UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ________________
Commission File Number 001-38066
SELECT ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
| |
Delaware | 81-4561945 |
(State of incorporation) | (IRS Employer Identification Number) |
| |
1233 W. Loop South, Suite 1400 Houston, TX | 77027 |
(Address of principal executive offices) | (Zip Code) |
(713) 235-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A common stock, par value $0.01 per share | WTTR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | Accelerated filer | Non-accelerated filer ☐ | Smaller reporting company ☐ |
| | | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑
As of November 2, 2020,May 3, 2021, the registrant had 86,824,12787,856,767 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC.
TABLE OF CONTENTS
| | |
| | Page |
| ||
| | |
| ||
| | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
| | |
| ||
| | |
| ||
| | |
| ||
| | |
| ||
| | |
| ||
| | |
| ||
| | |
| ||
| | |
| ||
| | |
| ||
| | |
|
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K, in our subsequently filed Quarterly Reports on Form 10-Q, under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report and those set forth from time to time in our other filings with the SEC. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
● | following his inauguration on January 20, 2021, President Biden issued several executive orders and made other announcements which may negatively impact the future production of oil and natural gas in the United States (“U.S.”) and may adversely affect our future operations; |
● | the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic, which |
● | actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, |
● | the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies; |
● | the level of capital spending and access to capital markets by oil and gas companies, including significant |
● | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, measures taken to protect the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; |
● | the degree to which consolidation among our |
● | trends and volatility in oil and gas prices, and our ability to manage through such volatility; |
● | our customers’ ability to complete and produce new wells; |
3
● | the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate |
3
freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters; |
● | regional impacts to our business, including our key infrastructure assets within the Bakken and the Northern Delaware portion of the Permian Basin; |
● | capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown |
● | regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our |
● | new or expanded regulations that materially limit our customers’ access to |
● | growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services; |
● | our ability to hire and retain key management and employees, including skilled labor; |
● | our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
● | our health, safety and environmental performance; |
● | the impact of competition on our operations; |
● | the degree to which our E&P customers may elect to operate their water-management services in-house rather than source these services from companies like us; |
● | our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments; |
● | delays or restrictions in obtaining permits by us or our customers; |
● | constraints in supply or availability of equipment used in our business; |
● | the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis; |
● | changes in global political or economic conditions, generally, and in the markets we serve; |
● | acts of terrorism, war or political or civil unrest in the U.S. or elsewhere; |
● | the ability to source certain raw materials globally from economically advantaged sources; |
● | accidents, weather, seasonality or other events affecting our business; and |
4
● | the other risks identified in our most recent Annual Report on Form 10-K |
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise
4
any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.
5
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 | ||||
|
| (unaudited) |
| |
| (unaudited) |
| | ||||
Assets | | | | | | | | | | | | |
Current assets |
| | | | | |
| | | | | |
Cash and cash equivalents | | $ | 185,438 | | $ | 79,268 | | $ | 160,021 | | $ | 169,039 |
Accounts receivable trade, net of allowance for credit losses of $9,731 and $5,773, respectively | |
| 92,148 | |
| 267,628 | ||||||
Accounts receivable trade, net of allowance for credit losses of $8,617 and $9,157, respectively | |
| 140,016 | |
| 129,392 | ||||||
Accounts receivable, related parties | |
| 595 | |
| 4,677 | |
| 332 | |
| 69 |
Inventories | |
| 34,366 | |
| 37,542 | |
| 34,410 | |
| 33,384 |
Prepaid expenses and other current assets | |
| 19,815 | |
| 26,486 | |
| 20,774 | |
| 19,621 |
Total current assets | |
| 332,362 | |
| 415,601 | |
| 355,553 | |
| 351,505 |
Property and equipment | |
| 907,980 | |
| 1,015,379 | |
| 870,091 | |
| 878,902 |
Accumulated depreciation | |
| (538,380) | |
| (562,986) | |
| (537,199) | |
| (528,537) |
Property and equipment held-for-sale, net | | | — | | | 885 | ||||||
Total property and equipment, net | |
| 369,600 | |
| 453,278 | |
| 332,892 | |
| 350,365 |
Right-of-use assets, net | | | 57,402 | | | 70,635 | | | 49,881 | | | 52,331 |
Goodwill | |
| — | |
| 266,934 | ||||||
Other intangible assets, net | |
| 118,801 | |
| 136,952 | |
| 113,463 | |
| 116,079 |
Other assets, net | |
| 2,468 | |
| 4,220 | ||||||
Other long-term assets, net | |
| 6,869 | |
| 5,079 | ||||||
Total assets | | $ | 880,633 | | $ | 1,347,620 | | $ | 858,658 | | $ | 875,359 |
Liabilities and Equity | |
| | |
|
| |
| | |
|
|
Current liabilities | |
| | |
|
| |
| | |
|
|
Accounts payable | | $ | 11,037 | | $ | 35,686 | | $ | 24,847 | | $ | 12,995 |
Accrued accounts payable | | | 13,058 | | | 47,547 | | | 23,177 | | | 21,359 |
Accounts payable and accrued expenses, related parties | |
| 300 | |
| 2,789 | |
| 946 | |
| 519 |
Accrued salaries and benefits | |
| 14,811 | |
| 20,079 | |
| 14,996 | |
| 16,279 |
Accrued insurance | |
| 10,227 | |
| 8,843 | |
| 9,458 | |
| 9,788 |
Sales tax payable | | | 678 | | | 2,119 | | | 2,488 | | | 1,415 |
Accrued expenses and other current liabilities | |
| 13,296 | |
| 15,375 | |
| 13,325 | |
| 12,077 |
Current operating lease liabilities | | | 14,611 | | | 19,315 | | | 13,968 | | | 14,019 |
Current portion of finance lease obligations | |
| 304 | |
| 128 | |
| 287 | |
| 307 |
Total current liabilities | |
| 78,322 | |
| 151,881 | |
| 103,492 | |
| 88,758 |
Long-term operating lease liabilities | |
| 64,217 | |
| 72,143 | |
| 57,834 | |
| 60,984 |
Other long-term liabilities | |
| 12,698 | |
| 10,784 | |
| 19,383 | |
| 19,735 |
Total liabilities | |
| 155,237 | |
| 234,808 | |
| 180,709 | |
| 169,477 |
Commitments and contingencies (Note 10) | |
| | |
|
| ||||||
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 86,824,127 shares issued and outstanding as of September 30, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and outstanding as of December 31, 2019 | |
| 868 | |
| 879 | ||||||
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of September 30, 2020 and December 31, 2019 | |
| — | |
| — | ||||||
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | |
| 162 | |
| 162 | ||||||
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | |
| — | |
| — | ||||||
Commitments and contingencies (Note 8) | |
| | |
|
| ||||||
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 87,856,767 shares issued and outstanding as of March 31, 2021; 350,000,000 shares authorized and 86,812,647 shares issued and outstanding as of December 31, 2020 | |
| 879 | |
| 868 | ||||||
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of March 31, 2021 and December 31, 2020 | |
| — | |
| — | ||||||
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of March 31, 2021 and December 31, 2020 | |
| 162 | |
| 162 | ||||||
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020 | |
| — | |
| — | ||||||
Additional paid-in capital | |
| 907,832 | |
| 914,699 | |
| 910,688 | |
| 909,278 |
Accumulated (deficit) retained earnings | |
| (299,264) | |
| 21,437 | ||||||
Accumulated deficit | |
| (340,354) | |
| (317,247) | ||||||
Total stockholders’ equity | |
| 609,598 | |
| 937,177 | |
| 571,375 | |
| 593,061 |
Noncontrolling interests | |
| 115,798 | |
| 175,635 | |
| 106,574 | |
| 112,821 |
Total equity | |
| 725,396 | |
| 1,112,812 | |
| 677,949 | |
| 705,882 |
Total liabilities and equity | | $ | 880,633 | | $ | 1,347,620 | | $ | 858,658 | | $ | 875,359 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
56
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
Revenue |
| |
|
| |
| | | | | | |
| |
|
| |
|
Water Services | | $ | 54,516 | | $ | 196,782 | | $ | 259,834 | | $ | 619,388 | | $ | 64,223 | | $ | 149,511 |
Water Infrastructure | | | 16,165 | | | 63,953 | | | 89,227 | | | 169,279 | | | 37,803 | | | 57,762 |
Oilfield Chemicals | |
| 30,561 | |
| 67,932 | | | 122,705 | | | 197,762 | |
| 41,716 | |
| 71,012 |
Other | |
| — | |
| 301 | | | — | | | 29,072 | ||||||
Total revenue | |
| 101,242 | |
| 328,968 | | | 471,766 | | | 1,015,501 | |
| 143,742 | |
| 278,285 |
Costs of revenue | |
|
| |
|
| | | | | | | |
|
| |
|
|
Water Services | | | 52,861 | | | 153,741 | | | 235,989 | | | 472,013 | | | 62,324 | | | 129,114 |
Water Infrastructure | | | 12,816 | | | 46,748 | | | 74,500 | | | 126,634 | | | 26,399 | | | 47,813 |
Oilfield Chemicals | |
| 28,558 | | | 57,357 | | | 110,996 | | | 170,935 | |
| 37,766 | | | 59,876 |
Other | |
| 30 | | | 1,865 | | | 37 | | | 30,365 | |
| — | | | 4 |
Depreciation and amortization | |
| 23,877 | | | 28,263 | | | 75,567 | | | 88,624 | |
| 21,650 | | | 26,182 |
Total costs of revenue | |
| 118,142 | |
| 287,974 | | | 497,089 | | | 888,571 | |
| 148,139 | |
| 262,989 |
Gross (loss) profit | |
| (16,900) | |
| 40,994 | | | (25,323) | | | 126,930 | |
| (4,397) | |
| 15,296 |
Operating expenses | |
|
| |
|
| | | | | | | |
|
| |
|
|
Selling, general and administrative | |
| 15,955 | | | 27,280 | | | 58,902 | | | 86,953 | |
| 19,894 | | | 25,289 |
Depreciation and amortization | |
| 685 | | | 952 | | | 2,204 | | | 2,858 | |
| 649 | | | 685 |
Impairment of goodwill and trademark | |
| — | | | — | | | 276,016 | | | 4,396 | |
| — | | | 276,016 |
Impairment and abandonment of property and equipment | | | — | | | 49 | | | 7,910 | | | 942 | | | — | | | 3,184 |
Lease abandonment costs | |
| 672 | | | 238 | | | 2,493 | | | 1,494 | |
| 104 | | | 953 |
Total operating expenses | |
| 17,312 | |
| 28,519 | | | 347,525 | | | 96,643 | |
| 20,647 | |
| 306,127 |
(Loss) income from operations | |
| (34,212) | |
| 12,475 | | | (372,848) | | | 30,287 | ||||||
Other income (expense) | |
|
| |
|
| | | | | | | ||||||
Gains (losses) on sales of property and equipment and divestitures, net | | | 891 | | | (2,033) | | | (1,727) | | | (8,233) | ||||||
Loss from operations | |
| (25,044) | |
| (290,831) | ||||||||||||
Other (expense) income | |
|
| |
|
| ||||||||||||
Losses on sales of property and equipment and divestitures, net | | | (579) | | | (435) | ||||||||||||
Interest expense, net | |
| (789) | | | (438) | | | (1,633) | | | (2,370) | |
| (435) | | | (331) |
Foreign currency gain (loss), net | | | 13 | | | (59) | | | (6) | | | 268 | | | 3 | | | (46) |
Other expense, net | |
| (2,364) | | | (272) | | | (4,805) | | | (62) | ||||||
(Loss) income before income tax benefit (expense) | |
| (36,461) | |
| 9,673 | | | (381,019) | | | 19,890 | ||||||
Income tax benefit (expense) | |
| 201 | | | (2,501) | | | 495 | | | (3,250) | ||||||
Net (loss) income | |
| (36,260) | |
| 7,172 | | | (380,524) | | | 16,640 | ||||||
Less: net loss (income) attributable to noncontrolling interests | |
| 5,719 | | | (1,793) | | | 59,823 | | | (3,926) | ||||||
Net (loss) income attributable to Select Energy Services, Inc. | | $ | (30,541) | | $ | 5,379 | | $ | (320,701) | | $ | 12,714 | ||||||
Other (expense) income, net | |
| (1,629) | | | 259 | ||||||||||||
Loss before income tax benefit | |
| (27,684) | |
| (291,384) | ||||||||||||
Income tax benefit | |
| 263 | | | 164 | ||||||||||||
Net loss | |
| (27,421) | |
| (291,220) | ||||||||||||
Less: net loss attributable to noncontrolling interests | |
| 4,314 | | | 45,358 | ||||||||||||
Net loss attributable to Select Energy Services, Inc. | | $ | (23,107) | | $ | (245,862) | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Net (loss) income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | | ||||||
Net loss per share attributable to common stockholders (Note 14): | | | | |
| | ||||||||||||
Class A—Basic | | $ | (0.36) | | $ | 0.07 | | $ | (3.76) | | $ | 0.16 | | $ | (0.27) | | $ | (2.86) |
Class B—Basic | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | |
Net (loss) income per share attributable to common stockholders (Note 16): | | | | |
| | | | | | | | ||||||
Net loss per share attributable to common stockholders (Note 14): | | | | |
| | ||||||||||||
Class A—Diluted | | $ | (0.36) | | $ | 0.07 | | $ | (3.76) | | $ | 0.16 | | $ | (0.27) | | $ | (2.86) |
Class B—Diluted | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
67
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net (loss) income | | $ | (36,260) | | $ | 7,172 | | $ | (380,524) | | $ | 16,640 |
Other comprehensive (loss) income | |
|
| |
|
| | | | | | |
Foreign currency translation adjustment, net of tax of $0 | | | — | | | 380 | | | — | | | 368 |
Comprehensive (loss) income | |
| (36,260) | |
| 7,552 | | | (380,524) | | | 17,008 |
Less: comprehensive loss (income) attributable to noncontrolling interests | |
| 5,719 | |
