i.e., the last day of each ~~phantom unit was approximately $5.53, before employer taxes.~~reporting period date) fair value and recognized using the accelerated attribution method. The Company recognized compensation expense of ~~$7.8~~$0.8 million, ~~during the nine months ended September 30, 2017~~$0.4 million, $1.7 million and $0.6 million related to the ~~settlement of its phantom unit awards.~~ PSUs for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.

As of ~~September~~June 30, ~~2017 there are no phantom units outstanding.~~

~~NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS~~

The Company had variable rate debt outstanding which was subject to interest rate risk based on volatility in underlying interest rates. In April 2013, the Company entered into a pay fixed, receive variable interest rate swap, with an aggregate notional amount of $125.0 million, which the Company designated as a cash flow hedge. The derivative contract matured in April 2016. The change in value and amounts reclassified to interest expense during the nine months ended September 30, 2016 were nominal. There was no activity during the nine months ended September 30, 2017.

~~Changes in the fair values of the Company’s derivative instruments are presented on a net basis in the accompanying consolidated statements of operations. Changes in~~2019, the fair value of outstanding PSUs issued was $11.8 million. The unrecognized compensation cost related to our unvested PSUs is estimated to be $8.6 million and is expected to be recognized over a weighted-average period of 1.8 years as of June 30, 2019.

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The following table summarizes the ~~Company’s interest rate swap derivative instruments are~~information about the performance share units outstanding as ~~follows:~~of June 30, 2019:


			Performance Share Units
Nonvested as of December 31, 2018	~~For the Nine Months Ended~~	255,364
~~Derivatives designated as cash flow hedges~~Target shares granted	~~September 30, 2016~~	769,741
Target shares vested	~~(in thousands)~~	—
~~Beginning fair value of interest rate swap derivative instruments~~Target shares forfeited	$	~~(7)~~	(9,442)
~~Amount~~Target shares outstanding as of ~~unrealized losses recognized in OCI~~June 30, 2019	1,015,663

Stock-Settled Incentive Awards

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


Stock Price at Vesting Date⁽¹⁾	~~(106)~~	Percentage of Target Amount Earned
~~Amount of gains reclassified from AOCI to earnings (effective portion)~~Less than $20.00			~~113~~	0%
~~Net change in fair value of interest rate swap derivative instruments~~At least $20.00, but less than $25.00			7	100%
~~Ending~~$25.00 or greater		200%

(1)

The stock price at vesting date equals the greater of (i) the fair market value of ~~interest rate swap derivative instruments~~

—

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 (“NYSE”), for the 30 trading days preceding the vesting date.

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

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

The Company recognized stock compensation expense of $0.1 million, $0.1 million, $0.3 million and $0.1 million related to the stock-settled incentive awards for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The unrecognized compensation cost related to our unvested stock-settled incentive awards is estimated to be $0.5 million and is expected to be recognized over approximately 11 months as of June 30, 2019.

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


			Award Value
	Value at Target		Being Recognized
Nonvested as of December 31, 2018	$	3,147	$	1,202
Granted during 2019		—		—
Forfeited during 2019		(210)		(80)
Nonvested as of June 30, 2019	$	2,937	$	1,122

Employee Stock Purchase Plan (ESPP)

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

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


	For the six months ended June 30, 2019
Cash received for shares issued	$	56
Shares issued		5,667

Share-repurchases

During the Current Quarter and Current Period, the Company repurchased 0 and 82,092 shares, respectively, of Class A Common Stock in the open market and repurchased 26,716 and 70,410 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. This was accounted for as a decrease to paid-in-capital of $1.5 million and a decrease to Class A Common Stock of approximately $1,500.

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NOTE ~~11—~~12—FAIR VALUE MEASUREMENT

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

~~Table of Contents~~

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

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

Level 2—Quoted prices for similar assets or liabilities in ~~non‑active~~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 no transfers into, or out of, the three levels of the fair value hierarchy for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 or the year ended December 31, ~~2016.~~2018. The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of June 30, 2019.


	Fair Value
	Measurements Using						Carrying
	Level 1		Level 2		Level 3		Value⁽¹⁾		Impairment
	(in thousands)
Six Months Ended June 30, 2019
Affirm goodwill	$	—	$	—	$	—	$	4,396	$	4,396
Property and equipment		—		—		4,732		5,625		893

(1)

Amount represents carrying value at the date of assessment.

Other fair value considerations

The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value ~~at September~~as of June 30, ~~2017~~2019 and December 31, ~~2016~~2018, due to the ~~short‑term~~short-term maturity of these instruments. The ~~Company had no outstanding~~carrying value of bank debt as of ~~September 30, 2017 and~~ December 31, ~~2016.~~2018 approximated fair value due to variable market rates of interest. The fair value of bank debt as of December 31, 2018, which is a Level 3 measurement, was estimated based on the Company’s incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices are not available. The Company did not have any bank debt as of June 30, 2019. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The ~~consideration transferred and the purchase price allocation of identified assets acquired and liabilities assumed related to the GRR Acquisition and Resource Water Acquisition are~~Affirm goodwill impairment was based on the Company’s estimate as of March 31, 2019 of fair value based on the expected proceeds to sell the remaining property and equipment utilizing Level 3 ~~inputs at~~inputs. The property and equipment impairment during the ~~date~~Current Period was based on the expected proceeds from selling a portion of ~~acquisition. Refer to Note~~the remaining Canadian property and equipment utilizing Level 3 ~~– Acquisitions for further discussion.~~inputs.

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NOTE ~~12—RELATED PARTY~~13—RELATED-PARTY TRANSACTIONS

The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing ~~persons.~~persons and an unconsolidated joint venture. The Company has entered into a ~~significant~~ number of transactions with related parties. ~~The~~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‑~~non-related parties. For more information regarding the Company’s policies and procedures for review of related ~~parties.~~party transactions, see the Company’s Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders filed with the SEC on March 22, 2019.

During the ~~three months ended September 30, 2017,~~Current Quarter, sales to related parties were ~~$0.4~~$3.6 million and purchases from ~~related party~~related-party vendors were ~~$2.1~~$6.4 million. These purchases ~~comprised $0.7 million relating to purchases~~consisted of property and equipment, less than $0.1 million relating to inventory and consumables, $0.8 million relating to rent of certain equipment or other services used in operations, and $0.5 million relating to management, consulting and other services. During the three months ended September 30, 2016, sales to related parties were $0.2 million and purchases from related party vendors were $0.9 million. These purchases comprised $0.4 million relating to purchases of property and equipment, ~~less than $0.1~~$5.6 million relating to ~~inventory and consumables, less than $0.1 million relating to rent~~the rental of certain equipment or other services used in operations and $0.4 million relating to management, consulting and other services.

During the ~~nine months ended September 30, 2017,~~Prior Quarter, sales to related parties were ~~$1.5~~$1.2 million and purchases from ~~related party~~related-party vendors were ~~$5.0~~$4.2 million. These purchases ~~comprised $1.4~~consisted of $1.0 million relating to purchases of property and equipment, $2.6 million relating to the rental of certain equipment or other services used in operations and $0.6 million relating to management, consulting and other services.

During the Current Period, sales to related parties were $9.9 million and purchases from related-party vendors were $12.4 million. These purchases consisted of $1.9 million relating to purchases of property and equipment, $9.5 million relating to the rental of certain equipment or other services used in operations and $1.0 million relating to management, consulting and other services.

During the Prior Period, sales to related parties were $3.6 million and purchases from related-party vendors were $7.5 million. These purchases consisted of $2.6 million relating to purchases of property and equipment, $0.2 million relating to inventory and consumables, ~~$1.7~~$3.8 million relating to ~~rent~~the rental of certain equipment or other services used in operations and $1.7 million relating to management, consulting and other services. During the nine months ended September 30, 2016, sales to related parties were $0.8 million and purchases from related party vendors were $2.6 million. These purchases comprised $0.6 million relating to purchases of property and equipment,

~~Table of Contents~~

~~$0.1 million relating to inventory and consumables, $0.4 million relating to rent of certain equipment or other services used in operations, and $1.5~~$0.9 million relating to management, consulting and other services.

Tax ~~receivable agreements~~Receivable Agreements

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

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

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

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

NOTE ~~13—~~14—INCOME TAXES

The Company is subject to U.S. federal and state income taxes as a corporation. SES Holdings and its subsidiaries, with the exception of certain corporate subsidiaries, are treated as flow‑through entities for U.S. federalCompany’s income tax ~~purposes, and as such, are generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to their taxable income~~information is passed through to their members or partners. Accordingly, prior to our reorganization in connection with the 144A Offering, the Predecessor only recorded a provision for Texas franchise tax and U.S. federal and state provisions for certain corporate subsidiaries as the Predecessor’s taxable income or loss was includablepresented in the income tax returns of the individual partners and members. However, for periods following our reorganization in connection with the 144A Offering, Select Energy Services recognizes a tax liability on its allocable share of SES Holdings’ taxable income.

The Company’s effective tax rates for the three months ended September 30, 2017 and 2016 were (12.8)% and 0.1%, respectively. The Company’s effective tax rates for the nine months ended September 30, 2017 and 2016 were (1.6)% and 0.1%, respectively.table below. The effective tax ~~rates for~~rate is lower than the ~~three and nine months ended September 30, 2017 differ from the statutory~~21% standard Federal rate ~~of 35%~~ due to net income allocated to noncontrolling interests, state income taxes ~~other permanent differences between book and tax accounting,~~ and valuation allowances.


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
	(in thousands)
Current income tax expense	$	405	$	160	$	583	$	622
Deferred income tax expense (benefit)		166		(10)		166		(10)
Total income tax expense	$	571	$	150	$	749	$	612
Effective Tax Rate		6.6%		0.6%		7.3%		1.5%

~~Table of Contents~~

~~The Company recorded income tax expense (benefit) of $(0.3) million and less than $0.1 million for~~ ~~the three months ended September 30, 2017 and 2016, respectively. The Company recorded income tax expense (benefit) of $(0.3) million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.~~

The tax benefits of deferred tax assets are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. When the future utilization of some portion of deferred tax assets is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded tax benefits from such assets. As of September 30, 2017, management’s assessment as to the realizability of certain deferred tax assets has resulted in the recording of a valuation allowance to reduce deferred tax assets to the amounts that are considered more likely than not to be realized. Management believes there will be sufficient future taxable income based on the reversal of temporary differences to enable utilization or sustainability of those deferred tax assets that do not have a valuation allowance recorded against them.

Separate federal and state income tax returns are filed for Select Energy Services, SES Holdings, and certain consolidated affiliates. The tax years 2013 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject to income tax. Select Energy Services and SES Holdings are not currently under any income tax audits.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2017 and December 31, 2016, there was no material liability or expense for the periods then ended recorded for payments of interest and penalties associated with uncertain tax positions or material unrecognized tax positions and the Company’s unrecognized tax benefits were not material.

NOTE ~~14—~~15—NONCONTROLLING INTERESTS

The ~~Company has ownership~~Company’s noncontrolling interests ~~in multiple subsidiaries that are consolidated within the Company’s financial statements but are not wholly owned. During the nine months ended September 30, 2017 and 2016, the Company entered~~fall into ~~transactions that impacted its~~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
	June 30, 2019		December 31, 2018
	(in thousands)
Noncontrolling interests attributable to joint ventures formed for water-related services	$	2,723	$	3,273
Noncontrolling interests attributable to holders of Class B Common Stock		275,487		274,566
Total noncontrolling interests	$	278,210	$	277,839

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For all periods presented, there were no changes to Select’s ownership interest in ~~certain of these subsidiaries while maintaining control over such subsidiaries. As a result of~~joint ventures formed for water-related services. However, during the ~~Company’s change~~Current Period and Prior Period, there were changes in ownership interest in these subsidiaries, the Company reduced its noncontrolling interests and recognized an increase in equity related to transactions with holders of noncontrolling interests. The Company reports a noncontrolling interest representing the common units of SES Holdings held by Legacy Owner Holdco. Changes in Select Energy Services’Select’s ownership interest in SES Holdings ~~while it retains its controlling~~LLC. The effects of the changes in Select’s ownership interest ~~are accounted for~~in SES Holdings LLC is as ~~equity transactions.~~follows:


	For the six months ended June 30,
	2019		2018
	(in thousands)
Net income attributable to Select Energy Services, Inc.	$	7,335	$	27,062
Transfers (to) from noncontrolling interests:
Increase (decrease) in additional paid-in capital as a result of stock option exercises		—		(1)
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures		3,540		2,195
Increase in additional paid-in capital as a result of issuance of common stock due to vesting of restricted stock units		4		104
(Decrease) increase in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units		(25)		74
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		—		111,803
Increase (decrease) in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued		2		(4)
Change to equity from net income attributable to Select Energy Services, Inc. and transfers from noncontrolling interests	$	10,856	$	141,233

2534

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~~The following table summarizes the effects of changes in noncontrolling interests on equity for the nine months ended September 30, 2017:~~

For the nine months ended September 30,


2017

2016

(in thousands)
Net loss attributable to Select Energy Services, Inc. and its Predecessor

$
(7,164)

$
(285,359)
Transfers from noncontrolling interests:




Increase in additional paid-in capital as a result of the contribution of proceeds from the IPO to SEC Holdings, LLC in exchange for common units

87,835


—
Increase in additional paid-in capital as a result of the contribution of assets acquired to SES Holdings, LLC in exchange for common units

4,360


—
Increase in contributed capital due to purchase of noncontrolling interest

—


135
Change to equity from net loss attributable to Select Energy Services, Inc. and its Predecessor and transfers from noncontrolling interests

$
85,031

$
(285,224)

NOTE ~~15—~~16—EARNINGS PER SHARE

Earnings per share are based on the amount of income allocated to the shareholders and the ~~weighted‑average~~weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase ~~597,749~~2,972,967, 1,834,105, 2,976,537 and ~~977,352~~1,848,482 shares are not included in the calculation of diluted weighted-average shares outstanding for the ~~three~~Current Quarter, Prior Quarter, Current Period and ~~nine months ended September 30, 2017~~Prior Period, respectively, as the effect is antidilutive.