| (1,888) | | | 59,823 | | | (4,013) |
Comprehensive (loss) income attributable to Select Energy Services, Inc. | | $ | (30,541) | | $ | 5,664 | | $ | (320,701) | | $ | 12,995 |
| | | | | | | |
| | Three months ended March 31, | | ||||
|
| 2021 |
| 2020 |
| ||
Net loss | | $ | (27,421) | | $ | (291,220) | |
Comprehensive loss | |
| (27,421) | |
| (291,220) | |
Less: comprehensive loss attributable to noncontrolling interests | |
| 4,314 | |
| 45,358 | |
Comprehensive loss attributable to Select Energy Services, Inc. | | $ | (23,107) | | $ | (245,862) | |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
78
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the ninethree months ended September 30,March 31, 2021 and 2020 and 2019
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | | | | Class A | | Class B | | | | | | | | | | | | | | | | |||||||||||||
| | Stockholders | | Stockholders | | | | | Accumulated | | Accumulated | | | | | | | | | | | Stockholders | | Stockholders | | | | | | | | | | | | | | | |||||||||||||||
| | | | Class A | | | | Class B | | Additional | | (Deficit) | | Other | | Total | | | | | | | | | | Class A | | | | Class B | | Additional | | | | Total | | | | | | | |||||||||||
| | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | | | | Common | | | | Common | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | | | |||||||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Income |
| Equity |
| Interests |
| Total |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||||||||||
Balance as of December 31, 2019 |
| 87,893,525 | | $ | 879 |
| 16,221,101 | | $ | 162 |
| $ | 914,699 | | $ | 21,437 | | $ | — | | $ | 937,177 | | $ | 175,635 | | $ | 1,112,812 | |||||||||||||||||||||||||
Balance as of December 31, 2020 |
| 86,812,647 | | $ | 868 |
| 16,221,101 | | $ | 162 |
| $ | 909,278 | | $ | (317,247) | | $ | 593,061 | | $ | 112,821 | | $ | 705,882 | ||||||||||||||||||||||||||||
ESPP shares issued | | 10,834 | | | — | | — | | | — | | | 65 | | | — | | | — | | | 65 | | | (6) | | | 59 | | 2,145 | | | — | | — | | | — | | | 14 | | | — | | | 14 | | | — | | | 14 |
Equity-based compensation | | — | | | — | | — | | | — | | | 3,419 | | | — | | | — | | | 3,419 | | | 639 | | | 4,058 | | — | | | — | | — | | | — | | | 1,202 | | | — | | | 1,202 | | | 220 | | | 1,422 |
Issuance of restricted shares |
| 1,477,488 | | | 15 | | — | | | — | | | 2,407 | | | — | | | — | | | 2,422 | | | (2,422) | | | — |
| 1,487,448 | | | 15 | | — | | | — | | | 1,529 | | | — | | | 1,544 | | | (1,544) | | | — |
Exercise of restricted stock units |
| 625 | | | — | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | (1) | | | — | |||||||||||||||||||||||||
Repurchase of common stock | | (2,199,824) | | | (22) | | — | | | — | | | (12,270) | | | — | | | — | | | (12,292) | | | 1,416 | | | (10,876) | | (144,078) | | | (1) | | — | | | — | | | (888) | | | — | | | (889) | | | 15 | | | (874) |
Restricted shares forfeited | | (358,521) | | | (4) | | — | | | — | | | (527) | | | — | | | — | | | (531) | | | 531 | | | — | | (301,395) | | | (3) | | — | | | — | | | (315) | | | — | | | (318) | | | 318 | | | — |
Noncontrolling interest in subsidiary |
| — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (133) | | | (133) |
| — | | | — | | — | | | — | | | (140) | | | — | | | (140) | | | (934) | | | (1,074) |
NCI income tax adjustment | | — | | | — | | — | | | — | | | 38 | | | — | | | — | | | 38 | | | (38) | | | — | | — | | | — | | — | | | — | | | 8 | | | — | | | 8 | | | (8) | | | — |
Net loss |
| — | | | — | | — | | | — | | | — | | | (320,701) | | | — | | | (320,701) | | | (59,823) | | | (380,524) |
| — | | | — | | — | | | — | | | — | | | (23,107) | | | (23,107) | | | (4,314) | | | (27,421) |
Balance as of September 30, 2020 |
| 86,824,127 | | $ | 868 |
| 16,221,101 | | $ | 162 |
| $ | 907,832 | | $ | (299,264) | | $ | — | | $ | 609,598 | | $ | 115,798 | | $ | 725,396 | |||||||||||||||||||||||||
Balance as of March 31, 2021 |
| 87,856,767 | | $ | 879 |
| 16,221,101 | | $ | 162 |
| $ | 910,688 | | $ | (340,354) | | $ | 571,375 | | $ | 106,574 | | $ | 677,949 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | | | |||||||
| | Stockholders | | Stockholders | | | | | | | Accumulated | | | | | | | | | | ||||||||
| | | | Class A | | | | Class B | | Additional | | | | Other | | Total | | | | | | | ||||||
| | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | |||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Loss |
| Equity |
| Interests |
| Total | ||||||||
Balance as of December 31, 2018 |
| 78,956,555 | | $ | 790 |
| 26,026,843 | | $ | 260 |
| $ | 813,599 | | $ | 18,653 | | $ | (368) | | $ | 832,934 | | $ | 277,839 | | $ | 1,110,773 |
Conversion of Class B to Class A | | 7,564,868 | | | 75 | | (7,564,868) | | | (75) | | | 82,706 | | | — | | | — | | | 82,706 | | | (82,706) | | | — |
ESPP shares issued | | 8,746 | | | — | | — | | | — | | | 79 | | | — | | | — | | | 79 | | | 1 | | | 80 |
Equity-based compensation | | — | | | — | | — | | | — | | | 9,045 | | | — | | | — | | | 9,045 | | | 2,829 | | | 11,874 |
Issuance of restricted shares | | 1,391,479 | | | 14 | | — | | | — | | | 3,590 | | | — | | | — | | | 3,604 | | | (3,604) | | | — |
Exercise of restricted stock units | | 1,250 | | | — | | — | | | — | | | 4 | | | — | | | — | | | 4 | | | (4) | | | — |
Stock options exercised | | 5,282 | | | — | | — | | | — | | | 84 | | | — | | | — | | | 84 | | | (54) | | | 30 |
Repurchase of common stock | | (1,597,150) | | | (16) | | — | | | — | | | (15,886) | | | — | | | — | | | (15,902) | | | 2,501 | | | (13,401) |
Restricted shares forfeited | | (10,017) | | | — | | — | | | — | | | (36) | | | — | | | — | | | (36) | | | 36 | | | — |
Distributions to noncontrolling interests, net | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (349) | | | (349) |
NCI income tax adjustment | | — | | | — | | — | | | — | | | 89 | | | — | | | — | | | 89 | | | (89) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | | 19 | | | — | | | 368 | | | 387 | | | 85 | | | 472 |
Net income |
| — | |
| — |
| — | |
| — |
|
| — | |
| 12,714 | |
| — | |
| 12,714 | |
| 3,926 |
|
| 16,640 |
Balance as of September 30, 2019 |
| 86,321,013 | | $ | 863 |
| 18,461,975 | | $ | 185 |
| $ | 893,293 | | $ | 31,367 | | $ | — | | $ | 925,708 | | $ | 200,411 | | $ | 1,126,119 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements
8
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the three months ended September 30, 2020 and 2019
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | | | |||||||
| | Stockholders | | Stockholders | | | | | Accumulated | | Accumulated | | | | | | | | | | ||||||||
| | | | Class A | | | | Class B | | Additional | | (Deficit) | | Other | | Total | | | | | | | ||||||
| | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | |||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Income |
| Equity |
| Interests |
| Total | ||||||||
Balance as of June 30, 2020 |
| 86,883,049 | | $ | 869 |
| 16,221,101 | | $ | 162 |
| $ | 906,164 | | $ | (268,723) | | $ | — | | $ | 638,472 | | $ | 121,165 | | $ | 759,637 |
ESPP shares issued | | 3,194 | | | — | | — | | | — | | | 17 | | | — | | | — | | | 17 | | | (2) | | | 15 |
Equity-based compensation | | — | | | — | | — | | | — | | | 1,889 | | | — | | | — | | | 1,889 | | | 353 | | | 2,242 |
Repurchase of common stock | | (43,923) | | | — | | — | | | — | | | (249) | | | — | | | — | | | (249) | | | 11 | | | (238) |
Restricted shares forfeited | | (18,193) | | | (1) | | — | | | — | | | (19) | | | — | | | — | | | (20) | | | 20 | | | — |
NCI income tax adjustment | | — | | | — | | — | | | — | | | 30 | | | — | | | — | | | 30 | | | (30) | | | — |
Net loss |
| — | |
| — |
| — | |
| — |
|
| — | |
| (30,541) | |
| — | |
| (30,541) | |
| (5,719) |
|
| (36,260) |
Balance as of September 30, 2020 |
| 86,824,127 | | $ | 868 |
| 16,221,101 | | $ | 162 |
| $ | 907,832 | | $ | (299,264) | | $ | — | | $ | 609,598 | | $ | 115,798 | | $ | 725,396 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | | | | Class A | | Class B | | | | | | | | | | | | | | | | |||||||||||||
| | Stockholders | | Stockholders | | | | | | | Accumulated | | | | | | | | | | | Stockholders | | Stockholders | | | | | Retained | | | | | | | | | | |||||||||||||||
| | | | Class A | | | | Class B | | Additional | | | | Other | | Total | | | | | | | | | | Class A | | | | Class B | | Additional | | Earnings | | Total | | | | | | | |||||||||||
| | | | Common | | | | Common | | Paid-In | | Retained | | Comprehensive | | Stockholders’ | | Noncontrolling | | | | | | | Common | | | | Common | | Paid-In | | (Accumulated | | Stockholders’ | | Noncontrolling | | | | |||||||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Earnings |
| Loss |
| Equity |
| Interests |
| Total |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit) |
| Equity |
| Interests |
| Total | |||||||||||||||
Balance as of June 30, 2019 |
| 80,176,078 | | $ | 802 |
| 26,026,843 | | $ | 260 |
| $ | 821,968 | | $ | 25,988 | | $ | (380) | | $ | 848,638 | | $ | 278,210 | | $ | 1,126,848 | |||||||||||||||||||||||||
Conversion of Class B to Class A | | 7,564,868 | | | 75 | | (7,564,868) | | | (75) | | | 82,706 | | | — | | | — | | | 82,706 | | | (82,706) | | | — | |||||||||||||||||||||||||
Balance as of December 31, 2019 |
| 87,893,525 | | $ | 879 |
| 16,221,101 | | $ | 162 |
| $ | 914,699 | | $ | 21,437 | | $ | 937,177 | | $ | 175,635 | | $ | 1,112,812 | ||||||||||||||||||||||||||||
ESPP shares issued | | 3,079 | | | — | | — | | | — | | | 21 | | | — | | | — | | | 21 | | | 3 | | | 24 | | 4,443 | | | — | | — | | | — | | | 30 | | | — | | | 30 | | | (3) | | | 27 |
Equity-based compensation | | — | | | — | | — | | | — | | | 2,774 | | | — | | | — | | | 2,774 | | | 792 | | | 3,566 | | — | | | — | | — | | | — | | | 483 | | | — | | | 483 | | | 91 | | | 574 |
Issuance of restricted shares | | 17,549 | | | — | | — | | | — | | | 41 | | | — | | | — | | | 41 | | | (41) | | | — | | 1,271,706 | | | 13 | | — | | | — | | | 2,158 | | | — | | | 2,171 | | | (2,171) | | | — |
Stock options exercised | | 5,282 | | | — | | — | | | — | | | 84 | | | — | | | — | | | 84 | | | (54) | | | 30 | |||||||||||||||||||||||||
Exercise of restricted stock units | | 625 | | | — | | — | | | — | | | 1 | | | — | | | 1 | | | (1) | | | — | ||||||||||||||||||||||||||||
Repurchase of common stock | | (1,444,648) | | | (14) | | — | | | — | | | (14,347) | | | — | | | — | | | (14,361) | | | 2,476 | | | (11,885) | | (979,391) | | | (10) | | — | | | — | | | (7,229) | | | — | | | (7,239) | | | 603 | | | (6,636) |
Restricted shares forfeited | | (1,195) | | | — | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | 13 | | | — | | (199,069) | | | (2) | | — | | | — | | | (338) | | | — | | | (340) | | | 340 | | | — |
Distributions to noncontrolling interests, net | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (124) | | | (124) | |||||||||||||||||||||||||
NCI income tax adjustment | | — | | | — | | — | | | — | | | 40 | | | — | | | — | | | 40 | | | (40) | | | — | | — | | | — | | — | | | — | | | 8 | | | — | | | 8 | | | (8) | | | — |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | | 19 | | | — | | | 380 | | | 399 | | | 89 | | | 488 | |||||||||||||||||||||||||
Net income |
| — | |
| — |
| — | |
| — |
|
| — | |
| 5,379 | |
| — | |
| 5,379 | |
| 1,793 |
|
| 7,172 | |||||||||||||||||||||||||
Balance as of September 30, 2019 |
| 86,321,013 | | $ | 863 |
| 18,461,975 | | $ | 185 |
| $ | 893,293 | | $ | 31,367 | | $ | — | | $ | 925,708 | | $ | 200,411 | | $ | 1,126,119 | |||||||||||||||||||||||||
Net loss |
| — | |
| — |
| — | |
| — |
|
| — | |
| (245,862) | |
| (245,862) | |
| (45,358) |
|
| (291,220) | ||||||||||||||||||||||||||||
Balance as of March 31, 2020 |
| 87,991,839 | | $ | 880 |
| 16,221,101 | | $ | 162 |
| $ | 909,812 | | $ | (224,425) | | $ | 686,429 | | $ | 129,128 | | $ | 815,557 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements
9
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| | | | | | | | | | | | |
| | Nine months ended September 30, | | Three months ended March 31, | ||||||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
Cash flows from operating activities |
| | | | | |
| | | | | |
Net (loss) income | | $ | (380,524) | | $ | 16,640 | ||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities | |
| | |
| | ||||||
Net loss | | $ | (27,421) | | $ | (291,220) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities | |
| | |
| | ||||||
Depreciation and amortization | |
| 77,771 | |
| 91,482 | |
| 22,299 | |
| 26,867 |
Net loss on disposal of property and equipment | |
| 1,316 | |
| 4,971 | ||||||
Net loss on disposal of property and equipment and divestitures | |
| 579 | |
| 435 | ||||||
Bad debt expense | |
| 6,108 | |
| 1,764 | |
| 300 | |
| 2,385 |
Amortization of debt issuance costs | |
| 516 | |
| 516 | |
| 172 | |
| 172 |
Inventory write-downs | | | 787 | | | 228 | | | 54 | | | 48 |
Equity-based compensation | |
| 4,058 | |
| 11,874 | |
| 1,422 | |
| 574 |
Impairment of goodwill and trademark | |
| 276,016 | |
| 4,396 | |
| — | |
| 276,016 |
Impairment and abandonment of property and equipment | | | 7,910 | | | 942 | | | — | | | 3,184 |
Loss on divestitures | | | 411 | | | 3,262 | ||||||
Unrealized loss on short-term investment | | | 1,831 | | | — | ||||||
Other operating items, net | |
| 158 | |
| 259 | |
| (129) | |
| (47) |
Changes in operating assets and liabilities | |
| | |
| | |
| | |
| |
Accounts receivable | |
| 171,700 | |
| 14,835 | |
| (11,187) | |
| 34,992 |
Prepaid expenses and other assets | |
| 11,761 | |
| 9,774 | |
| (2,696) | |
| 6,633 |
Accounts payable and accrued liabilities | |
| (58,160) | |
| (18,727) | |
| 10,903 | |
| (13,328) |
Net cash provided by operating activities | |