~~Table of Contents~~

~~Earnings related to periods prior to the reorganization and 144A Offering are attributable to the Predecessor.~~ The following ~~table presents~~tables present the Company’s calculation of basic and diluted earnings per share for the ~~three~~Current and ~~nine months ended September 30, 2017~~Prior Quarter and ~~2016~~the Current and Prior Period (dollars in thousands, except share and per share amounts):

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Net income (loss)

$
2,593

$
(35,204)

$
(20,177)

$
(289,235)

Net loss attributable to Predecessor

—

34,931

—

285,359

Net (income) loss attributable to noncontrolling interests

(1,369)

273

13,013

3,876

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

$
1,224

$
—

$
(7,164)

$
—

Allocation of net income (loss) attributable to:









Class A-1 stockholders

$
—



$
(2,679)



Class A stockholders

1,224



(4,485)



Class B stockholders

—



—



$
1,224



$
(7,164)



Weighted average shares outstanding:









Class A-1-Basic

—



9,671,795



Class A-Basic

30,336,923



16,189,997



Class B-Basic

38,462,541



38,462,541



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









Class A-1-Basic

$
—



$
(0.28)



Class A-Basic

$
0.04



$
(0.28)



Class B-Basic

$
—



$
—



Weighted average shares outstanding:









Class A-1-Diluted

—



9,671,795



Class A-Diluted

30,357,572



16,189,997



Class B-Diluted

38,462,541



38,462,541



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









Class A-1-Diluted

$
—



$
(0.28)



Class A-Diluted

$
0.04



$
(0.28)



Class B-Diluted

$
—



$
—


	Three months ended June 30, 2019								Three months ended June 30, 2018
	Select Energy Services, Inc.		Class A		Class A-2		Class B		Select Energy Services, Inc.		Class A		Class A-2		Class B
Numerator:
Net income	$	8,068							$	25,023
Net income attributable to noncontrolling interests		(1,868)								(8,060)
Net income attributable to Select Energy Services, Inc. — basic		6,200	$	6,200	$	—	$	—		16,963	$	16,963	$	—	$	—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock		9		9		—		—		6		6		—		—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options		3		3		—		—		22		22		—		—
Net income attributable to Select Energy Services, Inc. — diluted	$	6,212	$	6,212	$	—	$	—	$	16,991	$	16,991	$	—	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				78,544,502		—		26,026,843				71,412,158		—		34,677,182
Dilutive effect of restricted stock				471,542		—		—				71,969		—		—
Dilutive effect of stock options				150,889		—		—				261,582		—		—
Dilutive effect of ESPP				102		—		—				99		—		—
Weighted-average shares of common stock outstanding — diluted				79,167,035		—		26,026,843				71,745,808		—		34,677,182
Earnings per share:
Basic			$	0.08	$	—	$	—			$	0.24	$	—	$	—
Diluted			$	0.08	$	—	$	—			$	0.24	$	—	$	—


	Six months ended June 30, 2019								Six months ended June 30, 2018
	Select Energy Services, Inc.		Class A		Class A-2		Class B		Select Energy Services, Inc.		Class A		Class A-2		Class B
Numerator:
Net income	$	9,468							$	41,155
Net income attributable to noncontrolling interests		(2,133)								(14,093)
Net income attributable to Select Energy Services, Inc. — basic		7,335	$	7,335	$	—	$	—		27,062	$	25,784	$	1,278	$	—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of restricted stock		8		8		—		—		17		18		(1)		—
Add: Reallocation of net income attributable to noncontrolling interests for the dilutive effect of stock options		2		2		—		—		49		53		(4)		—
Net income attributable to Select Energy Services, Inc. — diluted	$	7,345	$	7,345	$	—	$	—	$	27,128	$	25,855	$	1,273	$	—
Denominator:
Weighted-average shares of common stock outstanding — basic				78,533,761		—		26,026,843				65,270,048		3,235,746		37,488,964
Dilutive effect of restricted stock				351,780		—		—				118,719		—		—
Dilutive effect of stock options				78,353		—		—				343,127		—		—
Dilutive effect of ESPP				195		—		—				83		—		—
Weighted-average shares of common stock outstanding — diluted				78,964,089		—		26,026,843				65,731,977		3,235,746		37,488,964
Earnings per share:
Basic			$	0.09	$	—	$	—			$	0.40	$	0.40	$	—
Diluted			$	0.09	$	—	$	—			$	0.39	$	0.39	$	—

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NOTE ~~16—~~17—SEGMENT INFORMATION

Select ~~Energy Services~~Inc. is an oilfield services company that provides solutions to the ~~North American~~ onshore oil and natural gas ~~industry.~~industry in the United States. The Company’s services are offered through three operating segments. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the ~~chief operating decision maker (“CODM”)~~CODM in deciding how to allocate resources and assess performance. The Company’s ~~chief operating decision maker~~CODM assesses performance and allocates resources on the basis of the three reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as ~~Corporate.~~Corporate or Other. Each operating segment reflects a reportable segment led by separate managers that report

~~Table of Contents~~

directly to the Company’s CODM.

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

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

Water ~~Solutions~~Services —The Water ~~Solutions~~Services segment ~~provides water‑related services to customers that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transfer~~consists of the Company’s services businesses including water ~~to the wellsite through permanent pipeline infrastructure~~transfer, flowback and ~~temporary pipe; the containment of fluids off‑ and on‑location; measuring and monitoring of water; the filtering and treatment of fluids,~~ well testing, fluids hauling, containment, and ~~handling~~water treatment and water network automation. Additionally, this segment includes the operations of ~~flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids.~~

~~Accommodations and Rentals—The Accommodations and Rentals segment provides workforce~~our accommodations and ~~surface rental equipment supporting drilling, completion~~rentals business, which were previously a part of the former Wellsite Services segment.

Water Infrastructure — The Water Infrastructure segment consists of the Company’s strategic infrastructure assets and ~~production~~ongoing infrastructure development projects, including operations associated with our water sourcing and pipelines, produced water gathering systems and salt water disposal wells.

Oilfield Chemicals — The Oilfield Chemicals segment develops, manufactures and provides a full suite of chemicals used in hydraulic fracturing, stimulation, cementing and well completions, including polymer slurries, crosslinkers, friction reducers, buffers breakers and other chemical technologies, to leading pressure pumping service companies in the ~~U.S. onshore~~United States. This segment also provides chemicals needed by our customers to increase oil and gas ~~industry.~~production and lower production costs over the life of a well.

~~Wellsite Completion and Construction Services~~—The results of our remaining service lines that were previously a part of the former Wellsite ~~Completion and Construction~~ Services segment, ~~provides oil~~including the operations of our Affirm subsidiary, our sand hauling operations and ~~natural gas operators with a variety~~our Canadian operations, are combined in the “Other” category.

Table of services, including crane and logistics services, wellsite and pipeline construction and field services. These services are performed to establish, maintain and improve production throughout the productive life of an oil or gas well, or to otherwise facilitate other services performed on a well.Contents

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


	For the three months ended June 30, 2019
			Income (loss)		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures
	(in thousands)
Water services	$	202,997	$	16,234	$	21,024	$	9,489
Water infrastructure		51,719		3,202		6,072		11,542
Oilfield chemicals		62,997		4,424		1,747		2,132
Other		9,403		673		—		3
Eliminations		(3,229)		—		—		—
Income from operations				24,533
Corporate		—		(13,354)		906		—
Interest expense, net		—		(839)		—		—
Other income, net		—		(1,701)		—		—
	$	323,887	$	8,639	$	29,749	$	23,166


	For the three months ended June 30, 2018
			Income (loss)		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures
	(in thousands)
Water services	$	234,040	$	27,039	$	18,947	$	33,321
Water infrastructure		55,733		7,030		5,219		7,214
Oilfield chemicals		64,842		1,031		2,823		3,424
Other		39,343		911		3,456		1,860
Eliminations		(711)		—		—		—
Income from operations				36,011
Corporate		—		(11,216)		807		—
Interest expense, net		—		(1,342)		—		—
Other income, net		—		1,720		—		—
	$	393,247	$	25,173	$	31,252	$	45,819


	For the six months ended June 30, 2019
			Income (loss)		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures
	(in thousands)
Water services	$	423,877	$	39,894	$	42,286	$	22,615
Water infrastructure		105,335		7,003		12,161		28,780
Oilfield chemicals		130,116		6,437		4,200		3,352
Other		33,073		(5,850)		1,714		64
Eliminations		(5,868)		—		—		—
Income from operations				47,484
Corporate		—		(29,672)		1,906		—
Interest expense, net		—		(1,932)		—		—
Other income, net		—		(5,663)		—		—
	$	686,533	$	10,217	$	62,267	$	54,811

Table of Contents


	For the six months ended June 30, 2018
			Income (loss)		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures
	(in thousands)
Water services	$	452,395	$	49,757	$	37,839	$	51,218
Water infrastructure		109,790		12,779		10,256		14,650
Oilfield chemicals		128,472		1,962		5,738		5,679
Other		80,167		(58)		7,494		5,378
Eliminations		(1,182)		—		—		—
Income from operations				64,440
Corporate		—		(21,042)		1,348		—
Interest expense, net		—		(2,493)		—		—
Other income, net		—		862		—		—
	$	769,642	$	41,767	$	62,675	$	76,925

Total assets by segment as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016 and for the three and nine months ended September 30, 2017 and 2016, by segment,~~2018 is as follows:

For the three months ended September 30, 2017




Income (loss) before

Depreciation and

Capital

Revenue

taxes

Amortization

Expenditures

(in thousands)
Water Solutions

$
125,142

$
9,844

$
19,433

$
22,260
Accommodations and Rentals

15,974

(304)

2,908

3,541
Wellsite Completion and Construction Services

13,301

(2)

1,079

1,303
Elimination

(537)

—

—

—
Income from operations



9,538




Corporate

—

(7,081)

375

—
Interest expense, net

—

(484)

—

—
Other income, net

—

326

—

—

$
153,880

$
2,299

$
23,795

$
27,104


	As of		As of
	June 30, 2019		December 31, 2018
	(in thousands)
Water services	$	873,107	$	865,992
Water infrastructure		312,638		250,207
Oilfield chemicals		171,457		173,762
Other		19,975		70,644
	$	1,377,177	$	1,360,605

NOTE 18—SUBSEQUENT EVENTS

The Company has evaluated subsequent events for potential recognition and/or disclosure through August 7, 2019, the date these consolidated financial statements were available to be issued.

For the three months ended September 30, 2016




Income (loss) before

Depreciation and

Capital

Revenue

taxes

Amortization

Expenditures

(in thousands)
Water Solutions

$
61,082

$
(28,278)

$
17,690

$
4,668
Accommodations and Rentals

5,881

(2,786)

2,644

268
Wellsite Completion and Construction Services

7,156

(1,325)

1,279

95
Elimination

(212)

—

—

—
Loss from operations



(32,389)




Corporate

—

1,123

363

—
Interest expense, net

—

(4,343)

—

—
Other income, net

—

431

—

—

$
73,907

$
(35,178)

$
21,976

$
5,031

2838

Table of Contents

For the nine months ended September 30, 2017




Income (loss) before

Depreciation and

Capital

Revenue

taxes

Amortization

Expenditures

(in thousands)
Water Solutions

$
311,645

$
5,652

$
55,623

$
57,273
Accommodations and Rentals

39,056

(3,813)

8,367

8,311
Wellsite Completion and Construction Services

38,951

56

3,154

6,598
Elimination

(1,398)

—

—

—
Loss from operations



1,895




Corporate

—

(23,855)

1,312

—
Interest expense, net

—

(1,885)

—

—
Other income, net

—

3,342

—

—

$
388,254

$
(20,503)

$
68,456

$
72,182

For the nine months ended September 30, 2016




Income (loss) before

Depreciation and

Capital

Revenue

taxes

Amortization

Expenditures

(in thousands)
Water Solutions

$
173,294

$
(264,416)

$
61,574

$
28,533
Accommodations and Rentals

19,750

(8,303)

8,197

834
Wellsite Completion and Construction Services

23,098

(3,820)

4,103

215
Elimination

(477)

—

—

—
Loss from operations



(276,539)




Corporate

—

(1,100)

1,644

—
Interest expense, net

—

(11,792)

—

—
Other income, net

—

588

—

—

$
215,665

$
(288,843)

$
75,518

$
29,582

Total Assets

As of

As of

September 30, 2017

December 31, 2016

(in thousands)
Water Solutions

$
448,585

$
324,171
Accommodations and Rentals

50,057

38,874
Wellsite Completion and Construction Services

38,827

29,994
Corporate

15,280

12,027

$
552,749

$
405,066

~~NOTE 17—SUBSEQUENT EVENTS~~

~~Completion of the Merger~~

On November 1, 2017, the Company completed the transactions contemplated by the Agreement and Plan of Merger, dated as of July 18, 2017 (the “Merger Agreement”), by and among the Company, SES Holdings, Raptor Merger Sub, Inc. (“Corporate Merger Sub”), Raptor Merger Sub, LLC (“LLC Merger Sub”), Rockwater Energy Solutions, Inc. (“Rockwater”) and Rockwater Energy Solutions, LLC (“RES Holdings”). Pursuant to the Merger Agreement, Corporate Merger Sub merged with and into Rockwater, with Rockwater continuing as the surviving entity as a wholly owned subsidiary of the Company (the “Corporate Merger”), and LLC Merger Sub merged with and into RES Holdings, with RES Holdings continuing as the surviving entity as an indirect wholly owned subsidiary of SES Holdings (the “LLC Merger”).

~~Table of Contents~~

At the effective time of the Corporate Merger (the “Corporate Merger Effective Time”), subject to certain exceptions, (x) each share of Rockwater’s Class A common stock, $0.01 par value per share (“Rockwater Class A Common Stock”), then outstanding was converted into the right to receive a number of shares of Select Class A Common Stock equal to 0.7652 per each such share (the “Exchange Ratio”), (y) each share of Rockwater’s Class A-1 common stock, $0.01 par value per share, then outstanding was converted into the right to receive a number of shares of the Company’s Class A-2 common stock, par value $0.01 per share (“Select Class A-2 Common Stock”), equal to the Exchange Ratio, and (z) each share of Rockwater’s Class B common stock, $0.01 par value per share, then outstanding was converted into the right to receive a number of shares of Select Class B Common Stock equal to the Exchange Ratio. At the effective time of the LLC Merger (the “LLC Merger Effective Time”), subject to certain exceptions, each unit of RES Holdings (each, an “RES Holdings Unit”) then outstanding (including RES Holdings Units held by Rockwater) was converted into the right to receive a number of units in SES Holdings equal to the Exchange Ratio. The original exchange ratio of 0.7777 set forth in the Merger Agreement was adjusted downwards to 0.7652 in accordance with the terms of the Merger Agreement.

Shares of the Company’s common stock outstanding immediately prior to the Corporate Merger Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the Corporate Merger. Based on the number of shares of Rockwater common stock issued and outstanding immediately prior to the Corporate Merger Effective Time, a total of approximately 25.9 million shares of Select Class A Common Stock, 6.7 million shares of Select Class A-2 Common Stock and 4.4 million shares of Select Class B Common Stock (excluding the issuance of equity awards, which are described in the following paragraph), were issued to the former holders of Rockwater common stock pursuant to the Merger Agreement. In the aggregate (including the issuance of equity awards), the Company issued approximately 37.3 million shares of common stock. Units in SES Holdings outstanding immediately prior to the LLC Merger Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the LLC Merger. Based on the number of RES Holdings Units issued and outstanding immediately prior to the LLC Merger Effective Time, a total of approximately 37.3 million units in SES Holdings were issued to the former holders of RES Holdings Units pursuant to the Merger Agreement.

At the Corporate Merger Effective Time, each outstanding option to purchase shares of Rockwater Class A Common Stock (each, a “Rockwater Stock Option”) was converted into an option to acquire, on the same terms and conditions as were applicable to such Rockwater Stock Option immediately prior to the Corporate Merger Effective Time, the number of shares of Select Class A Common Stock determined by multiplying the number of shares of Rockwater Class A Common Stock subject to such Rockwater Stock Option as of immediately prior to the Corporate Merger Effective Time by the Exchange Ratio, at an exercise price per share of Select Class A Common Stock equal to the exercise price per share of Rockwater Class A Common Stock under such Rockwater Stock Option divided by the Exchange Ratio (such conversions, collectively, the “Option Conversion”). Additionally, at the Corporate Merger Effective Time, each share of restricted Rockwater Class A Common Stock (each, a “Rockwater Restricted Stock Award”) that was outstanding immediately prior to the Corporate Merger Effective Time ceased to represent Rockwater Class A Common Stock and was converted into a new award of restricted shares, subject to the same terms and conditions as were applicable to such Rockwater Restricted Stock Award prior to the Corporate Merger Effective Time, equal to the number of shares of Select Class A Common Stock determined by multiplying the number of shares of Rockwater Class A Common Stock subject to such Rockwater Restricted Stock Award as of immediately prior to the Corporate Merger Effective Time by the Exchange Ratio (such conversions, collectively, the “Restricted Stock Conversion”). Subject to certain New York Stock Exchange (“NYSE”) restrictions, the shares available under the Rockwater Equity Plan as of the Corporate Merger Effective Time (as appropriately adjusted to reflect the Exchange Ratio) may be used for post-transaction grants under the 2016 Plan. The Option Conversion, Restricted Stock Conversion and assumption of shares available under the Rockwater Equity Plan described in the preceding sentences are collectively referred to as the “Equity Award Actions.” The Equity Plan Amendment, which was previously adopted to effectuate the Equity Award Actions, became effective on November 1, 2017 at the Corporate Merger Effective Time.

~~New Credit Agreement~~

On November 1, 2017, in connection with the closing of the transactions contemplated by the Merger Agreement (the “Closing”), SES Holdings and Select LLC (the “Borrower”) entered into a $300.0 million senior secured revolving credit facility (the “New Credit Agreement”), by and among SES Holdings, as parent, the Borrower, certain of

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SES Holdings’s 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 New 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 senior secured credit facility by $150.0 million during the first three years following the Closing.

The New 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 New Credit Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the New 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 New Credit Agreement) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the New Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the New 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 New 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 New Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by the Borrower to the Administrative Agent.

Borrowings under the New Credit Agreement bear interest, at the Borrower’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 ½%, (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, 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 the Borrower’s average excess availability under the New Credit Agreement. The applicable margin for Eurocurrency Rate loans will be 1.75% and the applicable margin for Base Rate loans will be 0.75% until June 30, 2018. 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 New Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate. The New Credit Agreement is scheduled to mature on the fifth anniversary of the Closing.

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

The New 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 New Credit Agreement to be immediately due and payable.

In addition, the New Credit Agreement restricts SES Holdings’s and the Borrower’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 New 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’s 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 New Credit Agreement generally permits the Borrower to make distributions required under its existing tax receivable agreements.

The New 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 New 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

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and including the first day after such time that availability under the New 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 New 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.

~~Termination of Credit Facility~~

~~In connection with the entry into the New Credit Agreement, the obligations of SES Holdings and the Borrower under the Credit Facility were repaid in full and the Credit Facility was terminated.~~

Certain lenders party to the Credit Facility 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.

~~In addition, certain lenders party to the Credit Facility are lenders under the New Credit Agreement.~~

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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 ~~the~~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 ~~the Final Prospectus.~~our 2018 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.”

This discussion relates to the three and six months ended June 30, 2019 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2018 (the “Prior Quarter” and the “Prior Period”, respectively).

Overview

We are a leading provider of ~~total water~~water-management solutions to the ~~U.S. unconventional~~ oil and gas ~~industry.~~industry in the United States (“U.S.”). We also develop, manufacture and deliver chemical solutions for use in oil and gas well completions and production operations. Within the major shale plays in the ~~United States,~~U.S., we ~~source and~~believe we are a market leader in water sourcing, water transfer ~~water~~ (both by permanent pipeline and temporary ~~pipe)~~hose) and temporary water containment prior to its use in drilling and completion activities associated with hydraulic ~~fracturing~~fracture stimulation or “fracking,” which we ~~collectively~~ refer to collectively as “pre-frac water ~~services.”~~services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water-related services that support oil and gas well completion and production activities, including ~~containment, monitoring,~~water network automation, treatment, ~~flowback,~~ hauling, water recycling and disposal. ~~Our services are necessary~~We also manufacture a full suite of specialty chemicals used in the fracturing process, and we provide chemicals needed by our customers to ~~establish and maintain production of~~increase oil and gas production and lower production costs over the ~~productive~~ life of a ~~horizontal~~ well. ~~Water and related services~~We believe we are ~~increasingly important as E&P companies have increased~~ the ~~complexity and completion intensity of horizontal wells (including the use of longer horizontal wellbore laterals, tighter spacing of frac stages~~only company in the ~~laterals~~oilfield services industry that combines full life cycle water-management services with the ability to develop and ~~increased water~~provide related chemical products.

Our operations have benefited from the investments and ~~proppant use per foot of lateral)~~acquisitions we have made, and we continue to invest both in our existing business and in new infrastructure and technology. When evaluating new investment decisions, we prioritize high returns on long-lived assets where applicable. One way we do this is through margin-enhancing capital expenditures, which often comprises upgrading or automating equipment in order to ~~improve production~~increase margin realization from those assets. One example of this type of investment is replacing conventional water transfer pumps with automated pumps, which lowers labor costs, increases reliability and ~~recovery~~improves environmental safeguards for our customers. Another area of ~~hydrocarbons. Historically,~~focus is longer-lived infrastructure assets in areas we believe will experience consistently high levels of completion activity. We have ~~generated~~successfully executed these types of investments both in the Bakken, through our fixed infrastructure investments there, through our GRR Acquisition in the northern Delaware Basin and with our recently announced northern Delaware Basin pipeline project. Additionally, as market opportunities continue to grow for treating and re-using produced water for new well completions, we are also focused on developing and expanding our production-related services including our existing produced water gathering infrastructure to help manage growing produced water volumes. The quality of water used for a ~~substantial majority~~well completion directly impacts the completion chemicals that are used in the frac fluid system. Our knowledge and expertise related to treatment, recycling and frac fluid chemistry allows us to provide our customers with sustainable solutions across a range of various water attributes.

For our Oilfield Chemicals segment, the opening of our ~~revenues through providing total water solutions~~Midland Friction Reducer production line has saved us freight and logistics cost relative to shipping this high-volume product out of our Tyler, Texas production facility. We continue to make investments in driving operational efficiencies with our in-basin manufacturing that will continue to reduce unnecessary logistics and freight cost, making us more competitive and more nimble to our customers. The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our water treatment capabilities.

We ~~provide our services~~have executed these acquisitions and investments within the context of a steadily improving balance sheet. As of June 30, 2019, we have no outstanding bank debt and a net cash position. We prioritize sustained positive free

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cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to ~~major integrated and large E&P companies, who typically represent~~ the ~~largest producers in each~~economics of ~~our areas of operations,~~the opportunity. We believe this approach provides the Company with additional flexibility to evaluate larger investments as well as ~~other independent companies operating~~improved resilience in ~~these regions.~~a sustained downturn versus many of our peers.

Going forward, we may pursue selected acquisitions of complementary assets, businesses and technologies, and believe we are well positioned to capture attractive opportunities due to our market position, customer and landowner relationships and industry experience and expertise.

Our Segments

Our services are offered through three operating segments: (i) Water ~~Solutions, Accommodations~~Services; (ii) Water Infrastructure; and ~~Rentals, and Wellsite Completion and Construction Services.~~(iii) Oilfield Chemicals.

●

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

●

Water ~~Solutions. Our~~Infrastructure. The Water ~~Solutions~~Infrastructure segment ~~is operated~~consists of the Company’s strategic infrastructure assets and ongoing infrastructure development projects, including operations associated with our water sourcing and pipelines, produced water gathering systems and salt water disposal wells, primarily ~~under our subsidiary Select LLC,~~serving E&P companies.

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Oilfield Chemicals. The Oilfield Chemicals segment develops, manufactures and provides ~~water-related services~~a full suite of chemicals used in hydraulic fracturing, stimulation, cementing and well completions, including polymer slurries, crosslinkers, friction reducers, buffers breakers and other chemical technologies, to leading pressure pumping service companies in the United States. This segment also provides chemicals needed by our customers ~~that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transfer of the water~~ to the wellsite through permanent pipeline infrastructure and temporary pipe; the containment of fluids off-and on-location; measuring and monitoring of water; the filtering and treatment of fluids, well testing and handling of flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids.

~~Accommodations and Rentals~~. Our Accommodations and Rentals segment is operated under our subsidiary Peak Oilfield Services, LLC, and provides workforce accommodations and surface rental equipment supporting drilling, completion and production operations to the U.S. onshoreincrease oil and gas ~~industry.~~

~~Wellsite Completion~~production and ~~Construction Services~~. Our Wellsite Completion and Construction Services segment is operated under our subsidiary Affirm Oilfield Services, LLC, and provides oil and natural gas operators with a variety of services, including crane and logistics services, wellsite and pipeline construction and field services. These services are performed to establish, maintain and improvelower production ~~throughout~~costs over the ~~productive~~ life of ~~an oil or gas well, or to otherwise facilitate other services performed on~~ a well.

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

How We Generate Revenue

We currently generate ~~a significant majority~~most of our revenue through our ~~Water Solutions segment, specifically through the sourcing and transfer of water used in drilling and completion activities~~water-management services associated with hydraulic ~~fracturing.~~fracturing, provided through our Water Services and Water Infrastructure segments. We generate the majority of our revenue through customer agreements with fixed pricing terms ~~but no guaranteed throughput amounts.~~

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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 Accommodations and Rentals and Wellsite Completion and Construction Services segments which provide workforce accommodations, related rentals and a variety of wellsite completion and construction services, including wellsite construction, pipeline construction, field services and well services.Oilfield Chemicals segment. We invoice the majority of our ~~clients~~Oilfield Chemicals customers for ~~these~~ services provided based on ~~a per job basis~~the quantity of chemicals used or pursuant to short-term contracts as the customer’s needs arise.

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Costs of Conducting Our Business

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

Labor costs associated with our employees and contract labor represent the most significant costs of our business. We incurred labor and labor-related costs of ~~$54.8~~$122.6 million, $140.0 million, $264.7 million and ~~$34.4~~$278.9 million for the ~~three months ended September 30, 2017~~Current Quarter, Prior Quarter, Current Period and ~~2016,~~Prior Period, respectively. We incurred labor costs of $155.5 million and $104.0 million for the nine months ended September 30, 2017 and 2016, respectively. Our labor costs for the nine months ended September 30, 2017 included $12.5 million of non-recurring costs related to a payout on our phantom equity units and IPO success bonuses. The majority of our recurring labor costs are variable and are incurred only while we are providing ~~water and water-related~~our operational services. We also incur costs to employ personnel to sell and supervise our services and perform maintenance on our assets, which ~~are~~is not directly tied to our level of business activity. ~~We also~~Additionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters. In light of the challenging activity and pricing trends, management has taken direct action during the Current Quarter to reduce operating and equipment costs, as well as selling, general and administrative costs, in order to proactively manage these expenses as a percentage of revenue.

We incur significant equipment costs in connection with the operation of our business, including depreciation, repair and maintenance, rental and leasing costs. We incurred equipment costs of ~~$36.0~~$61.6 million, $71.1 million, $127.6 million and ~~$26.2~~$139.8 million for the ~~three months ended September 30, 2017~~Current Quarter, Prior Quarter, Current Period and ~~2016,~~Prior Period, respectively.