| 119,828 | |
| 142,216 | ||||||
Net cash (used in) provided by operating activities | |
| (3,873) | |
| 46,711 | ||||||
Cash flows from investing activities | |
| | |
| | |
| | |
| |
Working capital settlement | |
| — | |
| 691 | ||||||
Proceeds received from divestitures | |
| 197 | |
| 24,927 | |
| — | |
| 85 |
Purchase of property and equipment | |
| (19,100) | |
| (86,374) | |
| (4,534) | |
| (11,338) |
Acquisitions, net of cash received | |
| — | |
| (10,400) | ||||||
Purchase of equity method investment | | | (2,000) | |
| — | ||||||
Proceeds received from sales of property and equipment | |
| 15,854 | |
| 13,958 | |
| 2,316 | |
| 5,768 |
Net cash used in investing activities | |
| (3,049) | |
| (57,198) | |
| (4,218) | |
| (5,485) |
Cash flows from financing activities | |
| | |
| | |
| | |
| |
Borrowings from revolving line of credit | | | — | | | 5,000 | ||||||
Payments on long-term debt | |
| — | |
| (50,000) | ||||||
Payments of finance lease obligations | | | (189) | | | (743) | | | (75) | | | (65) |
Proceeds from share issuance | | | 59 | | | 110 | | | 14 | | | 27 |
Contributions from (distributions to) noncontrolling interests | |
| 383 | |
| (349) | ||||||
Contributions from noncontrolling interests | |
| — | |
| 383 | ||||||
Repurchase of common stock | |
| (10,876) | |
| (13,401) | |
| (874) | |
| (6,636) |
Net cash used in financing activities | |
| (10,623) | |
| (59,383) | |
| (935) | |
| (6,291) |
Effect of exchange rate changes on cash | |
| 14 | |
| 127 | |
| 8 | |
| (61) |
Net increase in cash and cash equivalents | |
| 106,170 | |
| 25,762 | ||||||
Net (decrease) increase in cash and cash equivalents | |
| (9,018) | |
| 34,874 | ||||||
Cash and cash equivalents, beginning of period | |
| 79,268 | |
| 17,237 | |
| 169,039 | |
| 79,268 |
Cash and cash equivalents, end of period | | $ | 185,438 | | $ | 42,999 | | $ | 160,021 | | $ | 114,142 |
Supplemental cash flow disclosure: | |
| | |
| | |
| | |
| |
Cash paid for interest | | $ | 1,413 | | $ | 2,421 | | $ | 367 | | $ | 386 |
Cash paid for income taxes, net | | $ | 544 | | $ | 1,675 | ||||||
Supplemental disclosure of noncash operating activities: | |
| | |
| | ||||||
Noncash asset exchange | | $ | 1,578 | | $ | — | ||||||
Cash refunds received for income taxes, net | | $ | (650) | | $ | (156) | ||||||
Supplemental disclosure of noncash investing activities: | |
| | |
| | |
| | |
| |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 2,061 | | $ | 13,442 | | $ | 6,490 | | $ | 6,184 |
Noncash proceeds received from sale of interest in a formerly consolidated joint venture | | $ | 367 | | $ | — |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
10
SELECT ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”“the Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”).
We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production operations. ThroughAs a combination of organic growth and acquisitions over the last decade, we have developed a leading positionleader in the water solutions industry. We believeindustry, we areplace the only company inutmost importance on safe, environmentally responsible management of oilfield water throughout the oilfield services industry that combines comprehensive water-management services with related chemical products. Furthermore,lifecycle of a well. Additionally, we believe we are one of the few large oilfield services companies whose primary focus is on the management and treatment of water and water resources in the oil and gas production industry. Accordingly, the importance ofthat responsibly managing water resources through our operations to help conserve fresh water and protect the environment in the communities in which we operate is paramount to our continued success.
Select 144A Offering and Initial Public Offering.Rockwater Merger: On December 20, 2016, Select Inc.November 1, 2017, the Company completed a private placementmerger with Rockwater Energy Solutions, Inc. (the “Select 144A Offering”“Rockwater Merger”).
Class A and Class B Common Stock: At March 31, 2021, the Company had both Class A and Class B common shares issued and outstanding. Holders of 16,100,000 shares of Select Inc. Class A-1 common stock, par value $0.01 per share, which were converted into shares ofour Class A common stock par value $0.01 per share (“Class A Common Stock”) following the Company’s initial public offering (“IPO”). SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc., and Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its Class B common stock par value $0.01are entitled to 1 vote per share (“Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or 1 share for each SES Holdings LLC Unit held by Legacy Owner Holdco. On April 26, 2017, the Company completed its IPO of 8,700,000 shares of Class A Common Stock. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters subjectpresented to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Inc. based onour stockholders for their ownership of Class B Common Stock.
Tax Receivable Agreements: In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into 2 tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the then-holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder,” and together, the “TRA Holders”). On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 13—Related-Party Transactions for further discussion.vote or approval.
Exchange rights:Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner HoldcoHoldco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B Common Stock will be cancelled. During the year ended December 31, 2019, a total of 9,805,742 SES Holdings LLC Units were exchanged for 9,805,742 shares of Class A
11
Common Stock, and 9,805,742 shares of Class B Common Stock were cancelled. There were 0 exchanges during the Current Period (as defined below).
Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.
This Quarterly Report relates to the three and nine months ended September 30, 2020March 31, 2021 (the “Current Quarter” and the “Current Period”, respectively)) and the three and nine months ended September 30, 2019March 31, 2020 (the “Prior Quarter” and the “Prior Period”, respectively)). The Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 20192020 (the “2019“2020 Form 10-K”) filed with the SEC on February 25, 202024, 2021, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and Current Period may not be indicative of the results to be expected for the full year, in part due to the COVID-19 pandemic.pandemic and continued progress in the distribution and uptake of remedies such as vaccines.
11
The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method.method or other appropriate basis as applicable. As of September 30, 2020,March 31, 2021, the Company had 1 equity method investee and 1 cost-method investment.investee. The Company also had 1 investment in notes receivable accounted for using the amortized cost basis and 1 investment in publicly-traded securities accounted for using the fair value option. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below:
| | | | | | | | |
| | | | | (in thousands) | |||
Type of Investment | Year attained | Accounting method | Balance Sheet Location | March 31, 2021 | | December 31, 2020 | ||
20% minority interest | 2011 | Cost-method | Other long-term assets, net | $ | 300 | | $ | 300 |
Notes receivable | 2020 | Amortized cost basis | Other long-term assets, net | | 3,096 | | | 3,037 |
33% minority interest | 2021 | Equity-method | Other long-term assets, net | | 2,000 | | | — |
Publicly traded securities | 2020 | Fair value option | Prepaid expenses and other current assets | | 1,546 | | | 3,377 |
Segment reporting:reporting: The Company has 3 reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals.
The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business as well as the Company’s industrial solutions business.
The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and saltwater disposal wells, primarily serving E&P companies.
The Oilfield Chemicals segment develops, manufacturesprovides technical solutions and providesexpertise related to chemical applications in the oil and gas industry. We also have significant capabilities in supplying logistics for chemical applications. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completion and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also providescompletions. With our broad chemicals needed byproduct line, combined with our customers to increase oil and gas production and lower production costs over the life of a well. Given the breadth ofexpertise in oilfield chemicals and application, expertise we provide, our Oilfield Chemicals customers are primarilyserve pressure pumpers but also includeand major integrated and independent U.S. and international oil and gas producers. We further utilize our chemicals experience and lab testing capabilities to customize water treatment solutions tailored to the customer’s water quality and other fluid system design objectives.
The results of service lines divested during 2019, including the operations of our Affirm Oilfield Services, LLC subsidiary (“Affirm”), our sand hauling operations and our Canadian operations, are combined in the “Other” category.
12
Reclassifications: Certain reclassifications have been made to the Company’s prior period consolidated financial information to conform to the current period presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2019,2020, included in the 20192020 Form 10-K.
12
Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory reserve, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.
Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred where a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. The duration and severity of the COVID-19 pandemic and continued market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.
The following table presents the changes tochange in the allowance for the Current Period:credit losses is as follows:
| | | | | | |
| | Nine months ended September 30, 2020 | | Three months ended March 31, 2021 | ||
| | (in thousands) | | (in thousands) | ||
Balance at December 31, 2019 | | $ | 5,773 | |||
Increase to allowance based on a percentage of Current Period revenue | |
| 943 | |||
Adjustment based on aged receivable analysis | |
| 5,165 | |||
Balance at December 31, 2020 | | $ | 9,157 | |||
Increase to allowance based on a percent of revenue | |
| 290 | |||
Charge-offs | | | (2,150) | | | (830) |
Balance at September 30, 2020 | | $ | 9,731 | |||
Balance at March 31, 2021 | | $ | 8,617 |
13
Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:Quarter:
| | | | | | |
|
| Nine months ended September 30, 2020 | | | | |
|
| (in thousands) |
| Three months ended March 31, 2021 | ||
Balance at December 31, 2019 |
| $ | 1,527 | |||
|
| (in thousands) | ||||
Balance at December 31, 2020 |
| $ | 999 | |||
Accretion expense, included in depreciation and amortization expense |
| | 92 |
| | 13 |
Disposals |
| | (219) | |||
Payments | | | (163) | | | (121) |
Balance at September 30, 2020 |
| $ | 1,237 | |||
Balance at March 31, 2021 |
| $ | 891 |
We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.
13
Lessor Income: As of September 30, 2020,During the Current Quarter, the Company had 2 owned facility leases and 15multiple facility subleases that are accounted for as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended March 31, | |||||||||||||
| |
| 2020 |
| 2019 |
| 2020 | | 2019 |
| |
| 2021 |
| 2020 | ||||||
| | | (in thousands) | | (in thousands) | | | (in thousands) | |||||||||||||
Category | Classification | | | | | | | | | | | | | | Classification | | | | | | |
Lessor income | Cost of sales | | $ | 67 | | $ | 184 | | $ | 279 | | $ | 364 | | Costs of revenue | | $ | 66 | | $ | 116 |
Sublease income | Lease abandonment costs and Cost of sales | | | 355 | | | 393 | | | 1,091 | | | 1,155 | | Lease abandonment costs and Costs of revenue | | | 243 | | | 401 |
The Company also generates short-term equipment rental revenue. See Note 5—3—Revenue for a discussion of revenue recognition for the accommodations and rentals business.
Operating leases: Primarily due to future uncertainty stemming from the COVID-19 pandemic, certain renewal options were no longer considered reasonably certain of being exercised as of June 30, 2020. This caused a reduction of approximately $5.7 million in right of use assets and lease liabilities on the consolidated balance sheets during the second quarter of 2020. Additionally, the Company has successfully negotiated certain lease payment deferrals as well as lease payment reductions that are being accounted for as modifications, with no impact to straight-line lease expense from lease payment deferrals and a reduction in straight-line rent expense from lease payment reductions.
Defined Contribution Plan: During the Current Period,2020, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) Plan and the suspension has continued into the Current Quarter. The Company incurred 0 match expense in either the Current Period. The Company incurred $0.9 million and $3.4 million of match expense inQuarter or the Prior Quarter and Prior Period, respectively.Quarter.
Payroll Tax Deferral: In the Current Period,2020, the Company began takingtook advantage of the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and has deferred the payment of $3.8$6.0 million of payroll taxes as of September 30,December 31, 2020. The deferral is includedamounts deferred in other long-term liabilities on the accompanying consolidated balance sheets. The amounts being deferred during 2020 must be repaid half by December 31, 2021, and half by December 31, 2022.
Recent accounting pronouncements: In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends GAAP by introducing a new impairment model for financial instruments that The deferral is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019 and requires a
14
modified retrospective transition approach. After reviewing the new standard and reexamining current and prior year bad debt expense from trade receivables, as well as updating future expectations, the adoption of the new standard in the first quarter of 2020 did not have a material impact to the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 in the Current Quarter and elected all aspects of this standard as of the beginning of 2020. The adoption did not have a material impact to the Company’s financial statements.
NOTE 3—IMPAIRMENTS AND OTHER COSTS
Significant challenges that emerged during the Current Period, and that are expected to continue, have had and will likely continue to have a negative impact on our results of operations. The COVID-19 pandemic has caused a worldwide slowdown in economic activity, resulting in a sharp decline in global oil demand and therefore, lower oil and natural gas prices. Global oil demand is expected to remain challenged at least until the COVID-19 pandemic can be contained. In response to lower oil and gas prices, our E&P customers have cut capital spending, resulting in a sharp drop in the number of wells drilled and completed in all of our markets. Reduced demand for our services has had a material, negative impact on our Current Quarter and Current Period financial results. While oil prices and U.S. unconventional completions activity have partially recovered from the recent lows, given the continued uncertainty around the COVID-19 pandemic and the associated impact on oil demand, we are unable to predict if, when, and by how much the demand for our services and therefore our financial performance will improve.
Because the magnitude and duration of the COVID-19 pandemic is unknown, we cannot forecast with reasonable certainty its impact on our business, financial condition or near or longer-term financial or operational results. However, we currently expect that our 2020 net income will be negative. During the Current Period, we have taken actions to protect our balance sheet and maintain our liquidity, including significantly decreasing our operating expenses by reducing headcount, reducingsplit evenly between accrued salaries and director compensation, idling facilities, closing yard locations, reducing third-party expenses and streamlining operations, as well as reducing capital expenditures. We are also deferring employer payroll tax payments for the remainder of 2020, in accordance with the provisions of the CARES Act, and may take advantage of future legislation passed by the United States Congress in response to the COVID-19 pandemic.
As a result of the downturn in our business, we recorded impairment expenses in the first half of 2020 related to goodwill, property and equipmentbenefits and other intangible assets. There is no assurance that we will not have additional impairments in subsequent quarters.
A summary of impairment, severance, yard closure and lease abandonment costs for the Current Quarter, Prior Quarter, Current Period and Prior Period were as follows:
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 | | 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
| | | | | | | | | | | | | |
Impairment of goodwill and trademark | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 186,468 | | $ | — | |
Water Infrastructure | | | — | | | — | | | 80,466 | | | — | |
Oilfield Chemicals | | | — | | | — | | | 9,082 | | | — | |
Other | | | — | | | — | | | — | | | 4,396 | |
Total impairment of goodwill and trademark | | $ | — | | $ | — | | $ | 276,016 | | $ | 4,396 | |
For a discussion of the impairments to goodwill and trademark, See Note 8—Goodwill and Other Intangible Assets.
15
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | 2020 |
| 2019 | | 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
| | | | | | | | | | | | | |
Impairment and abandonment of property and equipment | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 3,894 | | $ | — | |
Water Infrastructure | | | — | | | — | | | 4,016 | | | — | |
Other | | | — | | | 49 | | | — | | | 942 | |
Total impairment and abandonment of property and equipment | | $ | — | | $ | 49 | | $ | 7,910 | | $ | 942 | |
During the Current Period, the Company recorded an impairment of $7.9 million related to certain equipment that was determined to be obsolete. During the Prior Quarter and Prior Period, the Company recorded an impairment of a nominal amount and $0.9 million, respectively, of Canadian property and equipment to write down the carrying value based on the expected future sale proceeds at that time.
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | 2020 |
| 2019 | | 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
| | | | | | | | | | | | | |
Severance | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 4,569 | | $ | — | |
Water Infrastructure | | | — | | | — | | | 500 | | | — | |
Oilfield Chemicals | | | — | | | — | | | 813 | | | — | |
Other | | | — | | | — | | | 1,286 | | | 1,680 | |
Total severance expense | | $ | — | | $ | — | | $ | 7,168 | | $ | 1,680 | |
| | | | | | | | | | | | | |
Yard closure costs | | | | | | | | | | | | | |
Water Services | | $ | — | | $ | — | | $ | 2,645 | | $ | — | |
Oilfield Chemicals | | | — | | | — | | | 316 | | | — | |
Total yard closure costs | | $ | — | | $ | — | | $ | 2,961 | | $ | — | |
| | | | | | | | | | | | | |
Lease abandonment costs | | | | | | | | | | | | | |
Water Services | | $ | 673 | | $ | 173 | | $ | 2,456 | | $ | 620 | |
Water Infrastructure | | | — | | | — | | | 51 | | | — | |
Oilfield Chemicals | | | — | | | 4 | | | 42 | | | 11 | |
Other | | | (1) | | | 61 | | | (56) | | | 863 | |
Total lease abandonment costs | | $ | 672 | | $ | 238 | | $ | 2,493 | | $ | 1,494 | |
During the Current Quarter, the Company recorded $0.7 million of lease abandonment costs due to revised sublease income expectations on certain leases as well as accretion of expenses for previously abandoned facilities. During the Prior Quarter, the Company recorded $0.2 million of lease abandonment costs related to accretion of expenses for previously abandoned facilities.
During the Current Period, the Company recorded exit-disposal costs including $7.2 million of severance costs, with $1.1 million of accrued severance at September 30, 2020, $3.0 million in accrued yard closure costs recognized within costs of revenuelong-term liabilities on the accompanying consolidated statements of operations with $0.4 million accrued yard closure costs at September 30, 2020, and $2.5 million of lease abandonment costs. Severance costs of $4.0 million and $3.2 million are recognized within costs of revenue and selling, general and administrative expenses, respectively, on the accompanying consolidated statements of operations. During the Prior Period, the Company recorded exit-disposal costs including $1.7 million of severance recognized within selling, general and administrative expenses on the accompanying
16
consolidated statements of operations, and $1.5 million of lease abandonment costs, both of which primarily related to the Company’s divested service lines.
NOTE 4—Acquisitions
Business combinations
Well Chemical Services Acquisition
On September 30, 2019, the Company acquired a well chemical services business (“WCS”), formerly a division of Baker Hughes Company, for $10.0 million, funded with cash on hand (the “WCS Acquisition”). WCS provides advanced water treatment solutions, specialized stimulation flow assurance and integrity additives and post-treatment monitoring service in the U.S. This acquisition expands the Company’s service offerings in oilfield water treatment across the full lifecycle of water, from pre-fracturing treatment through reuse and recycling.
The WCS Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions and valuation of the inventory and property and equipment acquired, customer relationships, and current liabilities were finalizedbalance sheets as of DecemberMarch 31, 2019. The assets acquired and liabilities assumed are included in the Company’s Oilfield Chemicals segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
2021.
| | | |
Purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousands) | |
Cash paid | | $ | 10,000 |
Total consideration transferred |
| | 10,000 |
Less: identifiable assets acquired and liabilities assumed |
| |
|
Inventory |
| | 5,221 |
Property and equipment |
| | 4,473 |
Customer relationships |
| | 476 |
Current liabilities | | | (170) |
Total identifiable net assets acquired |
| | 10,000 |
Fair value allocated to net assets acquired | | $ | 10,000 |
1714
NOTE 5—3—REVENUE
The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606), for most revenue recognition, which provides a five-step model for determining revenue recognition for arrangements that are within the scope of the standard: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model only to contracts when it is probable that we will collect the consideration the Company is entitled to in exchange for the goods or services the Company transfers to the customer. The accommodations and rentals revenue iscontinues to be guided by ASC 842 – Leases,. which is discussed further below.
The following factors are applicable to all 3 of the Company’s segments for the first ninethree months of 20202021 and 2019,2020, respectively:
● | The vast majority of customer agreements are short-term, lasting less than one year. |
● | Contracts are seldom combined together as virtually all of our customer agreements constitute separate performance obligations. Each job is typically distinct, thereby not interdependent or interrelated with other customer agreements. |
● | Most contracts allow either party to terminate at any time without substantive penalties. If the customer terminates the contract, the Company is unconditionally entitled to the payments for the services rendered and products delivered to date. |
● | Contract terminations before the end of the agreement are rare. |
● | Sales returns are rare and no sales return assets have been recognized on the balance sheet. |
● | There are minimal volume discounts. |
● | There are no service-type warranties. |
● | There is no long-term customer financing. |
In the Water Services and Water Infrastructure segments, performance obligations arise in connection with services provided to customers in accordance with contractual terms, in an amount the Company expects to collect. Services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenues are generated by services rendered and measured based on output generated, which is usually simultaneously received and consumed by customers at their job sites. As a multi-job site organization, contract terms, including pricing for the Company’s services, are negotiated on a job site level on a per-job basis. Most jobs are completed in a short period of time, usually between one day and one month. Revenue is recognized as performance obligations are completed on a daily, hourly or per unit basis with unconditional rights to consideration for services rendered reflected as accounts receivable trade, net of allowance for credit losses. In cases where a prepayment is received before the Company satisfies its performance obligations, a contract liability is recorded in accrued expenses and other current liabilities. Final billings generally occur once all of the proper approvals are obtained. No revenue is associated with mobilization or demobilization of personnel and equipment. Rather, mobilization and demobilization are factored into pricing for services. Billings and costs related to mobilization and demobilization is not material for customer agreements that start in one period and end in another. As of September 30, 2020,March 31, 2021, the Company had fivesix contracts in place for these segments lasting over one year. The Company has recorded an $8.2 million contract liability associated with one of the six long-term contracts as of March 31, 2021, recognized in other long-term liabilities in the accompanying balance sheets. The Company expects this contract liability to be converted to revenue under the terms of the contract as it is earned.
15
In the Oilfield Chemicals segment, the typical performance obligation is to provide a specific quantity of chemicals to customers in accordance with the customer agreement in an amount the Company expects to collect.
18
Products and services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenue is recognized as the customer takes title to chemical products in accordance with the agreement. Products may be provided to customers in packaging or delivered to the customers’ containers through a hose. In some cases, the customer takes title to the chemicals upon consumption from storage containers on their property, where the chemicals are considered inventory until customer usage. In cases where the Company delivers products and recognizes revenue before collecting payment, the Company usually has an unconditional right to payment reflected in accounts receivable trade, net of allowance for credit losses. Customer returns are rare and immaterial and there were no material in-process customer agreements for this segment as of September 30, 2020,March 31, 2021, lasting greater than one year.
The Company accounts for accommodations and rentals agreements as an operating lease. The Company recognizes revenue from renting equipment on a straight-line basis. Accommodations and rental contract periods are generally daily, weekly or monthly. The average lease term is less than three months and as of September 30, 2020,March 31, 2021, there were no material rental agreements lastedin effect lasting more than one year. During the Current Quarter and Prior Quarter, approximately $6.2 million and $15.2 million of accommodations and rentals revenue was accounted for under ASC 842 lease guidance, with the remainder accounted for under ASC 606 revenue guidance.
The following table sets forth certain financial information with respect to the Company’s disaggregation of revenues by geographic location:
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, | | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 | | 2019 |
| 2021 |
| 2020 |
| ||||||
| | (in thousands) | | (in thousands) | | ||||||||||||||
Geographic Region | | | | | | | | | | | | | | | | | | | |
Permian Basin | | $ | 38,804 | | $ | 158,609 | | $ | 213,440 | | $ | 469,391 | | $ | 71,204 | | $ | 137,998 | |
Eagle Ford | | | 10,089 | | | 44,694 | | | 56,425 | | | 124,453 | | | 20,785 | | | 35,664 | |
Haynesville/E. Texas | | | 21,096 | | | 18,322 | | | 54,819 | | | 53,918 | | | 17,265 | | | 19,015 | |
MidCon | | | 11,579 | | | 45,522 | | | 44,277 | | | 152,500 | |||||||
Marcellus/Utica | | | 11,021 | | | 21,330 | | | 44,111 | | | 79,781 | | | 11,667 | | | 19,839 | |
Rockies | | | 4,488 | | | 21,045 | | | 30,284 | | | 64,981 | | | 10,022 | | | 18,869 | |
MidCon | | | 8,476 | | | 24,873 | | ||||||||||||
Bakken | | | 4,938 | | | 20,052 | | | 30,040 | | | 66,195 | | | 6,903 | | | 22,560 | |
All other/eliminations | | | (773) | | | (606) | | | (1,630) | | | 4,282 | |||||||
Eliminations and other regions | | | (2,580) | | | (533) | | ||||||||||||
Total | | $ | 101,242 | | $ | 328,968 | | $ | 471,766 | | $ | 1,015,501 | | $ | 143,742 | | $ | 278,285 | |
In the Water Services segment, the top 3 revenue-producing regions are the Permian Basin, Eagle Ford and Marcellus/Utica, which collectively comprised 66%, 72%, 71% 77%and 72%74% of segment revenue for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively. In the Water Infrastructure segment, the top 2 revenue-producing regions are the Permian Basin and Bakken, which collectively comprised 87%, 84%, 86% and 83%87% of segment revenue for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively. In the Oilfield Chemicals segment, the top 3 revenue-producing regions are the Permian Basin, Haynesville/E. Texas and MidCon, which collectively comprised 96%, 90%, 86%88% and 88%81% of segment revenue for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively.