We incur significant transportation costs associated with our service lines, including fuel and freight. We incurred ~~equipment~~fuel and freight costs of ~~$98.4~~$20.2 million, $24.5 million, $42.5 million and ~~$84.5~~$47.3 million for the ~~nine months ended September 30, 2017~~Current Quarter, Prior Quarter, Current Period and 2016, respectively. Our depreciation costs are expected to decline over the next few years as a result of recent impairments as well as the decline in our capital expenditures over the last three years, which will be partially offset by any future capital expenditures on depreciable assets.

Fuel costs associated with water transportation are a significant operating cost. We incurred fuel costs of $8.2 million and $4.6 million for the three months ended September 30, 2017 and 2016, respectively. We incurred fuel costs of $21.4 million and $12.1 million for the nine months ended September 30, 2017 and 2016,Prior Period, respectively. Fuel prices impact our transportation costs, which affect the pricing and demand offor our services and have an impact on our results of operations.

We incur ~~water sourcing~~raw material costs in ~~connection with obtaining strategic and reliable~~manufacturing our chemical products, as well as for water ~~sources to provide repeatable water volumes to~~that we source for our customers. We incurred ~~water sourcing~~raw material costs of ~~$9.7~~$66.0 million, $69.3 million, $136.3 million and ~~$5.8~~$137.8 million for the ~~three~~Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.

Industry Overview

During the Current Quarter, the average spot price of West Texas Intermediate (“WTI”) (Cushing) crude oil was $59.88 versus an average price of $68.07 for the Prior Quarter. The average Henry Hub natural gas spot price during the Current Quarter was $2.56 versus an average of $2.86 for the Prior Quarter. The decline in oil and gas prices in the Current Quarter relative to the Prior Quarter has negatively impacted the pace of completions activity in 2019, relative to the Prior Period. Though oil prices have modestly recovered in recent months, ~~ended September 30, 2017~~many operators prepared and ~~2016, respectively.~~announced their capital budgets during a period of lower prices. With most operators appearing to prioritize free cash flow over production growth at this time, we do not see much potential upside in activity from Current Quarter levels for the second half of 2019. Additionally, capital markets, especially the IPO market, do not appear favorably disposed towards the Oil & Gas industry at this time. While we believe that the current oil prices and production profiles could lead to increased operator cash flow and additional activity in the future, current indications lead us not to anticipate large incremental sums of capital potentially entering the market to create higher demand for our services over the course of 2019.

While we cannot predict the future direction of oil or natural gas prices, our discussions with customers and the improving financial metrics of many U.S. onshore-focused operators lead us to believe that current price levels support significant capital investment by our customers over the longer term to maintain and grow oil and gas production from U.S. onshore resources. Additionally, the high rate of decline of U.S. onshore unconventional resources requires significant ongoing investment just to maintain production levels.

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Trends beyond oil and natural gas prices present both support and challenges. While we believe leading-edge lateral lengths and proppant use are plateauing, the average operator continues to catch up to this leading edge. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing frac efficiency and the use of lower cost in-basin sand have decreased total costs for our customers. This multi-well pad development, combined with recent upstream acreage consolidation and the emerging trends around the reuse applications of produced water, particularly in the Permian, provides significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production lifecycle of wells. We ~~incurred water sourcing costs of $23.8 million and $14.1 million for~~ note the ~~nine months ended September 30, 2017 and 2016~~ ~~respectively.~~

~~Public Company Expenses~~

~~General and administrative expenses related to being a publicly traded company include: Exchange Act reporting expenses; expenses associated with compliance with~~continued efficiency gains in the ~~Sarbanes‑Oxley Act of 2002; expenses associated with maintaining our listing~~well completions process can limit the days we spend on the ~~NYSE; incremental independent auditor fees; incremental legal fees; investor relations expenses; registrar~~wellsite and ~~transfer agent fees; incremental director~~therefore negatively impact the total revenue opportunity.

The trend of increased use of produced water may require additional chemical treatment solutions, which we are well positioned to provide given our water treatment capabilities and ~~officer liability insurance costs;~~our knowledge base within our Oilfield Chemicals segment. Additionally, this trend supports more complex “on the fly” solutions that treat, proportion, and ~~director compensation. We expect that general~~blend various streams of water and ~~administrative expenses related~~chemicals at the wellsite. This complexity favors service companies able to being a publicly traded company will increase in future periods. Costs incurred by us for corporate and other overhead expenses will be reimbursed by SES Holdings pursuant to the SES Holdings LLC Agreement.

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provide advanced technology solutions.

How We Evaluate Our Operations

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

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

Gross Profit

To measure our financial performance, we analyze our gross profit, which we define as revenues less direct operating expenses (including depreciation ~~expense)~~and amortization expenses). We believe gross profit ~~is a meaningful metric because it~~ provides insight oninto profitability and true operating performance ~~based on the historical cost basis~~ of our assets. We also compare gross profit to prior periods and across ~~locations~~segments to identify trends as well as underperforming ~~locations.~~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, thus decreasing our return on capital employed, nor pursue higher gross margins exclusively at the expense of declining gross profits. We track gross margins by segment and service line and compare them across prior periods and across segments and service lines to identify trends as well as underperforming segments.

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EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net ~~income,~~income/(loss), plus ~~taxes,~~ 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/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, ~~non-recurring compensation expense~~ and ~~nonrecurring~~non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or ~~facilities related~~facilities-related exit and ~~disposal related expenditures.~~disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs. See “—~~Comparison of Non-GAAP Financial Measures” and “Note~~Note Regarding Non-GAAP Financial ~~Measures”~~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.

Acquisition and Divestiture Activity

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

Pro Well Acquisition

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

Affirm Divestitures

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

Canadian Operations Divestitures

On March 19, 2019, we sold over half of our Canadian operationswhich accounted for approximately $40.0 million of annual revenue during 2018. On April 1, 2019, we sold and wound down the rest of the Canadian operations which accounted for approximately $8.6 million of annual revenue during 2018. Following the divestitures, the divested Canadian operations were not included in the consolidated results of operations.

Sand Hauling Wind Down

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

Proceeds received from Divestitures and Wind Down

During the Current Period, 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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Impact of Industry Conditions on Our Operating Results

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

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Results of Operations

The following tables set forth ~~selected financial and operating data~~our results of operations for the periods ~~indicated (all values are net to our interest unless indicated otherwise):~~presented, including revenue by segment.

~~Three Months Ended September 30, 2017~~Current Quarter Compared to the ~~Three Months Ended September 30, 2016~~Prior Quarter


	Three months ended September 30,				Change
	2017			2016	Dollars		Percentage
		(in thousands)

									Three months ended June 30,				Change
									2019		2018		Dollars		Percentage
									(in thousands)
Revenue
Water solutions	$	125,086	$	60,975	$	64,111	105.1	%
Accommodations and rentals		15,615		5,838		9,777	167.5	%
Wellsite completion and construction services		13,179		7,094		6,085	85.8	%
Water services									$	202,011	$	233,954	$	(31,943)	(13.7)	%
Water infrastructure										51,710		55,727		(4,017)	(7.2)	%
Oilfield chemicals										63,001		64,807		(1,806)	(2.8)	%
Other										7,165		38,759		(31,594)	(81.5)	%
Total revenue		153,880		73,907		79,973	108.2	%		323,887		393,247		(69,360)	(17.6)	%


Costs of revenue
Water solutions		88,087		49,996		38,091	76.2	%
Accommodations and rentals		11,976		4,969		7,007	141.0	%
Wellsite completion and construction services		10,888		6,299		4,589	72.9	%
Water services										155,151		176,571		(21,420)	(12.1)	%
Water infrastructure										38,456		37,884		572	1.5	%
Oilfield chemicals										54,051		58,500		(4,449)	(7.6)	%
Other										7,447		33,119		(25,672)	(77.5)	%
Depreciation and amortization		23,420		21,613		1,807	8.4	%		28,843		30,445		(1,602)	(5.3)	%
Total costs of revenue		134,371		82,877		51,494	62.1	%		283,948		336,519		(52,571)	(15.6)	%
Gross profit (loss)		19,509		(8,970)		28,479	NM

Gross profit										39,939		56,728		(16,789)	(29.6)	%

Operating expenses
Selling, general and administrative		16,087		8,764		7,323	83.6	%		27,297		26,871		426	1.6	%
Depreciation and amortization		375		363		12	3.3	%		906		807		99	12.3	%
Impairment of property and equipment										374		2,282		(1,908)	NM
Lease abandonment costs		590		13,169		(12,579)	(95.5)	%		183		1,973		(1,790)	(90.7)	%
Total operating expenses		17,052		22,296		(5,244)	(23.5)	%		28,760		31,933		(3,173)	(9.9)	%
Income (loss) from operations		2,457		(31,266)		33,723	NM

Income from operations										11,179		24,795		(13,616)	(54.9)	%

Other income (expense)
(Losses) gains on sales of property and equipment, net										(1,709)		2,056		(3,765)	NM
Interest expense, net		(484)		(4,343)		3,859	(88.9)	%		(839)		(1,342)		503	(37.5)	%
Other income, net		326		431		(105)	(24.4)	%
Income (loss) before tax expense		2,299		(35,178)		37,477	NM
Tax benefit (expense)		294		(26)		320	NM
Net income (loss)	$	2,593	$	(35,204)	$	37,797	NM
Foreign currency gain (loss), net										67		(340)		407	NM
Other (expense) income, net										(59)		4		(63)	NM
Income before income tax expense										8,639		25,173		(16,534)	(65.7)	%
Income tax expense										(571)		(150)		(421)	NM
Net income									$	8,068	$	25,023	$	(16,955)	(67.8)	%

Revenue

Our revenue ~~increased $80.0~~decreased $69.4 million, or ~~108.2%~~17.6%, to ~~$153.9~~$323.9 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$73.9~~$393.2 million for the ~~three months ended September 30, 2016.~~Prior Quarter. The ~~increase~~decrease was ~~primarily attributable to an increase in~~driven by $31.6 million lower revenue from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were fully divested and wound down during the Current Period. Also impacting the decrease was $31.9 million of lower Water Services revenue, $4.0 million of lower Water Infrastructure revenue and $1.8 million of lower Oilfield Chemicals revenue discussed below. For the Current Quarter, our Water ~~Solutions segment revenues of $64.1 million. For the three months ended September 30, 2017, our~~Services, Water ~~Solutions, Accommodations~~Infrastructure, Oilfield Chemicals and ~~Rentals, and Wellsite Completion and Construction Services~~Other segments constituted ~~81.3%~~62.4%, ~~10.1%~~16.0%, 19.4% and ~~8.6%~~2.2% of our total revenue, respectively, compared to ~~82.5%~~59.5%, ~~7.9%~~14.2%, 16.5%, and ~~9.6%~~9.8%, respectively, for the ~~three months ended September 30, 2016.~~Prior Quarter. The 2018 adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, did not have a material impact on revenue recognition. The revenue ~~increase~~decrease by operating segment ~~was~~were as follows:

Table of Contents

Water ~~Solutions~~Services. Revenue ~~increased $64.1~~decreased $31.9 million, or ~~105.1%~~13.7%, to ~~$125.1~~$202.0 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$61.0~~$234.0 million for the ~~three months ended September 30, 2016.~~Prior Quarter. The ~~increase~~decrease was primarily attributable to ~~an increase~~reduced activity and pricing pressures in ~~the demand for~~ our services as a result of a rise in completion activities and an increase in average quarterly rig count of 97.4% during the third quarter of 2017 compared to the third quarter of 2016. Additionally, the GRR Acquisition, which closed March 10, 2017, contributed $10.4 million of revenue for the three months ended September 30, 2017.water transfer business.

~~Table of Contents~~

~~Accommodations and Rentals~~. Water Infrastructure. Revenue ~~increased $9.8~~decreased by $4.0 million, or ~~167.5%~~7.2%, to ~~$15.6~~$51.7 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$5.8~~$55.7 million for the ~~three months ended September 30, 2016. The revenue increase was~~Prior Quarter, primarily ~~attributable~~due to ~~a rise~~reduced activity on our Bakken pipeline system, partially offset by increased revenues in completion activities and an increase in our customers’ quarterly rig count, which led to higher demand for equipment rentals as well as an increase in pricing for such rentals and other related services.the Permian.

~~Wellsite Completion and Construction Services~~Oilfield Chemicals. Revenue ~~increased $6.1~~decreased $1.8 million, or ~~85.8%~~2.8%, to ~~$13.2~~$63.0 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$7.1~~$64.8 million for the ~~three months ended September 30, 2016. The increase was~~Prior Quarter, primarily ~~attributable~~due to ~~an increase in field services revenues of $5.1~~reduced demand for guar-based frac fluid systems, partially offset by increased friction reducer sales.

Other. Other revenue decreased $31.6 million, or 81.5%, to $7.2 million for the Current Quarter compared to $38.8 million in the Prior Quarter as our ~~Rockies~~Affirm subsidiary, sand hauling operations and ~~Permian regions~~Canadian operations were divested and ~~increases in crane services revenues~~wound down as of ~~$1.9 million, offset by $0.9 million due to the closure~~June 30, 2019.

Costs of our South Texas field services at the end of 2016. These increases were driven by the addition of the Permian region in 2017 and by increased demand for these services resulting from several new customers resuming completion activities during 2017.Revenue

Costs of ~~Revenue~~revenue decreased $52.6 million, or 15.6%, to $283.9 million for the Current Quarter compared to $336.5 million for the Prior Quarter. The decrease was primarily due to $25.7 million lower combined costs from our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease were $21.4 million lower Water Services costs, $4.4 million lower Oilfield Chemicals costs and $1.6 million lower depreciation costs further discussed below.