1916
NOTE 6—4—INVENTORIES
Inventories, which are comprised of chemicals and materials available for resale and parts and consumables used in operations, are valued at the lower of cost and net realizable value, with cost determined under the weighted-average method. The significant components of inventory are as follows:
| | | | | | | | | | | | |
|
| | | | | |
| | | | | |
|
| September 30, 2020 |
| December 31, 2019 |
| March 31, 2021 |
| December 31, 2020 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Raw materials | | $ | 16,898 | | $ | 12,365 | | $ | 18,869 | | $ | 16,701 |
Finished goods | |
| 17,468 | |
| 24,724 | |
| 15,541 | |
| 16,683 |
Materials and supplies | |
| — | |
| 453 | ||||||
Total | | $ | 34,366 | | $ | 37,542 | | $ | 34,410 | | $ | 33,384 |
During the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, the Company recorded charges to the reserve for excess and obsolete inventory for $0.2immaterial amounts of $0.1 million a nominal amount, $0.8 million, and $0.2 million,or less, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The Company’s inventory reserve was $4.2 million and $4.1 million as of September 30, 2020March 31, 2021 and December 31, 2019, respectively.2020. The reserve for excess and obsolete inventories is determined based on the Company’s historical usage of inventory on hand, as well as future expectations and the amount necessary to reduce the cost of the inventory to its estimated net realizable value.
2017
NOTE 7—5—PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Depreciation (and amortization of finance lease assets) is calculated on a straight-line basis over the estimated useful life of each asset. Property and equipment consists of the following as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | | | | | | | | | | |
|
| | | | | |
| | | | | |
|
| September 30, 2020 |
| December 31, 2019 |
| March 31, 2021 |
| December 31, 2020 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Machinery and equipment | | $ | 591,362 | | $ | 596,441 | ||||||
Buildings and leasehold improvements | |
| 92,669 | |
| 93,236 | ||||||
Pipelines | | | 72,624 | | | 72,458 | ||||||
Disposal wells | |
| 47,571 | |
| 48,097 | ||||||
Vehicles and equipment | |
| 29,839 | |
| 30,975 | ||||||
Land | | $ | 14,013 | | $ | 16,030 | | | 12,803 | | | 13,497 |
Buildings and leasehold improvements | |
| 92,232 | |
| 97,426 | ||||||
Vehicles and equipment | |
| 31,665 | |
| 53,819 | ||||||
Computer equipment and software | | | 6,790 | | | 7,127 | ||||||
Office furniture and equipment | |
| 888 | |
| 892 | ||||||
Machinery and equipment - finance lease | |
| 537 | |
| 537 | ||||||
Vehicles and equipment - finance lease | |
| 784 | |
| 1,291 | |
| 463 | |
| 475 |
Machinery and equipment | |
| 617,066 | |
| 659,835 | ||||||
Machinery and equipment - finance lease | |
| 612 | |
| 162 | ||||||
Pipelines | | | 72,111 | | | 69,327 | ||||||
Computer equipment and software | | | 6,697 | | | 8,051 | ||||||
Computer equipment and software - finance lease | |
| 356 | |
| 356 | |
| 356 | |
| 356 |
Office furniture and equipment | |
| 962 | |
| 1,157 | ||||||
Disposal wells | |
| 49,965 | |
| 64,149 | ||||||
Other | | | — | | | 497 | ||||||
Construction in progress | |
| 21,517 | |
| 43,279 | |
| 14,189 | |
| 14,811 |
| |
| 907,980 | |
| 1,015,379 | |
| 870,091 | |
| 878,902 |
Less accumulated depreciation(1) | |
| (538,380) | |
| (562,986) | |
| (537,199) | |
| (528,537) |
Property and equipment held-for-sale, net | | | — | | | 885 | ||||||
Total property and equipment, net | | $ | 369,600 | | $ | 453,278 | | $ | 332,892 | | $ | 350,365 |
(1) | Includes |
Total depreciation and amortization expense related to property and equipment and finance leases presented in the table above, as well as amortization of intangible assets presented in Note 86 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, | | |||||||||||||
|
| 2020 |
| 2019 |
| 2020 | | 2019 |
|
| 2021 |
| 2020 |
| ||||||
| | (in thousands) | | (in thousands) | | |||||||||||||||
Category | | | | | | | | | | | | | | | | | | | | |
Depreciation expense from property and equipment | | $ | 21,449 | | $ | 26,163 | | $ | 68,720 | | $ | 81,698 | | | $ | 19,587 | | $ | 23,985 | |
Amortization expense from finance leases | | | 123 | | | 54 | | | 239 | | | 791 | | | | 82 | | | 77 | |
Amortization expense from intangible assets | | | 2,960 | | | 2,969 | | | 8,939 | | | 8,907 | | | | 2,617 | | | 2,993 | |
Accretion expense from asset retirement obligations | | | 30 | | | 29 | | | (127) | | | 86 | | | | 13 | | | (188) | |
Total depreciation and amortization | | $ | 24,562 | | $ | 29,215 | | $ | 77,771 | | $ | 91,482 | | | $ | 22,299 | | $ | 26,867 | |
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 3 forDuring the Prior Quarter, the Company determined that certain equipment was obsolete, and recorded a $3.2 million impairment and abandonment of property and equipment during the Current Quarter and Prior Quarter.equipment.
During the Current Period, the Company sold the remaining Canadian assets that were previously designated as held for sale at a loss of $0.1 million recognized within gains (losses) on sales of property, equipment and divestitures, net on the accompanying consolidated statements of operations.
2118
NOTE 8—6—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs (see Note 12)10 – Fair Value Measurement). During the first quarter of 2020, the Company had triggering events in connection withrelated to the resulting significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil and the related global economic impacts resulting from the OPEC+ disputes as well as the COVID-19 pandemic. This included uncertainty regarding oil prices and the length of the recovery following the significant market disruption in the oil and gas industry. Given the volatile market environment at March 31, 2020, the Company utilized third-party valuation advisors to assist with these evaluations. These evaluations included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on our weighted-average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset. The Company performed quantitative tests for reporting units in both the Water Services and Water Infrastructure segments using the income and market approaches, resulting in a full impairment to goodwill in both segments.
The changes in the carrying amounts of goodwill by reportable segment as of September 30, 2020 and December 31, 2019 are as follows:
| | | | | | | | | |
| | Water | | Water | | | | ||
|
| Services |
| Infrastructure |
| Total | |||
| | | | | | | | | |
Balance as of December 31, 2019 | | | 186,468 | | | 80,466 | | | 266,934 |
Impairment | | | (186,468) | | | (80,466) | | | (266,934) |
Balance as of September 30, 2020 | | $ | — | | $ | — | | $ | — |
segments totaling $266.9 million.
The components of other intangible assets, net as of September 30, 2020March 31, 2021 and December 31, 20192020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of December 31, 2019 | | As of March 31, 2021 | | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
|
| Gross |
| |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Gross | | |
| Accumulated |
| Net | ||||||||||||||
| | Value | | Impairment | | Amortization | | Value | | Value | | Amortization | | Value | | Value | | Amortization | | Value | | Value | | Impairment | | Amortization | | Value | ||||||||||||||
| | (in thousands) | | (in thousands) | | (in thousands) | | (in thousands) | ||||||||||||||||||||||||||||||||||
Definite-lived | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 116,554 | | $ | — | | $ | (27,036) | | $ | 89,518 | | $ | 116,554 | | $ | (20,233) | | $ | 96,321 | | $ | 116,554 | | $ | (31,568) | | $ | 84,986 | | $ | 116,554 | | $ | — | | $ | (29,302) | | $ | 87,252 |
Patents | | | 9,741 | | | — | | | (2,923) | | | 6,818 | | | 10,110 | | | (2,420) | | | 7,690 | | | 9,741 | | | (3,410) | | | 6,331 | | | 9,741 | | | — | | | (3,166) | | | 6,575 |
Other | | | 7,234 | | | — | | | (6,160) | | | 1,074 | |
| 7,234 | |
| (4,766) | |
| 2,468 | | | 7,234 | | | (6,479) | | | 755 | |
| 7,234 | | | — | |
| (6,373) | |
| 861 |
Total definite-lived | | | 133,529 | | | — | | | (36,119) | | | 97,410 | | | 133,898 | | | (27,419) | | | 106,479 | | | 133,529 | | | (41,457) | | | 92,072 | | | 133,529 | | | — | | | (38,841) | | | 94,688 |
Indefinite-lived | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Water rights | | | 7,031 | | | — | | | — | | | 7,031 | | | 7,031 | | | — | | | 7,031 | | | 7,031 | | | — | | | 7,031 | | | 7,031 | | | — | | | — | | | 7,031 |
Trademarks | | | 23,442 | | | (9,082) | | | — | | | 14,360 | | | 23,442 | | | — | | | 23,442 | | | 14,360 | | | — | | | 14,360 | | | 23,442 | | | (9,082) | | | — | | | 14,360 |
Total indefinite-lived | | | 30,473 | | | (9,082) | | | — | | | 21,391 | | | 30,473 | | | — | | | 30,473 | | | 21,391 | | | — | | | 21,391 | | | 30,473 | | | (9,082) | | | — | | | 21,391 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets, net | | $ | 164,002 | | $ | (9,082) | | $ | (36,119) | | $ | 118,801 | | $ | 164,371 | | $ | (27,419) | | $ | 136,952 | | $ | 154,920 | | $ | (41,457) | | $ | 113,463 | | $ | 164,002 | | $ | (9,082) | | $ | (38,841) | | $ | 116,079 |
Due to the triggering events discussed above, the Company also tested allindefinite-lived intangible assets for impairment during the first quarter of 2020. These evaluations included significant judgment, including discount rates based on our weighted-average cost of capital and the royalty rate. This resulted in $9.1 million of impairment to trademarks using the relief from royalty method, which was recorded in the Oilfield Chemicals segment. Further, the Company tested all other long-lived assets for impairment, including definite-lived intangible assets, using an undiscounted test for recoverability at the asset group level which resulted in no additional impairments.
2219
The weighted-average amortization period for customer relationships, patents, and other definite liveddefinite-lived assets was 9.99.4 years, 7.06.5 years, and 2.62.5 years, respectively, as of September 30, 2020.March 31, 2021. See Note 75 for the amortization expense during the Current Quarter and Prior Quarter, Current Period and Prior Period, respectively. The indefinite livedindefinite-lived water rights and trademarks are generally subject to renewal every five to ten years at immaterial renewal costs. Annual amortization of intangible assets for the next five years and beyond is as follows:
| | | | | | | |
|
| Amount |
| Amount | | ||
| | (in thousands) | | (in thousands) | | ||
Remainder of 2020 | | $ | 2,722 | ||||
Year ending December 31, 2021 | |
| 10,466 | ||||
Remainder of 2021 | | $ | 7,850 | | |||
Year ending December 31, 2022 | |
| 10,252 | |
| 10,252 | |
Year ending December 31, 2023 | |
| 10,180 | |
| 10,180 | |
Year ending December 31, 2024 | |
| 10,111 | |
| 10,111 | |
Year ending December 31, 2025 | |
| 9,948 | | |||
Thereafter | | | 53,679 | | | 43,731 | |
Total | | $ | 97,410 | | $ | 92,072 | |
2320
NOTE 9—7—DEBT
Credit facility and revolving line of credit
On November 1, 2017, SES Holdings and Select Energy Services, LLC (“Select LLC”) entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, the Company has the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the closing. The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the earlier termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.
The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.
Borrowings under the Credit Agreement bear interest, at Select LLC’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1% and (iii) the Administrative Agent’s prime rate (the ”Base Rate”), in each case plus an applicable margin. Interest is payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
| | | | | | |
Level | | Average Excess Availability | | Base Rate Margin | | Eurocurrency Rate Margin |
| | | | | | |
I | | < 33% of the commitments | | 1.00% | | 2.00% |
II | | < 66.67% of the commitments and ≥ 33.33% of the commitments | | 0.75% | | 1.75% |
III | | ≥ 66.67% of the commitments | | 0.50% | | 1.50% |
| | | | |
Level | | Average Revolver Usage | | Unused Line Fee Percentage |
| | | | |
I | | ≥ 50% of the commitments | | 0.250% |
II | | < 50% of the commitments | | 0.375% |
The obligations under the Credit Agreement are guaranteed by SES Holdings and certain subsidiaries of SES Holdings and Select LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, Select LLC and their domestic subsidiaries.
24
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.
21
In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements. See “Note 13—11—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 0 borrowings outstanding under the Credit Agreement as of September 30, 2020March 31, 2021 and December 31, 2019.2020. As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the borrowing base under the Credit Agreement was $63.6$117.8 million and $214.6$96.4 million, respectively. The significant reduction in our borrowing base since December 31, 2019 was driven primarily by the meaningful reductions during the Current Period in our accounts receivable, which represent the primary collateral for the borrowing base. The borrowing capacity under the Credit Agreement was reduced by outstanding letters of credit of $15.6 million and $19.9 million as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The Company’s letters of credit have a variable interest rate between 1.50% and 2.00% based on the Company’s average excess availability as outlined above. The unused portion of the available borrowings under the Credit Agreement was $48.0$102.2 million as of September 30, 2020.March 31, 2021.
Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of September 30, 2020March 31, 2021 and December 31, 2019,2020, were $1.4$1.1 million and $2.0$1.3 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheets. Amortization expense related to debt issuance costs was $0.2 million $0.2 million, $0.5 million and $0.5 million for both the Current Quarter Prior Quarter, Current Period and Prior Period, respectively.Quarter.
The Company was in compliance with all debt covenants as of September 30, 2020.March 31, 2021.
2522
NOTE 10—8—COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to a number of lawsuits and claims arising out of the normal conduct of its business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. Based on a consideration of all relevant facts and circumstances, including applicable insurance coverage, it is not expected that the ultimate outcome of any currently pending lawsuits or claims against the Company will have a material adverse effect on its consolidated financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters.
As previously disclosed, certain subsidiaries acquired in the Rockwater mergerMerger are under investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania and the U.S. Environmental Protection Agency.Agency (“EPA”). It is alleged that certain employees at some of the facilities altered emissions controls systems on less than 5% of the vehicles in the fleet in violation of the Clean Air Act. The Company is continuing to cooperate with the relevant authorities to resolve the matter, and while at this time no administrative, civil or criminal charges have been brought against the Company, the Company accrued $4.3 million related to the settlement of this investigation prior to the Current Quarter and made an initial paymentpayments of $1.2$1.7 million related to this accrual during the Current Quarter.2020. The Company does not believe that the ultimate resolution of this matter will be material to the Company’s financial statements.See Note 16 – Subsequent Events for additional information.
In February 2021, the Company, and certain subsidiaries, received Notices of Proposed Debarment (“Notices”) from the EPA’s Suspension and Debarment Official (“SDO”). The Notices propose a debarment from participation in future federal contracts, non-procurement covered transactions such as grants, and other assistance activities, and would render the Company ineligible to receive any federal contracts or approved subcontracts in excess of $35,000 or to act as an agent or representative on behalf of another in such transaction, or receive certain federal benefits. Please see Item 1A – Risk Factors in this Form 10-Q.
Self-Insured Reserves
We are self-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters and effective June 1, 2020, health insurance. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.
2623
NOTE 11—9—EQUITY-BASED COMPENSATION
The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the board of managers of SES Holdings in April 2011. In conjunction with the Selectprivate placement of 16,100,000 shares of the Company’s Class A Common Stock on December 20, 2016 (the “Select 144A Offering,Offering”), the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan.
On July 18, 2017,May 8, 2020, the Company’s board of directorsstockholders approved the First Amendmentan amendment to the 2016 Plan (the “ First Equity Plan Amendment”), which clarified the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater merger which occurred on November 1, 2017) and allowed for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which the Company’s Class A Common Stock is listed. The effectiveness of the First Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement for the Rockwater merger. Stockholders holding a majority of the Company’s outstanding common stock approved the First Equity Plan Amendment on July 18, 2017, and such amendment became effective on November 1, 2017 upon the consummation of the Rockwater merger.
On February 28, 2020, the Company’s board of directors approved the Second Amendment to the 2016 Plan (the “Second Equity Plan Amendment”), which increasesincrease the number of shares of the Company’s Class A Common Stockcommon stock that may be issued under the 2016 Plan by 4,000,000 shares.shares and to make certain other administrative changes. The effectiveness2016 Plan includes share recycling provisions that allow shares subject to an award that expires or is cancelled, forfeited or otherwise terminated without actual delivery of the Second Equity Plan Amendment was subject to approval by the Company's stockholders. Stockholders holding a majorityunderlying shares of the Company’s outstandingClass A common stock approvedto be considered not delivered and thus available to be granted as new awards under the Second Equity Plan Amendment on May 8, 2020, and such amendment became immediately effective.2016 Plan.
Currently, the maximum number of shares reserved for issuance under the 2016 Plan taking into account the Second Equity Plan Amendment, is approximately 13.3 million shares.shares, with approximately 3.4 million shares available to be issued as of March 31, 2021. For all share-based compensation award types, the Company accounts for forfeitures as they occur.
Stock option awards
Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Class A Common Stock as of the date of grant. Certain awards granted during the years ended December 31, 2017 and 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were either granted in exchange for the cancellation of outstanding options granted under the 2011 Plan or the Rockwater Equity Plan, as applicable, that were fully vested and exercisable prior to such cancellation.
The Company utilized the Monte Carlo option pricing model to determine fair value of the options granted during 2018, which incorporates assumptions to value equity-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected life of the options was based on the vesting period and term of the options awarded, which is ten years. NaN stock options were granted in 2019 or in the Current Period.
27
A summary of the Company’s stock option activity and related information as of and for the Current PeriodQuarter is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2020 | | For the three months ended March 31, 2021 | ||||||||||||||||
| | | | | | | Weighted-average | | | | | | | | | | Weighted-average | | | |
| | | | Weighted-average | | Grant Date Value | | Aggregate Intrinsic | | | | Weighted-average | | Grant Date Value | | Aggregate Intrinsic | ||||
|
| Stock Options |
| Exercise Price |
| Term (Years) |
| Value (in thousands) (a) |
| Stock Options |
| Exercise Price |
| Term (Years) |
| Value (in thousands) (a) | ||||
Beginning balance, outstanding |
| 3,797,319 | | $ | 15.95 | | 4.2 | | $ | 509 |
| 3,519,159 | | $ | 16.11 | | 3.3 | | $ | — |
Forfeited |
| (22,437) | | | 18.52 | | | | | | ||||||||||
Expired | | (238,104) | | | 14.05 | | | | | | | (1,246,718) | | | 14.28 | | | | | |
Ending balance, outstanding |
| 3,536,778 | | $ | 16.06 | | 3.6 | | $ | — |
| 2,272,441 | | $ | 17.11 | | 4.8 | | $ | — |
Ending balance, exercisable | | 3,533,403 | | $ | 16.06 | | 3.6 | | $ | — | | 2,272,441 | | $ | 17.11 | | 4.8 | | $ | — |
Nonvested at September 30, 2020 | | 3,375 | | $ | 22.22 | | | | | | ||||||||||
Nonvested at March 31, 2021 | | — | | $ | — | | | | | |
(a) Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $3.84$4.98 and $9.28$4.10 as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
The Company recognized a nominal amount $1.0 million,and $0.2 million and $3.4 million of compensation expense related to stock options during the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively. As of September 30, 2020, there was a nominal amount of unrecognizedMarch 31, 2021, all equity-based compensation expense remaining related to nonvested stock options.options had been recognized.
Restricted Stock Awards and Restricted Stock Units
The value of the restricted stock awards and restricted stock units granted was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one to three years from the applicable date of grant. The Company recognized compensation expense of $2.1$1.0 million $2.3 million, $5.8 million and $6.3 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 September 30, 2020, there was $8.9 million of unrecognized compensation expense with a weighted-average remaining life of 1.9 years related to unvested restricted stock awards.
A summary of the Company’s restricted stock awards activity and related information for the Current Period is as follows:
| | | | | |
| | For the nine months ended September 30, 2020 | |||
| | | | Weighted-average | |
|
| Restricted Stock Awards |
| Grant Date Fair Value | |
Nonvested at December 31, 2019 | | 1,518,193 | | $ | 10.08 |
Granted | | 1,477,488 | | | 5.80 |
Vested | | (578,281) | | | 11.79 |
Forfeited | | (398,550) | | | 7.50 |
Nonvested at September 30, 2020 | | 2,018,850 | | $ | 6.97 |
2824
$1.9 million related to the restricted stock awards for the Current Quarter and Prior Quarter, respectively. As of March 31, 2021, there was $13.6 million of unrecognized compensation expense with a weighted-average remaining life of 2.4 years related to unvested restricted stock awards.
A summary of the Company’s restricted stock unitawards activity and related information for the Current PeriodQuarter is as follows:
| | | | | | | | | | |
| | For the nine months ended September 30, 2020 | | For the three months ended March 31, 2021 | ||||||
| | | | Weighted-average | | | | Weighted-average | ||
|
| Restricted Stock Units |
| Grant Date Fair Value |
| Restricted Stock Awards |
| Grant Date Fair Value | ||
Nonvested at December 31, 2019 |
| 1,250 | | $ | 19.00 | |||||
Nonvested at December 31, 2020 | | 2,003,072 | | $ | 6.97 | |||||
Granted | | 1,487,448 | | | 6.31 | |||||
Vested |
| (625) | | | 20.00 | | (484,816) | | | 8.71 |
Forfeited |
| (625) | | | 18.00 | | (301,395) | | | 6.38 |
Nonvested at September 30, 2020 |
| — | | $ | — | |||||
Nonvested at March 31, 2021 | | 2,704,309 | | $ | 6.36 |
Performance Share Units (PSUs)
During 2018 and 2019, the Company approved grants of performance share units (“PSUs”) that are subject to both performance-based and service-based vesting provisions. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSU will be calculated based on performance against certain metrics that relate to the Company’s return on asset performance over the January 1, 2018 through December 31, 2020, and January 1, 2019 through December 31, 2021 performance periods, respectively.
The target number of shares of Class A Common Stock subject to each PSU granted in 2018 and 2019 is 1; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0 to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2021 for the 2018 PSU grants, and June 30, 2022 for the 2019 PSU grants, assuming the minimum performance metrics are achieved. The target PSUs that become earned PSUs during the performance period will be determined in accordance with the following table:
| | |
Return on Assets at Performance Period End Date | | Percentage of Target PSUs Earned |
Less than 9.6% | | 0% |
9.6% | | 50% |
12% | | 100% |
14.4% | | 175% |
All PSUs granted in 2018 did not achieve the performance-based vesting conditions and were forfeited. Also, during 2020, the Company revised the estimates for the PSUs granted in 2019, which are not expected to achieve the performance-based vesting conditions.
During 2020 and 2021, the Company approved grants of PSUs that are subject to both performance-based and service-based vesting provisions related to (i) return on asset performance (“ROA”) in comparison to thirteen peer companies and (ii) Adjusted Free Cash Flow (“FCF”) performance percentage. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSUs will be calculated based on ROA and FCF performance over the applicable period from either January 1, 2020 through December 31, 2022.2022 or January 1, 2021 through December 31, 2023.
The target number of shares of Class A Common Stock subject to each PSU granted in 2020 and 2021 is one; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0zero to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2023 for the 2020 PSU grants, assuming the minimum performance metrics are achieved.
2925
committee, which will be no later than June 30, 2023 for the 2020 PSU grants and June 30, 2024 for the 2021 PSU grants, assuming the applicable minimum performance metrics are achieved.
The target PSUs granted in 2020 that become earned connected with the ROA in comparison to other companies will be determined based on the Company’s Average Return on Assets (as defined in the applicable PSU agreement) relative to the Average Return on Assets of the peer companies (as defined in the applicable PSU agreement) in accordance with the following table, but only if the Company’s Average Return on Assets is equal to or greater than 5% during the performance period:period. The target PSUs granted in 2021 removed the 5% minimum ROA for the Company and added that the Company must have a positive Total Shareholder Return (as defined in the applicable PSU agreement) over the performance period. As a result of this market condition being added, the 2021 PSUs will be valued each reporting period utilizing a Black-Scholes model.
| | |
Ranking Among Peer Group | | Percentage of Target Amount Earned |
Outside of Top 10 | | 0% |
Top 10 | | 50% |
Top 7 | | 100% |
Top 3 | | 175% |
The target PSUs that become earned in connection with the adjusted FCF performance percentage will be determined (as defined in the applicable PSU agreement) in accordance with the following table:
| | |
Adjusted FCF Performance Percentage | | Percentage of Target Amount Earned |
Less than 70% | | 0% |
70% | | 50% |
100% | | 100% |
130% | | 175% |
The fair value on the date the PSUs were granted during 2021, 2020, and 2019 and 2018 was $4.2 million, $4.4 million, $7.0 million and $5.9 million, respectively. Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest by the measurement-date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. During the Current Period, the Company revised the estimates for the PSUs granted in 2018 and 2019 and expected to vest to 0%. The Company recognized compensation expense of $0.2$0.4 million compensation expense of $0.1 million,and a reductioncredit to compensation expense of $2.0 million and compensation expense of $1.8$1.4 million related to the PSUs for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively.
As of September 30, 2020,March 31, 2021, the unrecognized compensation cost related to our unvested PSUs is estimated to be $2.3$4.7 million and is expected to be recognized over a weighted-average period of 2.3 years. However, this compensation cost will be adjusted as appropriate throughout the applicable performance periods.
The following table summarizes the information about the performance share units outstanding as of September 30, 2020:March 31, 2021:
| | |
|
| Performance Share Units |
Nonvested as of December 31, | |
|
Target shares granted | |
|
Target shares forfeited | | (242,087) |
Target shares outstanding as of | |
|
Stock-Settled Incentive Awards
Effective May 17, 2018, the Company approved grants of stock-settled incentive awards to certain key employees under the 2016 Plan that were subject to both market-based and service-based vesting provisions. These awards vested after a two-year service period and, if earned, would have settled in shares of Class A Common Stock. The ultimate amount earned was based on the achievement of the market metrics, which was based on the stock price of the Class A Common Stock at the vesting date, for which payout could range from 0% to 200%. Any award not earned on the vesting date was forfeited. The target amount that became earned during the performance period was determined in accordance with the following table:
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The target amount of stock-settled incentive awards granted was $3.9 million. However, the ultimate settlement of the awards was in shares of Class A Common Stock with a fair market value equal to the earned amount, which could have ranged from 0% to 200% of the target amount depending on the stock price at vesting date. The earned amount was 0% and 0 shares of Class A Common Stock were issued.
Compensation expense associated with the stock-settled incentive awards was recognized ratably over the corresponding requisite service period. The fair value of the stock-settled incentive awards was determined using a Monte Carlo option pricing model, similar to the Black-Scholes-Merton model, and adjusted for the specific characteristics of the awards. The key assumptions in the model included price, the expected volatility of our stock, risk-free interest rate based on U.S. Treasury yield curve, cross-correlations between us and our self-determined peer companies’ asset, equity and debt-to-equity volatility.
The Company recognized stock compensation expense related to stock-settled incentive awards of $0.1 million, $0.1 million and $0.4 million in the Prior Quarter, Current Period and Prior Period, respectively.
The following table summarizes the information about the stock-settled incentive awards as of June 30, 2020:
| | | | | | |
| | | | | Award Value | |
|
| Value at Target |
| Being Recognized | ||
Nonvested as of December 31, 2019 | | $ | 2,937 | | $ | 1,122 |
Forfeited during 2020 | | | (410) | | | (157) |
Awards earned and forfeited as market condition not satisfied as of vesting date | | | (2,527) | | | — |
Cumulative expense recognized | | $ | — | | $ | 965 |
Employee Stock Purchase Plan (ESPP)
The Company has an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of Class A Common Stock at a discount. The plan provides for four offering periods for purchases: December 1 through February 28, March 1 through May 31, June 1
26
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.