Water Services. Cost of revenue ~~increased $51.5~~decreased $21.4 million, or ~~62.1%~~12.1%, to ~~$134.4~~$155.2 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$82.9~~$176.6 million for the ~~three months ended September 30, 2016. The increase was largely attributable~~Prior Quarter. Cost of revenue as a percent of revenue increased from 75.5% to ~~higher salaries and wages~~76.8% due to an increase in employee headcount, and increased outside services, rentals and materials expense as a result of increased demand for our services resulting from the overall increase in drilling, completion and production activities, particularly in our pricing pressures we could not fully offset with cost reductions.

Water ~~Solutions segment. The cost of revenue increase by operating segment was as follows:~~

~~Water Solutions~~Infrastructure. Cost of revenue increased ~~$38.1~~$0.6 million, or ~~76.2%~~1.5%, to ~~$88.1~~$38.5 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$50.0~~$37.9 million for the three months ended September 30, 2016. The increase was partly attributable to an increase in salaries and wages of $14.7 million resulting from a 48% increase in average headcount during the three months ended September 30, 2017 as compared to the prior year period. The increase in cost of revenue was also attributable to an increase in contract labor expense of $7.6 million, materials and supplies expense of $6.8 million, equipment rental and maintenance expense of $4.7 million, bulk and retail fuel expense of $2.9 million and allocated insurance costs of $0.4 million, offset by a decrease in allocated facility costs of $0.4 million. The increase in fuel and maintenance related expenses were largely attributable to a 28.1% increase in the average number of trucks and tractors in our fleet.

~~Accommodations and Rentals~~.Prior Quarter. Cost of revenue as a percent of revenue increased ~~$7.0~~from 68.0% to 74.4% primarily due to a decline in contribution from our high-margin Bakken pipeline system.

Oilfield Chemicals. Costs of revenue decreased $4.4 million, or ~~141.0%~~7.6%, to ~~$12.0~~$54.1 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$5.0~~$58.5 million for the three months ended September 30, 2016. The increase was partially attributable to an increase in salaries and wages of $1.9 million resulting from an 85% increase in average headcount during the three months ended September 30, 2017 as compared to the prior year period. This increase in labor workforce also resulted in a $1.1 million increase of certain labor support costs including fuel and repair and maintenance expenses. The cost of revenue increase was also partly attributable to increases in outside services, equipment rentals and variable supplies expense totaling $3.7 million resulting from increased demand for services.

~~Wellsite Completion and Construction Services~~.Prior Quarter. Cost of revenue ~~increased $4.6~~as a percent of revenue decreased from 90.3% to 85.8% due primarily to freight cost savings from our Midland, Texas plant.

Other. Other costs decreased $25.7 million, or ~~72.9%~~77.5%, to ~~$10.9~~$7.4 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$6.3~~$33.1 million ~~for~~in the ~~three months ended September 30, 2016. The increase was~~Prior Quarter primarily ~~attributable~~due to ~~increased direct labor costs of $1.7 million, contract labor expense of $2.2 million and rental expense of $0.7 million.~~the divestitures discussed above.

Depreciation and Amortization. Depreciation and amortization expense ~~increased $1.8~~decreased $1.6 million, or ~~8.4%~~5.3%, to ~~$23.4~~$28.8 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$21.6~~$30.4 million for the ~~three months ended September 30, 2016. The increase was~~Prior Quarter, primarily ~~attributable~~due to the ~~depreciation recognized in the three months ended September 30, 2017 related to recently acquired assets from the GRR Acquisition, the DAWS Acquisition and the TEX Acquisition.~~divestitures discussed above.

3746

Table of Contents

Gross Profit ~~(Loss)~~

Gross profit ~~(loss) improved~~decreased by ~~$28.5~~$16.8 million, or 29.6%, to a gross profit of ~~$19.5~~$39.9 million for the ~~three months ended September 30, 2017~~Current Quarter compared to a gross ~~loss~~profit of ~~$9.0~~$56.7 million for the ~~three months ended September 30, 2016~~Prior Quarter primarily due to a $10.5 million decrease in Water Services gross profit stemming from lower revenue, $5.9 million lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period, and a $4.6 million decrease to Water Infrastructure gross profit due to lower revenue and slightly higher costs. This was partially offset by $2.6 million higher Oilfield Chemicals gross profit and $1.6 million lower depreciation expense. Gross margin as a ~~result~~percent of ~~factors described above.~~revenue was 12.3% and 14.4% in the Current Quarter and Prior Quarter, respectively.

Selling, General and Administrative Expenses

~~The increase in selling,~~Selling, general and administrative expenses ~~of $7.3~~increased $0.4 million, or ~~83.6%~~1.6%, to ~~$16.1~~$27.3 million for the ~~three months ended September 30, 2017~~Current Quarter compared to ~~$8.8~~$26.9 million for the ~~three months ended September 30, 2016~~Prior Quarter.

Lease Abandonment Costs

Lease abandonment costs were $0.2 million and $2.0 million in the Current Quarter and Prior Quarter, respectively. During the Current Quarter, lease abandonment costs primarily related to the wind-down of impaired right-of-use assets from previously abandoned properties, partially offset by sublease income. The Prior Quarter costs were primarily due to excess facility capacity stemming from the Rockwater Merger.

Net Interest Expense

Net interest expense decreased by $0.5 million, or 37.5%, to $0.8 million during the Current Quarter compared to $1.3 million in the Prior Quarter primarily due to lower average borrowings due to paying down our debt.

Net Income

Net income decreased by $17.0 million, or 67.8%, to net income of $8.1 million for the Current Quarter compared to net income of $25.0 million for the Prior Quarter primarily due to lower Water Services and Water Infrastructure revenue, higher relative Water Infrastructure costs, and lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, as discussed above. This was partially offset by lower lease abandonment costs, lower interest expense and lower impairment expense.

Table of Contents

Current Period Compared to the Prior Period


	Six months ended June 30,				Change
	2019			2018	Dollars		Percentage
	(in thousands)
Revenue
Water services	$	422,606	$	452,184	$	(29,578)	(6.5)	%
Water infrastructure		105,326		109,784		(4,458)	(4.1)	%
Oilfield chemicals		129,830		128,437		1,393	1.1	%
Other		28,771		79,237		(50,466)	(63.7)	%
Total revenue		686,533		769,642		(83,109)	(10.8)	%

Costs of revenue
Water services		318,272		341,201		(22,929)	(6.7)	%
Water infrastructure		79,886		77,980		1,906	2.4	%
Oilfield chemicals		113,578		115,584		(2,006)	(1.7)	%
Other		28,500		68,873		(40,373)	(58.6)	%
Depreciation and amortization		60,361		61,327		(966)	(1.6)	%
Total costs of revenue		600,597		664,965		(64,368)	(9.7)	%
Gross profit		85,936		104,677		(18,741)	(17.9)	%

Operating expenses
Selling, general and administrative		59,673		52,552		7,121	13.6	%
Depreciation and amortization		1,906		1,348		558	41.4	%
Impairment of goodwill		4,396		—		4,396	NM
Impairment of property and equipment		893		2,282		(1,389)	NM
Impairment of cost-method investment		—		2,000		(2,000)	NM
Lease abandonment costs		1,256		3,097		(1,841)	(59.4)	%
Total operating expenses		68,124		61,279		6,845	11.2	%
Income from operations		17,812		43,398		(25,586)	(59.0)	%

Other income (expense)
(Losses) gains on sales of property and equipment, net		(6,200)		1,502		(7,702)	NM
Interest expense, net		(1,932)		(2,493)		561	(22.5)	%
Foreign currency gain (loss), net		327		(740)		1,067	NM
Other income, net		210		100		110	NM
Income before income tax expense		10,217		41,767		(31,550)	(75.5)	%
Income tax expense		(749)		(612)		(137)	NM
Net income	$	9,468	$	41,155	$	(31,687)	(77.0)	%

Revenue

Our revenue decreased $83.1 million, or 10.8%, to $686.5 million for the Current Period compared to $769.6 million for the Prior Period. The decrease was primarily due to ~~an increase in administrative labor costs~~$50.5 million lower revenue from the combination of ~~$1.5 million, primarily related to~~ our ~~new status as a public company~~Affirm subsidiary, sand hauling operations and ~~an increase in legal~~Canadian operations, all of which were fully divested and ~~professional fees of $4.9 million~~wound down during the ~~three months ended September 30, 2017 as compared to~~Current Period. Also impacting the ~~prior year period, largely related to the Merger,~~change was $29.6 million lower Water Services revenue and $4.5 million lower Water Infrastructure revenue, partially offset by ~~lower corporate office rent of less than $0.1 million.~~

~~Lease Abandonment Costs~~

~~Due to depressed industry conditions and a resulting reduction in~~slightly higher Oilfield Chemicals revenue discussed below. For the need for facilities primarily in 2016, during the three months ended September 30, 2017, we recorded $0.6 million of lease abandonment costs related to certain facilities that were no longer in use. During the three months ended September 30, 2016, we ~~recorded $13.2 million of lease abandonment costs related to certain facilities that were no longer in use~~.

~~Interest Expense~~

The decrease in interest expense of $3.9 million, or 88.9% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to the completion of the 144A Offering on December 20, 2016 and the completion of the IPO on April 26, 2017. We used a portion of the net proceeds from the 144A Offering to repay all outstanding borrowings and a portion of the net proceeds from the IPO to repay all of our subsequent outstanding indebtedness related to the GRR Acquisition.

~~Net Loss~~

Net income (loss) improved by $37.8 million to a net income of $2.6 million for the three months ended September 30, 2017 compared to a net loss of $35.2 million for the three months ended September 30, 2016 as a result of the factors described above.

~~Table of Contents~~

~~Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016~~

Nine months ended September 30,

Change


2017


2016

Dollars

Percentage

(in thousands)

Revenue









Water solutions

$
311,275

$
173,157

$
138,118

79.8
%
Accommodations and rentals

38,457

19,585

18,872

96.4
%
Wellsite completion and construction services

38,522

22,923

15,599

68.0
%
Total revenue

388,254

215,665

172,589

80.0
%

Costs of revenue





Water solutions

226,737

144,653

82,084

56.7
%
Accommodations and rentals

30,697

15,527

15,170

97.7
%
Wellsite completion and construction services

32,155

19,817

12,338

62.3
%
Depreciation and amortization

67,144

73,874

(6,730)

(9.1)
%
Total costs of revenue

356,733

253,871

102,862

40.5
%
Gross profit (loss)

31,521

(38,206)

69,727

NM

Operating expenses





Selling, general and administrative

49,298

25,928

23,370

90.1
%
Depreciation and amortization

1,312

1,644

(332)

(20.2)
%
Impairment of goodwill and other intangible assets

—

138,666

(138,666)

(100.0)
%
Impairment of property and equipment

—

60,026

(60,026)

(100.0)
%
Lease abandonment costs

2,871

13,169

(10,298)

(78.2)
%
Total operating expenses

53,481

239,433

(185,952)

(77.7)
%
Loss from operations

(21,960)

(277,639)

255,679

(92.1)
%

Other income (expense)





Interest expense, net

(1,885)

(11,792)

9,907

(84.0)
%
Other income, net

3,342

588

2,754

468.4
%
Loss before tax expense

(20,503)

(288,843)

268,340

(92.9)
%
Tax benefit (expense)

326

(392)

718

NM

Net loss

$
(20,177)

$
(289,235)

$
269,058

(93.0)
%

~~Revenue~~

Our revenue increased $172.6 million, or 80.0%, to $388.3 million for the nine months ended September 30, 2017 compared to $215.7 million for the nine months ended September 30, 2016. The increase was primarily attributable to an increase inCurrent Period, our Water ~~Solutions segment revenues of $138.1 million. For the nine months ended September 30, 2017, our~~Services, Water ~~Solutions, Accommodations~~Infrastructure, Oilfield Chemicals and ~~Rentals, and Wellsite Completion and Construction Services~~Other segments constituted ~~80.2%~~61.6%, ~~9.9%~~15.3%, 18.9% and ~~9.9%~~4.2% of our total revenue, respectively, compared to ~~80.3%~~58.7%, ~~9.1%~~14.3%, 16.7%, and ~~10.6%~~10.3%, respectively, for the ~~nine months ended September 30, 2016.~~Prior Period. The 2018 adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, did not have a material impact on revenue recognition. The revenue ~~increase~~variances by operating segment ~~was~~were as follows:

Table of Contents

Water ~~Solutions~~Services. Revenue decreased $29.6 million, or 6.5%, to $422.6 million for the Current Period compared to $452.2 million for the Prior Period. The decrease was primarily due to lower water transfer and fluids hauling revenue primarily attributable to reduced activity and pricing pressure, partially offset by increases in revenues from flowback and well testing, rentals and containment.

Water Infrastructure. Revenue decreased by $4.5 million, or 4.1%, to $105.3 million for the Current Period compared to $109.8 million for the Prior Period, primarily due to reduced activity on our Bakken pipeline system.

Oilfield Chemicals. Revenue increased ~~$138.1~~$1.4 million, or ~~79.8%~~1.1%, to ~~$311.3~~$129.8 million for the ~~nine months ended September 30, 2017~~Current Period compared to ~~$173.2~~$128.4 million for the ~~nine months ended September 30, 2016. The increase was~~Prior Period, primarily ~~attributable~~due to ~~an increase in~~higher friction reducer sales stemming from larger manufacturing capacity from our Midland, Texas plant, which more than offset the ~~demand for our services as a result~~declining sale of a rise in completion activities and an increase in average quarterly rig count of 77.2% during the nine months ended September 30, 2017 compared to nine months ended September 30, 2016. Additionally, the GRR Acquisition, which closed on March 10, 2017, contributed $21.5 million ofguar related products.

Other. Other revenue ~~for the nine months ended September 30, 2017.~~

~~Table of Contents~~

~~Accommodations and Rentals. Revenue increased $18.9~~decreased $50.5 million, or ~~96.4%~~63.7%, to ~~$38.5~~$28.8 million for the ~~nine months ended September 30, 2017~~Current Period compared to ~~$19.6~~$79.2 million in the Prior Period as our Affirm subsidiary, sand hauling operations and Canadian operations were divested and wound down.

Costs of Revenue

Costs of revenue decreased $64.4 million, or 9.7%, to $600.6 million for the ~~nine months ended September 30, 2016. The revenue increase was primarily attributable~~Current Period compared to ~~a rise in completion activities and an increase in our customers’ quarterly rig count, which led to higher demand for equipment rentals.~~

~~Wellsite Completion and Construction Services. Revenue increased $15.6 million, or 68.0%, to $38.5~~$665.0 million for the ~~nine months ended September 30, 2017 compared~~Prior Period. The decrease was primarily due to $40.4 million lower costs from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease was $22.9 million lower Water Services costs, primarily due to aligning our cost structure to lower revenue, further discussed below.

Water Services. Cost of revenue decreased $22.9 million, or 6.7%, to $318.3 million for the ~~nine months ended September 30, 2016. The increase was primarily attributable~~Current Period compared to ~~an increase in field services revenues of $12.9~~$341.2 million in our Rockies and Permian regions, increases in construction services revenue of $2.3 million in our South Texas region and increases in crane services revenues of $3.8 million, offset by $3.1 million due tofor the closure of our South Texas field services at the end of 2016. These increases were driven by the addition of the Permian region in 2017 and by the increased demand for these services resulting from several new customers resuming completion activities during 2017.

~~Costs of Revenue~~

Prior Period. Cost of revenue increased $102.9 million, or 40.5%, to $356.7 million for the nine months ended September 30, 2017 compared to $253.9 million for the nine months ended September 30, 2016. The increase was largely attributable to higher salaries and wages due to an increase in employee headcount, and increased outside services, rentals and materials as a ~~result of increased demand for ours services resulting from the overall increase in drilling, completion and production activities, particularly in our Water Solutions segment. The cost~~percent of revenue ~~increase by operating segment~~ was ~~as follows:~~relatively flat, moving from 75.5% to 75.3%.

Water ~~Solutions~~Infrastructure. Cost of revenue increased ~~$82.1~~$1.9 million, or ~~56.7%~~2.4%, to ~~$226.7~~$79.9 million for the ~~nine months ended September 30, 2017~~Current Period compared to ~~$144.7~~$78.0 million for the nine months ended September 30, 2016. The increase was partly attributable to an increase in salaries and wages of $28.0 million as a result of a 28% increase in average headcount during the nine months ended September 30, 2017 as compared to the prior year period. The increase was also attributable to an increase in materials and supplies expense of $17.0 million, contract labor expense of $16.1 million, equipment rental and maintenance expense of $11.3 million and bulk and retail fuel expense of $7.3 million, offset by a decrease in allocated facility costs of $3.3 million.

~~Accommodations and Rentals~~.Prior Period. Cost of revenue as a percent of revenue increased ~~$15.2~~from 71.0% to 75.8% primarily due to a decline in contribution from our high-margin Bakken pipeline system.

Oilfield Chemicals. Costs of revenue decreased $2.0 million, or ~~97.7%~~1.7%, to ~~$30.7~~$113.6 million for the ~~nine months ended September 30, 2017~~Current Period compared to ~~$15.5~~$115.6 million for the nine months ended September 30, 2016. The increase was partially attributable to an increase in salaries and wages of $3.8 million resulting from a 45% increase in average headcount during the nine months ended September 30, 2017 as compared to the prior year period. This increase in labor workforce also resulted in a $2.8 million increase of certain labor support costs including fuel and repair and maintenance expenses. The cost of revenue increase was also partly attributable to increases in outside services, equipment rentals and variable supplies expense totaling $8.1 million resulting from increased demand for services.

~~Wellsite Completion and Construction Services~~.Prior Period. Cost of revenue ~~increased $12.3~~as a percent of revenue decreased from 90.0% to 87.5% due primarily to freight cost-savings from our Midland, Texas plant.

Other. Other costs decreased $40.4 million, or ~~62.3%~~58.6%, to ~~$32.2~~$28.5 million for the ~~nine months ended September 30, 2017~~Current Period compared to ~~$19.8~~$68.9 million ~~for~~in the ~~nine months ended September 30, 2016. The increase was~~Prior Period, primarily ~~attributable~~due to ~~expansion into~~ the Permian region in 2017 and new customer wins which led to higher direct and contract labor expenses of $8.0 million. To support this increased labor expense, increases in fuel and repair and maintenance costs of $1.2 million were incurred. This cost of revenue increase was also partially attributable to increases in equipment rental costs of $2.2 million and supplies and materials expense of $0.9 million needed to support customer demand.divestitures discussed above.

Depreciation and Amortization. Depreciation and amortization expense decreased ~~$6.7~~$1.0 million, or ~~9.1%~~1.6%, to ~~$67.1~~$60.4 million for the ~~nine months ended September 30, 2017~~Current Period compared to ~~$73.9~~$61.3 million for the ~~nine months ended September 30, 2016. The decrease was primarily attributable to assets becoming fully depreciated or being impaired during the first half of 2016.~~

~~Table of Contents~~

Prior Period.

Gross Profit ~~(Loss)~~

Gross profit ~~(loss) improved~~decreased by ~~$69.7~~$18.7 million, or 17.9%, to a gross profit of ~~$31.5~~$85.9 million for the ~~nine months ended September 30, 2017~~Current Period compared to a gross ~~loss~~profit of ~~$38.2~~ $104.7 million for the ~~nine months ended September 30, 2016~~Prior Period, primarily due to $10.1 million lower gross profit from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during the Current Period. Also impacting the decrease was $6.6 million lower gross profit from Water Services and $6.4 million lower gross profit from Water Infrastructure discussed above. These were partially offset by $3.4 million higher gross profit from Oilfield Chemicals and $1.0 million lower depreciation costs discussed above. Gross margin as a ~~result~~percent of ~~factors described above.~~revenue was 12.5% and 13.6% in the Current Period and Prior Period, respectively.

Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7.1 million, or 13.6%, to $59.7 million for the Current Period compared to $52.6 million for the Prior Period. The increase was primarily driven by increased equity incentive plan costs and severance expense in connection with the divestitures.

Lease Abandonment Costs

Lease abandonment costs were $1.3 million and $3.1 million in the Current Period and Prior Period, respectively. The Current Period costs were primarily due to Canadian lease terminations in connection with divesting and winding down the Canadian business. The Prior Period costs were primarily due to excess facility capacity stemming from the Rockwater Merger.

Net Interest Expense

Net interest expense decreased by $0.6 million, or 22.5%, to $1.9 million during the Current Period compared to $2.5 million in the Prior Period, primarily due to lower average borrowings.

Net Income

Net income decreased by $31.7 million, or 77.0%, to net income of $9.5 million for the Current Period compared to net income of $41.2 million for the Prior Period, primarily due to $18.7 million lower gross profit stemming from divestitures and lower revenue discussed above, $7.7 million higher losses on sales of property and equipment, net and $7.1 million higher selling, general and administrative expenses of $23.4 million, or 90.1%, to $49.3 million for the nine months ended September 30, 2017 compared to $25.9 million for the nine months ended September 30, 2016 was primarily due to a payout on our phantom equity units and IPO success bonuses of $12.5 million, including associated taxes, an increase in administrative labor costs of $2.7 million, primarily related to our new status as a public company, and an increase in legal and professional fees of $6.4 million, primarily related to the Merger, GRR Acquisition and other deal costs, during the nine months ended September 30, 2017 as compared to the prior year perioddiscussed above, partially offset by ~~lower corporate office rent of $0.6 million.~~

~~Impairment~~

There were no impairment losses recorded during the nine months ended September 30, 2017. Due to significant reductions in oil and gas prices and rig counts during early 2016, we determined there were triggering events requiring an assessment of the recoverability of goodwill. This assessment resulted in our recognition in our consolidated statements of operations for the nine months ended September 30, 2016 of an impairment loss of $137.6$1.8 million related to goodwill and $60.0 million related to long-lived assets in our Water Solutions segment, $1.0 million related to goodwill and less than $0.1 million related to other intangible assets in our Accommodations and Rentals segment.

~~Lease Abandonment Costs~~

Due to depressed industry conditions and a resulting reduction in the need for facilities, we decided to close certain facilities beginning in the third quarter of 2016. As a result of continuing costs related to certain facilities that are no longer in use, we recorded $2.9 million oflower lease abandonment costs ~~during the nine months ended September 30, 2017. We recorded $13.2 million of lease abandonment costs during the nine months ended September 30, 2016.~~

~~Interest Expense~~

The decrease in interest expense of $9.9 million, or 84.0%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to the completion of the 144A Offering on December 20, 2016 and the completion of the IPO on April 26, 2017. We used a portion of the net proceeds from the 144A Offering to repay all outstanding borrowings and a portion of the net proceeds from the IPO to repay all of our subsequent outstanding indebtedness related to GRR Acquisition.

~~Net Loss~~

Net loss decreased by $269.1 million, or 93.0%, to $20.2 million for the nine months ended September 30, 2017 compared to $289.2 million for the nine months ended September 30, 2016 largely as a result of the impairment losses and other factors describeddiscussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus ~~taxes,~~ 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/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense,

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non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related ~~expenditures.~~expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs.

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

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Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. ~~You~~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 ~~“Summary—Summary Consolidated~~“Item 6. Selected Financial Data” in our ~~Final Prospectus.~~2018 Form 10-K.

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


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
	(in thousands)
Net income	$	8,068	$	25,023	$	9,468	$	41,155
Interest expense		839		1,342		1,932		2,493
Income tax expense		571		150		749		612
Depreciation and amortization		29,749		31,252		62,267		62,675
EBITDA		39,227		57,767		74,416		106,935
Impairment of goodwill		—		—		4,396		—
Impairment of property and equipment		374		2,282		893		2,282
Impairment of cost-method investment		—		—		—		2,000
Lease abandonment costs		183		1,973		1,256		3,097
Non-recurring severance expenses⁽¹⁾		—		—		1,680		—
Non-recurring transaction costs⁽²⁾		412		2,481		1,074		5,175
Non-cash compensation expenses		4,129		2,984		8,308		5,465
Non-cash loss on sale of assets or subsidiaries		7,314		249		13,220		1,764
Foreign currency (gain) loss		(67)		340		(327)		740
Inventory write-down		—		128		75		394
Adjusted EBITDA	$	51,572	$	68,204	$	104,991	$	127,852

Three Months Ended September 30,

Nine Months Ended September 30,


2017


2016

2017


2016

(In thousands)

(In thousands)
Net income (loss)

$
2,593

$
(35,204)

$
(20,177)

$
(289,235)
Interest expense

484

4,343

1,885

11,792
Depreciation and amortization

23,795

21,976

68,456

75,518
Tax (benefit) expense

(294)

26

(326)

392
EBITDA

26,578

(8,859)

49,838

(201,533)
Impairment

—

—

—

198,692
Lease abandonment costs

590

13,169

2,871

13,169
Non-recurring severance costs

—

147

122

689
Non-recurring deal costs

4,382

20

5,462

(236)
Non-cash incentive compensation

549

(1)

1,781

(488)
Non-cash loss on sale of subsidiaries and other assets

268

(491)

775

(29)
Non-recurring phantom equity and IPO-related compensation

—

—

12,537

—
Adjusted EBITDA

$
32,367

$
3,985

$
73,386

$
10,264

(1)	These costs are due to severance payments in connection with the dissolution of our former Wellsite Services segment.

(2)	For 2018, these costs were primarily related to rebranding as a result of the Rockwater Merger.

EBITDA was $39.2 million for the Current Quarter compared to $57.8 million for the Prior Quarter. The $18.6 million decrease in EBITDA was primarily driven by a decrease of $10.5 million in Water Services gross profit, a decrease of $4.6 million in Water Infrastructure gross profit and a decrease of $5.9 million in gross profit from the operations being divested and wound down, partially offset by an increase of $2.6 million in Oilfield Chemicals gross profit. Adjusted EBITDA was $51.6 million for the Current Quarter compared to $68.2 million for the Prior Quarter. The $16.6 million decrease is primarily attributable to the items discussed above.

EBITDA was $74.4 million for the Current Period compared to $106.9 million for the Prior Period. The $32.5 million decrease in EBITDA was primarily driven by a decrease of $6.6 million in Water Services gross profit, a decrease of $6.4 million in Water Infrastructure gross profit, a decrease of $10.1 million in gross profit from the

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operations being divested and wound down and an increase in selling, general and administrative costs of $7.1 million, partially offset by an increase of $3.4 million in Oilfield Chemicals gross profit. Adjusted EBITDA was $105.0 million for the Current Period compared to $127.9 million for the Prior Period. The $22.9 million decrease in Adjusted EBITDA was primarily due to the $32.5 million decrease in EBITDA discussed above partially offset by an $11.5 million increase in non-cash losses on sales of assets or subsidiaries.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity to date have been capital contributions from our members, the net proceeds from the Select 144A Offering, the net proceeds from the IPO, ~~borrowings~~borrowing capacity under our current Credit ~~Facility~~Agreement and our prior credit facility and cash flows from

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operations. Our primary uses of capital have been to maintain our asset base, implement technological advancements, make capital expenditures to support organic growth and to fund acquisitions. Depending ~~upon~~on market conditions and other factors, we may also issue debt and equity securities if needed.

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

~~On April 26, 2017, we completed the IPO for net proceeds~~As of approximately $111.4 million, net of underwriting discounts and commissions and estimated offering expenses. We contributed all of these net proceeds to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds to repay borrowings incurred under our Credit Facility to fund the cash portion of the purchase price of the GRR Acquisition, for the cash settlement of outstanding phantom unit awards at SES Holdings and for 2017 budgeted capital expenditures.On May 10, 2017, we received approximately $17.1 million, net of underwriting discounts and commissions and estimated offering expenses, from the exercise in full by the underwriters of our IPO of their option to purchase additional shares of our Select Class A Common Stock. We used the net proceeds from the underwriters’ option exercise for general corporate purposes, including funding 2017 budgeted capital expenditures.