31
The following table summarizes ESPP activity (in thousands, except shares):
| | | | | | |
| | For the nine months ended | | For the three months ended | ||
|
| September 30, 2020 |
| March 31, 2021 | ||
Cash received for shares issued | | $ | 59 | | $ | 14 |
Shares issued | | | 10,834 | | | 2,145 |
Share Repurchases
During the Current Quarter, and the Current Period, the Company repurchased 0 and 1,989,440144,078 shares respectively, of Class A Common Stock in the open market and repurchased 43,923 and 210,384 shares, respectively, of Class A Common Stock in connection with employee minimum tax withholding requirements for units vested under the 2016 Plan. All repurchased shares were retired. During the Current Quarter, the repurchases were accounted for as a decrease to paid-in-capital of $0.2$0.9 million and a decrease to Class A Common Stock of approximately $400. During the Current Period, the repurchases were accounted for as a decrease to paid-in-capital of $10.9 million and a decrease to Class A Common Stock of approximately $22,000.$1,400. In the Prior Quarter, the Company repurchased 1,443,409849,711 shares in the open market and repurchased 1,239 shares in connection with employee minimum tax withholding requirements. In the Prior Period, the Company repurchased 1,525,501 shares in the open market and repurchased 71,649129,680 shares in connection with employee minimum tax withholding requirements.
3227
NOTE 12—10—FAIR VALUE MEASUREMENT
The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment and abandonment of property and equipment, intangible assets and goodwill. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.
ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value).
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were 0 transfers into, or out of, the three levels of the fair value hierarchy for the ninethree months ended September 30, 2020March 31, 2021 or the year ended December 31, 2019. 2020.
The following table presents information about the Company’s assets measured at fair value on a recurring and non-recurring basis as of March 31, 2020, June 30, 2020 and September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value | | | | | | | | | | | | Fair Value | | | | | | | ||||||||||||||
| | | | | | Measurements Using | | Carrying | | | | | | | | | Measurements Using | | Carrying | | | | ||||||||||||||||
| | Frequency | | Measurement Date |
| Level 1 |
| Level 2 |
| Level 3 |
| Value(1) |
| Impairment | | Frequency | | Measurement Date |
| Level 1 |
| Level 2 |
| Level 3 |
| Value(1) |
| Impairment | ||||||||||
| | | | | | (in thousands) | | | | | | (in thousands) | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Goodwill | | Non-recurring | | March 31 | | $ | — | | $ | — | | $ | — | | $ | 266,934 | | $ | 266,934 | |||||||||||||||||||
Trademark | | Non-recurring | | March 31 | | | — | | | — | | | 14,360 | | | 23,442 | | | 9,082 | |||||||||||||||||||
Property and equipment | | Non-recurring | | March 31 | | | — | | | — | | | 176 | | | 3,360 | | | 3,184 | |||||||||||||||||||
Property and equipment | | Non-recurring | | June 30 | | | — | | | — | | | — | | | 4,726 | | | 4,726 | |||||||||||||||||||
Prepaid expenses and other current assets | | Recurring | | September 30 | | | — | | | 1,768 | | | — | | | 1,768 | | | — | |||||||||||||||||||
Quarter Ended March 31, 2021 | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Investments | | Recurring | | March 31 | | | 1,546 | | | — | | | — | | | 1,546 | | | — |
(1) | Amount represents carrying value at the date of assessment. |
See Note 3 – Impairments and Other Costs, for a discussion of the impairment to goodwill, trademark and property and equipment presented in the table above.
Other fair value considerations
The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade short-term investments and accounts payable, approximate their fair value as of September 30, 2020March 31, 2021 and December 31, 2019,2020, due to the short-term maturity of these instruments. The Company did not have any bank debt
33
as of September 30, 2020March 31, 2021 or December 31, 2019.2020. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
Nonmonetary transaction: During the Current Quarter,third quarter of 2020, the Company had a nonmonetary exchange with a customer whereby the customer settled a $1.6 million accounts receivable balance using its restricted common stock, warrants and other privately traded securities. The Company electeduses the fair value option to account for this investment with the fair value of the restricted stock and warrants derived from quoted active market pricing of the unrestricted, publicly traded, common stock and warrants andpublicly-traded equity. The Company
28
chose the fair value option because it represents the period-end value of the other privately traded securities, was derived from a correlation with observable market data.which the Company has the ability to sell. The Company recorded a $0.2 $1.8million unrealized gainloss on the nonmonetary exchange during the Current Quarter based on the value of the equity at September 30, 2020March 31, 2021, recognized within other expense,(expense) income, net on the accompanying consolidated statements of operations. The Company expects the registration statement registering the restricted common stock, warrants and other privately traded securities received to be declared effective in either the fourth quarter of 2020 or first quarter of 2021, and can sell the common stock and related securities once registered. The $1.8$1.5 million of common stock and related securities was included in prepaid expenses and other current assets on the accompanying consolidated balance sheets as of September 30, 2020.March 31, 2021.
34
NOTE 13—11—RELATED-PARTY TRANSACTIONS
The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons, an investment in a company that is significantly influenced by a related party, and an unconsolidated joint venture.cost-method and equity-method investees. The Company has entered into a number of transactions with related parties. In accordance with the Company’s related persons transactions policy, the audit committee of the Company’s board of directors regularly reviews these transactions. However, the Company’s results of operations may have been different if these transactions were conducted with non-related parties. For more information regarding the Company’s policies and procedures for review of related-party transactions, see the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders filed with the SEC on March 27, 2020.
During the Current Quarter, sales to related parties were $0.2$0.3 million and purchases from related-party vendors were $0.5$1.1 million. These purchases consisted of $0.4$0.9 million relating to the rental of certain equipment or other services used in operations and $0.1$0.2 million relating to management, consulting and other services.
During the Prior Quarter, sales to related parties were $3.5$2.4 million and purchases from related-party vendors were $3.2$4.2 million. These purchases consisted of $2.3$3.7 million relating to the rental of certain equipment or other services used in operations, $0.6$0.2 million relating to purchases of property and equipment, and $0.3 million relating to management, consulting and other services.
During the Current Period, sales to related parties were $2.7 million and purchases from related-party vendors were $6.2 million. These purchases consisted of $5.5 million relating to the rental of certain equipment or other services used in operations, $0.3 million relating to purchases of property and equipment, $0.3$0.2 million relating to management, consulting and other services and $0.1 million relatedrelating to inventory and consumables.
During the Prior Period, sales to related parties were $10.8 million and purchases from related-party vendors were $15.6 million. These purchases consisted of $11.8 million relating to the rental of certain equipment or other services used in operations, $2.5 million relating to purchases of property and equipment and $1.3 million relating to management, consulting and other services.
Tax Receivable Agreements
In connection with the Select 144A Offering, the Company entered into the Tax Receivable Agreements with the TRA Holders.
The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview Partners II GP, L.P. (“Crestview GP”), generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the Select 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement.
The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of the Contributingcertain 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
35
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.
3629
The Company has not recognized a liability associated with the Tax Receivable Agreements as of March 31, 2021 or December 31, 2020.
NOTE 14—12—INCOME TAXES
The Company’s income tax information is presented in the table below. The effective tax rate is different than the 21% standard Federal rate due to net income allocated to noncontrolling interests, state income taxes and valuation allowances.
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, | | ||||||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | ||||||
| | (in thousands) | | (in thousands) | |||||||||||||||
Current income tax (benefit) expense | | $ | (157) | | $ | 2,115 | | $ | (836) | | $ | 2,698 | |||||||
Deferred income tax (benefit) expense | | | (44) | | | 386 | | | 341 | | | 552 | |||||||
Total income tax (benefit) expense | | $ | (201) | | $ | 2,501 | | $ | (495) | | $ | 3,250 | |||||||
Current income tax benefit | | $ | (197) | | $ | (72) | | ||||||||||||
Deferred income tax benefit | | | (66) | | | (92) | | ||||||||||||
Total income tax benefit | | $ | (263) | | $ | (164) | | ||||||||||||
Effective Tax Rate | | | 0.6% | | | 25.9% | | | 0.1% | | | 16.3% | | | 1.0% | | | 0.1% | |
On March 27, 2020, the CARES Act was enacted. The CARES Act includes, among other things, certain income tax provisions for businesses. The Company recognized an income tax benefit of $0.5$0.4 million during the Current Period,Prior Quarter, as a result of the net operating loss carryback and interest expense limitation provisions of the CARES Act.
3730
NOTE 15—13—NONCONTROLLING INTERESTS
The Company’s noncontrolling interests fall into two categories as follows:
● | Noncontrolling interests attributable to joint ventures formed for water-related services. |
● | Noncontrolling interests attributable to holders of Class B Common Stock. |
| | | | | | | | | | | | | | | |
| | | As of | | As of | | | As of | | As of | | ||||
|
| | September 30, 2020 |
| December 31, 2019 |
| | March 31, 2021 |
| December 31, 2020 | | ||||
| | | (in thousands) | | | (in thousands) | | ||||||||
Noncontrolling interests attributable to joint ventures formed for water-related services | | | $ | 1,908 |
| $ | 2,674 | | | $ | 1,080 |
| $ | 2,002 | |
Noncontrolling interests attributable to holders of Class B Common Stock | | | | 113,890 |
|
| 172,961 | | | | 105,494 |
|
| 110,819 | |
Total noncontrolling interests | | | $ | 115,798 |
| $ | 175,635 | | | $ | 106,574 |
| $ | 112,821 | |
For all periods presented,During the Current Quarter, the Company dissolved one of its water-related services joint ventures and increased its ownership interest in another joint venture, which combined eliminated $0.9 million of noncontrolling interest. During the Prior Quarter, there were no changes to Select’s ownership interest in joint ventures formed for water-related services, with the exception of a divestiture of a 50% owned joint venture during the Current Period that eliminated $0.1 million of noncontrolling interest.services. Additionally, for all periods presented, there were changes in Select’s ownership interest in SES Holdings LLC. The effects of the changes in Select’s ownership interest in SES Holdings LLC are as follows:
| | | | | | | | | | | | | | |
| | | For the nine months ended September 30, | | | For the three months ended March 31, | ||||||||
|
| | 2020 |
| 2019 |
| | 2021 |
| 2020 | ||||
| | | (in thousands) | | | (in thousands) | ||||||||
Net (loss) income attributable to Select Energy Services, Inc. | | | $ | (320,701) |
| $ | 12,714 | |||||||
Transfers (to) from noncontrolling interests: | | | | |
|
| | |||||||
Increase in additional paid-in capital as a result of stock option exercises | | |
| — |
|
| 54 | |||||||
Net loss attributable to Select Energy Services, Inc. | | | $ | (23,107) |
| $ | (245,862) | |||||||
Transfers from (to) noncontrolling interests: | | | | |
|
| | |||||||
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures | | |
| 1,891 |
|
| 3,568 | | |
| 1,226 |
|
| 1,831 |
Increase in additional paid-in capital as a result of issuance of common stock due to vesting of restricted stock units | | | | 1 | | | 4 | | | | — | | | 1 |
Decrease in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units | | |
| (1,416) |
|
| (2,501) | | |
| (15) |
|
| (603) |
Increase in additional paid-in capital as a result of exchanges of SES Holdings LLC Units (an equivalent number of shares of Class B Common Stock) for shares of Class A Common Stock | | | | — | | | 82,706 | |||||||
Increase (decrease) in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued | | | | 6 | | | (1) | |||||||
Change to equity from net (loss) income attributable to Select Energy Services, Inc. and transfers from noncontrolling interests | | | $ | (320,219) |
| $ | 96,544 | |||||||
Increase in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued | | | | — | | | 3 | |||||||
Change to equity from net loss attributable to Select Energy Services, Inc. and transfers from noncontrolling interests | | | $ | (21,896) |
| $ | (244,630) |
3831
NOTE 16—(LOSS) EARNINGS14—LOSS PER SHARE
(Loss) earningsLoss per share are based on the amount of (loss) incomeloss allocated to the stockholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 3,536,778, 2,956,610, 3,536,7782,272,441 and 2,956,8373,777,228 shares of Class A Common Stock are not included in the calculation of diluted weighted-average shares outstanding for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively, as the effect is antidilutive.