~~At September~~June 30, ~~2017,~~2019, cash and cash equivalents totaled ~~$42.4 million. In addition to cash~~$23.8 million and ~~cash equivalents,~~ we had approximately ~~$85.9~~$240.0 million of available borrowing capacity under our Credit ~~Facility as~~Agreement. As of ~~September~~June 30, ~~2017.~~2019, the borrowing base under the Credit Agreement was $256.4 million, we had no outstanding borrowings and the outstanding letters of credit totaled $16.4 million. As of August 2, 2019, we had no outstanding borrowings, the borrowing base under the Credit Agreement was $256.3 million, the outstanding letters of credit totaled$19.9 million, and the available borrowing capacity under the Credit Agreement was $236.4 million.

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Cash Flows

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

Nine months ended September 30,

Change


2017

2016


(In thousands)

Net cash (used in) provided by operating activities

$
(4,249)

$
8,078

$
(12,327)
Net cash used in investing activities

(121,535)

(20,372)

(101,163)
Net cash provided by financing activities

128,136

2,730

125,406
Net increase (decrease) in cash

$
2,352

$
(9,564)


	Six months ended June 30,				Change
	2019		2018		Dollars		Percentage
	(in thousands)
Net cash provided by operating activities	$	74,735	$	64,305	$	10,430	16.2	%
Net cash used in investing activities		(21,056)		(59,097)		38,041	(64.4)	%
Net cash (used in) provided by financing activities		(47,234)		3,465		(50,699)	NM
Subtotal		6,445		8,673
Effect of exchange rate changes on cash and cash equivalents		136		(146)		282	NM
Net increase in cash and cash equivalents	$	6,581	$	8,527

Analysis of Cash Flow Changes ~~Between~~between the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018

Operating Activities. Net ~~cash used in operating activities was $4.2 million for the nine months ended September 30, 2017, compared to net~~ cash provided by operating activities ~~of $8.1~~was $74.7 million for the ~~nine months ended September 30, 2016.~~Current Period, compared to $64.3 million for the Prior Period. The ~~$12.3~~$10.4 million ~~decrease~~increase in net cash provided by operating activities ~~was~~related primarily ~~attributable~~ to ~~increases in accounts receivable and~~improved working capital ~~during the nine months ended September 30, 2017 in response to growth in revenues driven by recovering demand for our services as compared to the prior year period.~~management.

Investing Activities. Net cash used in investing activities was ~~$121.5~~$21.1 million for the ~~nine months ended September 30, 2017,~~Current Period, compared to ~~$20.4~~$59.1 million for the ~~nine months ended September 30, 2016.~~Prior Period. The ~~$101.2~~$38.0 million ~~increase~~decrease in net cash used in investing activities was primarily due to ~~net~~$25.3 million received from divestitures, a $6.6 million increase in cash proceeds from sales of property and equipment, primarily related to the wind down of Affirm and the sand hauling and Canadian operations, a $5.5 million reduction in purchases of property and equipment and $0.7 million of working capital receipts from the 2018 Pro Well acquisition.

Financing Activities. Net cash used in financing activities was $47.2 million for ~~acquisitions of $62.2 million and by higher capital expenditures during~~ the ~~nine months ended September 30, 2017 of $37.4 million as~~Current Period compared to ~~the nine months ended September 30, 2016.~~

~~Financing Activities. Net cash~~$3.5 million provided by financing activities ~~was $128.1 million~~by for the ~~nine months ended September 30, 2017, compared to cash provided by financing activities of $2.7 million for the nine months ended September 30, 2016.~~Prior Period. The ~~$125.4 million~~ increase in ~~net~~ cash ~~provided by~~used in financing activities was primarily due to ~~$128.5~~$45 million of net debt repayments during the Current Period.

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Credit Agreement

On November 1, 2017, in ~~net proceeds received from~~connection with the ~~issuance of shares in the IPO, including exercise~~closing of the ~~over-allotment option.~~

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~~Credit Facility~~

~~On May 3, 2011, we~~Rockwater Merger (the “Closing”), SES Holdings and Select LLC entered into ~~our~~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 Facility, which was amended most recently on June 13, 2017. As of September 30, 2017, the total commitment under our Credit Facility was $100.0 million in the form of a revolver. As of September 30, 2017, we had no drawn borrowings under this bank facility. However, our available borrowings are reduced by letters of credit of $14.1 million. The revolver alsoAgreement has a sublimit of ~~$20.0~~$40.0 million for letters of credit and a sublimit of ~~$5.0~~$30.0 million for ~~swing-line~~swingline loans. ~~The most recent amendment of our Credit Facility was~~Subject to ~~remove~~obtaining commitments from existing or new lenders, we have the ~~requirement that businesses or assets acquired by us meet a positive EBITDA test (the “Positive EBITDA Test”) in order~~option to ~~be a Permitted Acquisition (as defined in and~~increase the maximum amount under the Credit ~~Facility), as well as~~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 ~~waive any defaults resulting from~~Section 2.1(b) of Article VII of the ~~DAWS Acquisition not being in compliance with~~Credit Agreement.

The Credit Agreement permits extensions of credit up to the ~~Positive EBITDA Test.~~

~~Our Credit Facility contains certain financial covenants, including~~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 ~~maintenance of an Interest Coverage Ratio~~Eligible Billed Receivables (as defined in the Credit ~~Facility)~~Agreement), plus (ii) 75.0% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not ~~less~~equal more than 35.0% of the borrowing base, plus (iii) the lesser of (A) the product of 70.0% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85.0% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30.0% of the borrowing base, minus (iv) the aggregate 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) ~~1.25 to 1.0 for~~one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the ~~quarter ending on March 31, 2017, (b) 1.50 to 1.0 for~~greatest of (i) the ~~quarter ending on June 30, 2017, (c) 2.50 to 1.0 for the quarter ending on September 30, 2017 and (d) 3.00 to 1.0 for each fiscal quarter ending on or after December 31, 2017 and~~federal funds rate plus 0.5%, (ii) the ~~maintenance of a Leverage Ratio of not greater than (a) 4.00 to 1.0 for~~one-month Eurocurrency Rate plus 1.0% and (iii) the quarter ending on September 30, 2017, (b) 3.50 to 1.0 for the quarter ending on December 31, 2017, (c) 3.25 to 1.0 for the quarters ending on March 31, 2018, June 30, 2018 and September 30, 2018, (d) 3.00 to 1.0 for the quarter ending December 31, 2018 and (e) 2.75 to 1.0 forAdministrative Agent’s prime rate (the “Base Rate”), in each ~~fiscal quarter ending on or after March 31, 2019.~~

~~Our scheduled maturity date is February 28, 2020 and the per annum interest rate on our loans is LIBOR~~case plus an applicable margin, ~~that~~and interest shall be payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges ~~between 3.00%~~from 1.50% to 2.00% and ~~4.50%~~the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, ~~based~~in each case, depending on ~~our Leverage Ratio. Our capacity~~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.

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.

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 ~~capital expenditures is $35 million~~distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the fiscal year ending December 31, 2017 and for each year thereafter is the greater of (i) $35 million or (ii) 50% of our EBITDA for the prior twelve months; but this restriction is not applicable for any quarter if our Leverage Ratio astime of the ~~end of~~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 ~~fiscal quarter was less than 3.00 to 1.0. Our Leverage Ratio was less than 3.00 to 1.0 as of September~~ 30 ~~2017. In addition, our Credit Facility contains an anti-cash hoarding provision that restricts us from making any borrowing, if~~consecutive days, on a pro forma basis and after giving effect to such ~~borrowing, we would have in excess~~distribution, is not less than the greater of ~~$20 million in cash and cash equivalents at the end~~(1) 25.0% of the ~~week~~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 ~~made.~~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.

~~As of September 30, 2017, we~~We were in compliance with all ~~restrictive~~debt covenants ~~under our Credit Facility.~~as of June 30, 2019.

Contractual Obligations

Our contractual obligations include, among other things, our Credit ~~Facility~~Agreement and operating leases. Refer to Note 7—9—Debt in Part I, Item 1 of this Quarterly Report for an update to our contractual obligations as of ~~September~~June 30, ~~2017.~~2019.

Critical Accounting Policies and Estimates

~~There~~With the exception of the adoption of the new lease standard, there were no other changes to our critical accounting policies from those disclosed in our ~~Final Prospectus~~2018 Form 10-K filed on ~~April 24, 2017.~~March 1, 2019.

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 -~~ 2—Significant Accounting Policies in Part I, Item 1 of this Quarterly ~~Report, which is incorporated herein by reference.~~Report.

~~Off Balance Sheet~~Off-Balance-Sheet Arrangements

~~Currently,~~As of June 30, 2019, we ~~have~~had no material ~~off balance sheet arrangements, except for operating leases.~~off-balance-sheet arrangements. As such, we are not ~~materially~~ exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The level of activity in the U.S. oil and gas industry is volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Any prolonged substantial reduction in oil and gas prices would likely affect oil and gas ~~production levels~~drilling and completion activity and therefore affect demand for our services. A material decline in oil and gas prices or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Interest Rate Risk

~~At September~~As of June 30, ~~2017,~~2019, we had no outstanding ~~debt~~borrowings under our Credit ~~Facility.~~Agreement. As of August 2, 2019, we had no outstanding borrowings and approximately $236.4 million of available borrowing capacity under our Credit Agreement. Interest is calculated under the terms of our Credit ~~Facility~~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. Assuming our indebtedness remained constant throughout the period, there would not be an impact on interest expense as a result of a 1% increase or decrease in the interest rate on this amount of debt for the nine months ended September 30, 2017. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.

Foreign Currency Exchange Risk

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

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

As required by Rule ~~13a‑15(b)~~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)~~15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.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~~June 30, ~~2017.~~2019.

Status of Previously Identified Material Weaknesses

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

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

Changes in Internal Control over Financial Reporting

~~There~~Other than noted above, 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~~June 30, ~~2017~~2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

~~The following risk factors update the risk factors described under “Risk Factors” in the Final Prospectus. Except as set forth below, there~~There have been no material changes to the Risk Factors disclosed in the ~~Final Prospectus.~~2018 Form 10-K.

~~The Merger may not be beneficial to us.~~

The consummation of the Merger involves potential risks, including, without limitation, the failure to realize expected profitability, growth or accretion; the incurrence of liabilities or other compliance costs related to environmental or regulatory matters, including potential liabilities that may be imposed without regard to fault or the legality of conduct; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. If these risks or other unanticipated liabilities were to materialize, any desired benefits of the Merger may not be fully realized, if at all, and our future financial performance and results of operations could be negatively impacted.

~~Failure to successfully combine our business with the business from Rockwater may adversely affect our future results.~~

~~The consummation of the Merger involves potential risks, including:~~

~~the failure to realize expected profitability, growth or accretion;~~

~~environmental or regulatory compliance matters or liabilities;~~

~~diversion of management's attention from our existing businesses; and~~

~~the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate.~~

If these risks or other anticipated or unanticipated liabilities were to materialize, any desired benefits of the Merger may not be fully realized, if at all, and our future business operations and our cash available for distribution could be negatively impacted.

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

~~Unregistered Sales of Equity Securities~~

On September 15, 2017, we issued 156,909 shares of Select Class A Common Stock, valued at $15.17 per share, to Resource Water Transfer, L.P. as partial consideration for the Resource Water Acquisition. This issuance of Select Class A Common Stock did not involve any underwriters, underwriting discounts or commissions or a public offering, and such issuance was exempt from registration requirements pursuant to Section 4(a)(2) of the Securities Act.

~~Table of Contents~~

Issuer Purchases of Equity Securities

~~Neither~~During the Current Quarter, we ~~nor any affiliated purchaser~~ repurchased ~~any~~the shares shown in the table below to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our ~~equity securities during the period covered by this Quarterly Report on Form 10‑Q.~~employees:


	Total Number of	Weighted Average Price
Period	Shares Purchased	Paid Per Share
April 1, 2019 to April 30, 2019	2,573	$	11.45
May 1, 2019 to May 31, 2019	16,172		11.35
June 1, 2019 to June 30, 2019	7,971	$	10.95
	26,716

Table of Contents

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits

The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference, as applicable, as part of this report, and such Exhibit Index is incorporated herein by reference.

4759

Table of Contents

EXHIBIT INDEX

HIDDEN_ROW
Exhibit Number		Description

~~2.1~~3.1		~~Agreement~~Fourth Amended and ~~Plan~~Restated Certificate of ~~Merger, dated as~~Incorporation of ~~July 18, 2017, by and among~~ Select Energy Services, Inc.~~, SES Holdings, LLC, Raptor Merger Sub, Inc., Raptor Merger Sub, LLC, Rockwater Energy Solutions, Inc. and Rockwater Energy Solutions, LLC~~ dated as of May 10, 2019 (incorporated by reference herein to Exhibit ~~2.1~~3.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed ~~on July 19, 2017)~~May 15, 2019).

~~3.1~~		Third Amended and Restated Certificate of Incorporation of Select Energy Services, Inc. (incorporated by reference herein to Exhibit 4.1 to Select Energy Services, Inc.’s Registration Statement on Form S-8, filed on November 2, 2017 (Registration No. 333-221282)).

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 ~~Registration Statement on Form S‑1, filed on March 2, 2017 (Registration No. 333‑ 216404)).~~

~~4.1~~		Form of Stock Certificate (incorporated by reference herein to Exhibit 4.1 to Select Energy Services, Inc.’s Registration Statement on Form S‑1, filed on March 2, 2017 (Registration No. 333‑216404)).

~~4.2~~		Amended and Restated Registration Rights Agreement, dated as of July 18, 2017, by and among Select Energy Services, Inc., SES Legacy Holdings, LLC, Crestview Partners II SES Investment B, LLC, SCF-VI, L.P., SCF-VII, L.P., SCF-VII(A), L.P. and WDC Aggregate LLC (incorporated by reference herein to Exhibit 4.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed ~~on July 19, 2017)~~May 15, 2019).

**†10.1		~~Waiver~~Employment Agreement between Mitchell Shauf and Amendment No. 16 to Amended and Restated Revolving Credit Agreement, dated June 13, 2017 (incorporated by reference herein to Exhibit 10.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed on June 16, 2017).

~~10.2~~		~~Credit Agreement. dated November 1, 2017, by and among~~ Select Energy Services, LLC, SES Holdings, LLC, Wells Fargo Bank, N.A., as administrative agent, and the lenders named therein (incorporated by reference herein to Exhibit 10.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed November 2, 2017).dated January 14, 2019.

~~10.3~~31.1		First Amendment to Select Energy Services, Inc. 2016 Equity Incentive Plan (incorporated by reference herein to Exhibit 10.2 to Select Energy Services, Inc.’s Quarterly Report on Form 10-Q, filed August 11, 2017).

~~10.4~~		Amendment No. 1 to Tax Receivable Agreement, dated July 18, 2017, by and among Select Energy Services, Inc., SES Legacy Holdings, LLC and Crestview Partners II GP,��L.P. (incorporated by reference herein to Exhibit 10.3 to Select Energy Services, Inc.’s Quarterly Report on Form 10-Q, filed August 11, 2017).

~~10.5~~		Amendment No. 1 to Tax Receivable Agreement, dated July 18, 2017, by and among Select Energy Services, Inc., Crestview Partners II SES Investment B, LLC and Crestview Partners II GP, L.P. (incorporated by reference herein to Exhibit 10.4 to Select Energy Services, Inc.’s Quarterly Report on Form 10-Q, filed August 11, 2017).

~~10.6~~		Letter Agreement, dated as of September 19, 2017, by and among Select Energy Services, Inc., SES Holdings, LLC, Raptor Merger Sub, Inc., Raptor Merger Sub, LLC, Rockwater Energy Solutions, Inc. and Rockwater Energy Solutions, LLC (incorporated by reference herein to Exhibit 10.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed on September 20, 2017).

~~Table of Contents~~

~~31.1~~		Certification of Chief Executive Officer required by Rules ~~13a‑14~~13a14 and ~~15d‑14~~15d14 under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer required by Rules ~~13a‑14~~13a14 and ~~15d‑14~~15d14 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

** Furnished herewith

†Management contract or compensatory plan or arrangement.

4960

Table of Contents

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 13, 2017~~August 7, 2019	By:	/s/ Holli Ladhani
		Holli Ladhani
		President and Chief Executive Officer
~~(Principal Executive Officer)~~


Date: ~~November 13, 2017~~August 7, 2019	By:	/s/ ~~Gary Gillette~~Nick Swyka
		~~Gary Gillette~~Nick Swyka
		Senior Vice President and Chief Financial Officer ~~and Senior Vice President~~ ~~(Principal Financial Officer and Principal Accounting Officer)~~

5061


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

~~1400 Post Oak Boulevard,~~1233 W. Loop South, Suite ~~400~~1400 Houston, TX	~~77056~~77027
(Address of principal executive offices)	(Zip Code)


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


Large accelerated filer ☐☑	Accelerated filer ☐	Non-accelerated filer ☑☐	Smaller reporting company ☐
		~~(Do not check if a smaller reporting company)~~	Emerging growth company ☑☐


	Nine Months Ended September 30,
	2017		2016
Cash flows from operating activities
Net loss	$	(20,177)	$	(289,235)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		68,456		75,518
Gain on disposal of property and equipment		(3,127)		(30)
Bad debt expense		1,098		1,679
Amortization of debt issuance costs		928		2,244
Equity-based compensation		1,781		317
Impairment of goodwill and other intangible assets		—		138,666
Impairment of property and equipment		—		60,026
Other operating items		(560)		(806)
Changes in operating assets and liabilities
Accounts receivable		(65,815)		15,339
Prepaid expenses and other assets		(6,493)		679
Accounts payable and accrued liabilities		19,660		3,681
Net cash (used in) provided by operating activities		(4,249)		8,078
Cash flows from investing activities
Acquisitions, net of cash received		(62,199)		—
Purchase of property and equipment		(66,013)		(28,630)
Proceeds received from sale of property and equipment		6,677		8,258
Net cash used in investing activities		(121,535)		(20,372)
Cash flows from financing activities
Proceeds from revolving line of credit		34,000		18,500
Payments on long-term debt		(34,000)		(36,334)
Payment of debt issuance costs		—		(2,775)
Proceeds from initial public offering		140,070		—
Payments incurred for initial public offering		(11,566)		—
Purchase of noncontrolling interests		—		(318)
Proceeds from (distributions to) noncontrolling interests		(368)		138
Member contributions		—		23,519
Net cash provided by financing activities		128,136		2,730
Net increase (decrease) in cash and cash equivalents		2,352		(9,564)
Cash and cash equivalents, beginning of period		40,041		16,305
Cash and cash equivalents, end of period	$	42,393	$	6,741
Supplemental cash flow disclosure:
Cash paid for interest	$	1,139	$	9,592
Cash paid for taxes	$	37	$	619
Supplemental disclosure of noncash investing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	7,733	$	2,479


	Six months ended June 30, 2019
	(in thousands)
Balance at beginning of Current Period	$	1,898
Accretion expense, included in depreciation and amortization expense		57
Change in estimate		—
Divestitures		(61)
Balance at end of Current Period	$	1,894


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33 39

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45 56

Item 4.	Controls and Procedures	45 57

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	46 58

Item 1A.	Risk Factors	46 58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46 58

Item 3.	Defaults upon Senior Securities	47 59

Item 4.	Mine Safety Disclosures	47 59

Item 5.	Other Information	47 59

Item 6.	Exhibits	47 59


	September 30, 2017		December 31, 2016
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	42,393	$	40,041
Accounts receivable trade, net of allowance for doubtful accounts of $2,867 and $2,144, respectively		148,372		75,892
Accounts receivable, related parties		433		135
Inventories		852		1,001
Prepaid expenses and other current assets		13,495		7,586
Total current assets		205,545		124,655
Property and equipment		815,002		739,386
Accumulated depreciation		(535,456)		(490,519)
Property and equipment, net		279,546		248,867
Goodwill		25,091		12,242
Other intangible assets, net		35,351		11,586
Other assets		7,216		7,716
Total assets	$	552,749	$	405,066
Liabilities and Equity
Current liabilities
Accounts payable	$	11,751	$	10,796
Accounts payable and accrued expenses, related parties		1,246		648
Accrued salaries and benefits		8,595		2,511
Accrued insurance		11,008		10,338
Accrued expenses and other current liabilities		39,713		22,091
Total current liabilities		72,313		46,384
Accrued lease obligations		18,100		15,946
Other long term liabilities		8,008		8,028
Long-term debt, net of current maturities		—		—
Total liabilities		98,421		70,358
Commitments and contingencies (Note 8)
Class A-1 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017; 16,100,000 shares issued and outstanding as of December 31, 2016		—		161
Class A common stock, $0.01 par value; 250,000,000 shares authorized and 30,468,249 shares issued and outstanding as of September 30, 2017; 3,802,972 shares issued and outstanding as of December 31, 2016		305		38
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 38,462,541 shares issued and outstanding as of September 30, 2017 and December 31, 2016		385		385
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016		—		—
Additional paid-in capital		206,158		113,175
Accumulated deficit		(8,207)		(1,043)
Total stockholders’ equity		198,641		112,716
Noncontrolling interests		255,687		221,992
Total equity		454,328		334,708
Total liabilities and equity	$	552,749	$	405,066


	Class A-1			Class A			Class B			Preferred
	Stockholders			Stockholders			Stockholders			Stockholders
		Class A-1			Class A			Class B					Additional				Total
		Common			Common			Common			Preferred		Paid-In		Accumulated		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit		Equity		Interests		Total
Balance as of December 31, 2016	16,100,000	$	161	3,802,972	$	38	38,462,541	$	385	—	$	—	$	113,175	$	(1,043)	$	112,716	$	221,992	$	334,708
Conversion of Class A-1 to Class A	(16,100,000)		(161)	16,100,000		161	—		—	—		—		—		—		—		—		—
Issuance of shares for acquisitions	—		—	560,277		6	—		—	—		—		4,360		—		4,366		5,514		9,880
Issuance of shares for initial public offering	—		—	10,005,000		100	—		—	—		—		87,835		—		87,935		40,569		128,504
Equity-based compensation	—		—	—		—	—		—	—		—		788		—		788		993		1,781
Noncontrolling interest in subsidiary	—		—	—		—	—		—	—		—		—		—		—		(368)		(368)
Net loss	—		—	—		—	—		—	—		—		—		(7,164)		(7,164)		(13,013)		(20,177)
Balance as of September 30, 2017	—	$	—	30,468,249	$	305	38,462,541	$	385	—	$	—	$	206,158	$	(8,207)	$	198,641	$	255,687	$	454,328


Preliminary purchase price allocation	Amount
Consideration transferred	(in thousand)
Cash paid	$	6,692
Class A common stock issued		2,380
Total consideration transferred		9,072
Less: identified assets
Working capital		1,396
Fixed assets		3,485
Customer relationship intangible assets		1,912
Other intangible assets		466
Total identified assets		7,259
Goodwill	$	1,813


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


Date of Divestiture	Entity	Initial Net Proceeds		Working Capital True Up		Adjusted Net Proceeds		Working Capital Status at June 30, 2019	(Gain)/loss for the six months ended June 30, 2019
		(in thousands)
February 26, 2019	Affirm	$	10,982	$	92	$	To be determined	Not Final	$	(92)
June 28, 2019	Affirm		6,968		—		6,968	Final		(1,646)
March 19, 2019	Canada		4,975		(325)		4,650	Final		5,040
April 1, 2019	Canada		2,242		—		To be determined	Not Final		101


	Pro Forma				Pro Forma
	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
	(in thousands)				(in thousands)
Revenue	$	156,045	$	82,824	$	400,948	$	237,644

Net income (loss)	$	3,195	$	(34,344)	$	(17,951)	$	(289,130)
Less: net (income) loss attributable to noncontrolling interests 1		(1,706)		19,284		11,682		163,044
Net income (loss) attributable to Select Energy Services, Inc. 1	$	1,489	$	(15,060)	$	(6,269)	$	(126,086)


			Provision during the		Usage during the
	Balance as of		nine months ended		nine months ended		Balance as of
	December 31, 2016		September 30, 2017		September 30, 2017		September 30, 2017
	(in thousands)
Lease obligations and terminations	$	18,000	$	2,871	$	2,153	$	18,718
Reclassification of deferred rent		1,069						1,254
Total	$	19,069					$	19,972


			Wellsite Completion
	Water		and Construction		Accommodations
	Solutions		Services		and Rentals		Total
	(in thousands)
Balance as of December 31, 2015	$	137,534	$	12,242	$	995	$	150,771
Impairment		(137,534)		—		(995)		(138,529)
Balance as of December 31, 2016		—		12,242		—		12,242
Additions		12,849		—		—		12,849
Balance as of September 30, 2017	$	12,849	$	12,242	$	—	$	25,091


Leverage Ratio Before Receipt of Fourth Quarter 2017	Eurodollar		Base Rate
Compliance Certificate	Advances		Advances
< 4.00	4.00	%	3.00	%
≥ 4.00	4.50	%	3.50	%


	For the nine months ended September 30, 2017
		Weighted-average
	Equity Options	Exercise Price
Beginning balance	620,721	$	16.50
Granted	455,130		20.00
Forfeited	(98,499)		20.00
Ending balance	977,352	$	17.78


	$20.00 Strike
Underlying Equity	$	20.00
Strike Price	$	20.00
Dividend Yield (%)		0.0	%
Risk free rate (%)		1.68 - 2.00	%
Volatility (%)		46.6 - 46.8	%
Expected Term (Years)		4-6


	For the nine months ended September 30, 2017
		Weighted-average
	Restricted Stock	Grant Date Fair Value
Beginning balance	—	$	—
Granted	41,117		19.91
Forfeited	(10,757)		20.00
Ending balance	30,360	$	19.88


	For the nine months ended September 30,
	2017		2016
	(in thousands)
Net loss attributable to Select Energy Services, Inc. and its Predecessor	$	(7,164)	$	(285,359)
Transfers from noncontrolling interests:
Increase in additional paid-in capital as a result of the contribution of proceeds from the IPO to SEC Holdings, LLC in exchange for common units		87,835		—
Increase in additional paid-in capital as a result of the contribution of assets acquired to SES Holdings, LLC in exchange for common units		4,360		—
Increase in contributed capital due to purchase of noncontrolling interest		—		135
Change to equity from net loss attributable to Select Energy Services, Inc. and its Predecessor and transfers from noncontrolling interests	$	85,031	$	(285,224)


	For the three months ended September 30, 2017
			Income (loss) before		Depreciation and		Capital
	Revenue		taxes		Amortization		Expenditures
	(in thousands)
Water Solutions	$	125,142	$	9,844	$	19,433	$	22,260
Accommodations and Rentals		15,974		(304)		2,908		3,541
Wellsite Completion and Construction Services		13,301		(2)		1,079		1,303
Elimination		(537)		—		—		—
Income from operations				9,538
Corporate		—		(7,081)		375		—
Interest expense, net		—		(484)		—		—
Other income, net		—		326		—		—
	$	153,880	$	2,299	$	23,795	$	27,104


	Total Assets
	As of		As of
	September 30, 2017		December 31, 2016
	(in thousands)
Water Solutions	$	448,585	$	324,171
Accommodations and Rentals		50,057		38,874
Wellsite Completion and Construction Services		38,827		29,994
Corporate		15,280		12,027
	$	552,749	$	405,066