The following tables present the Company’s calculation of basic and diluted (loss) earningsloss per share for the Current and Prior Quarter and the Current and Prior Period (dollars in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Three months ended September 30, 2019 | | Three months ended March 31, 2021 | | Three months ended March 31, 2020 | ||||||||||||||||||||||||||||
| | Select Energy | | | | | | | | Select Energy | | | | | | | | Select Energy | | | | | | | | Select Energy | | | | | | | ||||
|
| Services, Inc. |
| Class A |
| Class B |
| Services, Inc. |
| Class A |
| Class B |
| Services, Inc. |
| Class A |
| Class B |
| Services, Inc. |
| Class A |
| Class B | ||||||||||||
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (36,260) | | | | | | | | $ | 7,172 | | | | | | | ||||||||||||||||||
Net loss (income) attributable to noncontrolling interests | | | 5,719 | | | | | | | | | (1,793) | | | | | | | ||||||||||||||||||
Net (loss) income attributable to Select Energy Services, Inc. — basic | | | (30,541) | | $ | (30,541) | | $ | — | | | 5,379 | | $ | 5,379 | | $ | — | ||||||||||||||||||
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of restricted stock | | | — | | | — | | | — | | | 7 | | | 7 | | | — | ||||||||||||||||||
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of stock options | | | — | | | — | | | — | | | 1 | | | 1 | | | — | ||||||||||||||||||
Net (loss) income attributable to Select Energy Services, Inc. — diluted | | $ | (30,541) | | $ | (30,541) | | $ | — | | $ | 5,387 | | $ | 5,387 | | $ | — | ||||||||||||||||||
Net loss | | $ | (27,421) | | | | | | | | $ | (291,220) | | | | | | | ||||||||||||||||||
Net loss attributable to noncontrolling interests | | | 4,314 | | | | | | | | | 45,358 | | | | | | | ||||||||||||||||||
Net loss attributable to Select Energy Services, Inc. — basic | | $ | (23,107) | | $ | (23,107) | | $ | — | | $ | (245,862) | | $ | (245,862) | | $ | — | ||||||||||||||||||
Net loss attributable to Select Energy Services, Inc. — diluted | | $ | (23,107) | | $ | (23,107) | | $ | — | | $ | (245,862) | | $ | (245,862) | | $ | — | ||||||||||||||||||
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares of common stock outstanding — basic | | | | | | 84,794,286 | | | 16,221,101 | | | | | | 79,468,991 | | | 24,513,654 | | | | | | 84,989,945 | | | 16,221,101 | | | | | | 86,104,925 | | | 16,221,101 |
Dilutive effect of restricted stock | | | | | | — | | | — | | | | | | 339,911 | | | — | ||||||||||||||||||
Dilutive effect of stock options | | | | | | — | | | — | | | | | | 28,575 | | | — | ||||||||||||||||||
Dilutive effect of ESPP | | | | | | — | | | — | | | | | | 104 | | | — | ||||||||||||||||||
Weighted-average shares of common stock outstanding — diluted | | | | | | 84,794,286 | | | 16,221,101 | | | | | | 79,837,581 | | | 24,513,654 | | | | | | 84,989,945 | | | 16,221,101 | | | | | | 86,104,925 | | | 16,221,101 |
(Loss) earnings per share: | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Loss per share: | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Basic | | | | | $ | (0.36) | | $ | — | | | | | $ | 0.07 | | $ | — | | | | | $ | (0.27) | | $ | — | | | | | $ | (2.86) | | $ | — |
Diluted | | | | | $ | (0.36) | | $ | — | | | | | $ | 0.07 | | $ | — | | | | | $ | (0.27) | | $ | — | | | | | $ | (2.86) | | $ | — |
39
| | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 | ||||||||||||||
| | Select Energy | | | | | | | | Select Energy | | | | | | | ||
|
| Services, Inc. |
| Class A |
| Class B |
| Services, Inc. |
| Class A |
| Class B | ||||||
Numerator: | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (380,524) | | | | | | | | $ | 16,640 | | | | | | |
Net loss (income) attributable to noncontrolling interests | | | 59,823 | | | | | | | | | (3,926) | | | | | | |
Net (loss) income attributable to Select Energy Services, Inc. — basic | | | (320,701) | | $ | (320,701) | | $ | — | | | 12,714 | | $ | 12,714 | | $ | — |
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of restricted stock | | | — | | | — | | | — | | | 15 | | | 15 | | | — |
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of stock options | | | — | | | — | | | — | | | 3 | | | 3 | | | — |
Net (loss) income attributable to Select Energy Services, Inc. — diluted | | $ | (320,701) | | $ | (320,701) | | $ | — | | $ | 12,732 | | $ | 12,732 | | $ | — |
Denominator: | | | | | | | | | | | | | | | | | | |
Weighted-average shares of common stock outstanding — basic | | | | | | 85,276,951 | | | 16,221,101 | | | | | | 78,848,939 | | | 25,516,904 |
Dilutive effect of restricted stock | | | | | | — | | | — | | | | | | 358,503 | | | — |
Dilutive effect of stock options | | | | | | — | | | — | | | | | | 60,174 | | | — |
Dilutive effect of ESPP | | | | | | — | | | — | | | | | | 299 | | | — |
Weighted-average shares of common stock outstanding — diluted | | | | | | 85,276,951 | | | 16,221,101 | | | | | | 79,267,915 | | | 25,516,904 |
(Loss) earnings per share: | | | | | | | | | | | | | | | | | | |
Basic | | | | | $ | (3.76) | | $ | — | | | | | $ | 0.16 | | $ | — |
Diluted | | | | | $ | (3.76) | | $ | — | | | | | $ | 0.16 | | $ | — |
4032
NOTE 17—15—SEGMENT INFORMATION
Select Inc. is a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the U.S. The Company’s services are offered through 3 reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the CODM in deciding how to allocate resources and assess performance. The Company’s CODM assesses performance and allocates resources on the basis of the 3 reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate or Other.
The Company’s CODM assesses performance and allocates resources on the basis of the following three3 reportable segments:
Water Services — The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business as well as the Company’s industrial solutions business.
Water Infrastructure — The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and saltwater disposal wells, primarily serving E&P companies.
Oilfield Chemicals — The Oilfield Chemicals segment develops, manufacturesprovides technical solutions and providesexpertise related to chemical applications in the oil and gas industry. We also have significant capabilities in supplying logistics for chemical applications. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completioncompletions. Given the breadth of chemicals and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed byapplication expertise we provide, our customers to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarilyrange from pressure pumpers but also includeto major integrated and independent U.S. and international oil and gas producers.
The results This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of our service lines divested during 2019, including the operations of our Affirm subsidiary, our sand hauling operations and our Canadian operations, are combinedwater used in the “Other” category.well completions.
Financial information by segment for the Current and Prior Quarter and the Current and Prior Period is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2020 | | For the three months ended March 31, 2021 | ||||||||||||||||||||
|
| | |
| Loss |
| Depreciation and |
| Capital |
| | |
| (Loss) Income |
| Depreciation and |
| Capital | ||||||
| | Revenue | | before taxes | | Amortization | | Expenditures | | Revenue | | before taxes | | Amortization | | Expenditures | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Water Services | | $ | 54,665 | | $ | (18,682) | | $ | 14,888 | | $ | 332 | | $ | 66,717 | | $ | (13,310) | | $ | 13,054 | | $ | 269 |
Water Infrastructure | | | 16,255 | | | (4,843) | | | 6,556 | | | 149 | | | 37,805 | | | 1,657 | | | 6,255 | | | 4,460 |
Oilfield Chemicals | | | 31,064 | | | (2,951) | | | 2,433 | | | 1,796 | | | 41,812 | | | (1,477) | | | 2,340 | | | 561 |
Other | | | — | | | (21) | | | — | | | 1 | | | — | | | (13) | | | — | | | 1 |
Eliminations | |
| (742) | |
| — | |
| — | |
| — | |
| (2,592) | |
| — | |
| — | |
| — |
Loss from operations | |
| | |
| (26,497) | |
| | |
| | |
| | |
| (13,143) | |
| | |
| |
Corporate | |
| — | |
| (7,715) | |
| 685 | |
| — | |
| — | |
| (11,901) | |
| 650 | |
| — |
Interest expense, net | |
| — | |
| (789) | |
| — | |
| — | |
| — | |
| (435) | |
| — | |
| — |
Other expense, net | |
| — | |
| (1,460) | |
| — | |
| — | |
| — | |
| (2,205) | |
| — | |
| — |
| | $ | 101,242 | | $ | (36,461) | | $ | 24,562 | | $ | 2,278 | | $ | 143,742 | | $ | (27,684) | | $ | 22,299 | | $ | 5,291 |
4133
| | | | | | | | | | | | |
| | For the three months ended March 31, 2020 | ||||||||||
|
| | |
| (Loss) Income |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 150,152 | | $ | (195,900) | | $ | 17,156 | | $ | 1,267 |
Water Infrastructure | | | 57,884 | | | (82,077) | | | 7,028 | | | 2,568 |
Oilfield Chemicals | | | 71,028 | | | (2,896) | | ��� | 1,998 | | | 2,890 |
Other | | | — | | | 25 | | | — | | | 325 |
Eliminations | |
| (779) | |
| — | |
| — | |
| — |
Loss from operations | |
| | |
| (280,848) | |
| | |
| |
Corporate | |
| — | |
| (9,983) | |
| 685 | |
| — |
Interest expense, net | |
| — | |
| (331) | |
| — | |
| — |
Other expense, net | |
| — | |
| (222) | |
| — | |
| — |
| | $ | 278,285 | | $ | (291,384) | | $ | 26,867 | | $ | 7,050 |
| | | | | | | | | | | | |
Total assets by segment as of March 31, 2021 and December 31, 2020, is as follows:
| | | | | | |
| | As of | | As of | ||
|
| March 31, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
Water Services | | $ | 494,495 | | $ | 515,856 |
Water Infrastructure |
| | 206,825 |
| | 204,995 |
Oilfield Chemicals |
| | 151,078 |
| | 147,612 |
Other | | | 6,260 | | | 6,896 |
| | $ | 858,658 | | $ | 875,359 |
| | | | | | | | | | | | |
| | For the three months ended September 30, 2019 | ||||||||||
|
| | |
| Income (loss) |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 196,772 | | $ | 13,787 | | $ | 19,418 | | $ | 10,061 |
Water Infrastructure | | | 63,953 | | | 8,234 | | | 6,410 | | | 13,873 |
Oilfield Chemicals | | | 67,933 | | | 5,514 | | | 2,435 | | | 3,162 |
Other | | | 310 | | | (2,347) | | | — | | | — |
Eliminations | |
| — | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 25,188 | |
| | |
| |
Corporate | |
| — | |
| (12,713) | |
| 952 | |
| — |
Interest expense, net | |
| — | |
| (438) | |
| — | |
| — |
Other expense, net | |
| — | |
| (2,364) | |
| — | |
| — |
| | $ | 328,968 | | $ | 9,673 | | $ | 29,215 | | $ | 27,096 |
NOTE 16—SUBSEQUENT EVENTS
| | | | | | | | | | | | |
| | For the nine months ended September 30, 2020 | ||||||||||
|
| | |
| Loss |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 260,907 | | $ | (237,100) | | $ | 47,924 | | $ | 1,551 |
Water Infrastructure | | | 89,578 | | | (97,957) | | | 20,608 | | | 2,512 |
Oilfield Chemicals | | | 123,266 | | | (13,063) | | | 7,035 | | | 6,300 |
Other | | | — | | | (34) | | | — | | | 326 |
Eliminations | |
| (1,985) | |
| — | |
| — | |
| — |
Loss from operations | |
| | |
| (348,154) | |
| | |
| |
Corporate | |
| — | |
| (24,694) | |
| 2,204 | |
| — |
Interest expense, net | |
| — | |
| (1,633) | |
| — | |
| — |
Other expense, net | |
| — | |
| (6,538) | |
| — | |
| — |
| | $ | 471,766 | | $ | (381,019) | | $ | 77,771 | | $ | 10,689 |
| | | | | | | | | | | | |
| | For the nine months ended September 30, 2019 | ||||||||||
|
| | |
| Income (loss) |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 620,649 | | $ | 53,681 | | $ | 61,704 | | $ | 32,676 |
Water Infrastructure | | | 169,288 | | | 15,237 | | | 18,571 | | | 42,653 |
Oilfield Chemicals | | | 198,049 | | | 11,951 | | | 6,635 | | | 6,514 |
Other | | | 33,383 | | | (8,197) | | | 1,714 | | | 64 |
Eliminations | |
| (5,868) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 72,672 | |
| | |
| |
Corporate | |
| — | |
| (42,385) | |
| 2,858 | |
| — |
Interest expense, net | |
| — | |
| (2,370) | |
| — | |
| — |
Other expense, net | |
| — | |
| (8,027) | |
| — | |
| — |
| | $ | 1,015,501 | | $ | 19,890 | | $ | 91,482 | | $ | 81,907 |
On April 20, 2021, an entity acquired in the Rockwater Merger formally pled guilty to violations of the Clean Air Act that occurred prior to the Rockwater Merger and entered a plea agreement before the U.S. District Court for the Middle District of Pennsylvania. Entry into this plea agreement has resolved the government’s prosecution related to Rockwater’s altering emissions controls systems on less than 5% of the vehicles in the fleet. The Company made final payments in April totaling $2.6 million, which was the amount accrued as of both March 31, 2021 and December 31, 2020, and did not incur additional monetary penalties or fines. The total amount paid in settlement of this matter was $4.3 million.
4234
Total assets by segment as of September 30, 2020 and December 31, 2019, is as follows:
| | | | | | |
| | As of | | As of | ||
|
| September 30, 2020 |
| December 31, 2019 | ||
| | (in thousands) | ||||
Water Services | | $ | 548,652 | | $ | 831,123 |
Water Infrastructure |
| | 178,967 |
| | 314,026 |
Oilfield Chemicals |
| | 145,069 |
| | 192,224 |
Other | | | 7,945 | | | 10,247 |
| | $ | 880,633 | | $ | 1,347,620 |
43
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the Securities and Exchange Commission on February 25, 202024, 2021 (our “2019“2020 Form 10-K”). This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements” and other cautionary statements described under the heading “Risk Factors” included in our 20192020 Form 10-K and under the heading “Part II—Item 1A. Risk Factors” in ourthis Quarterly ReportsReport on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and this Quarterly Report.10-Q. We assume no obligation to update any of these forward-looking statements.
This discussion relates to the three and nine months ended September 30, 2020March 31, 2021 (the “Current Quarter” and the “Current Period”, respectively)) and the three and nine months ended September 30, 2019March 31, 2020 (the “Prior Quarter” and the “Prior Period”, respectively)).
Overview
We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the United States (“U.S.”). We also develop, manufacture and deliver a full suite of chemical products for use in oil and gas well completion and production operations. As an industrya leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.
In many regions of the country, there has been growing concern about the volumes of water required for new oil and gas well completions. Working with our customers and local communities, we strive to be an industry leader in the development of cost-effective alternatives to fresh water. Specifically, we offer services that enable our exploration and production (“E&P&P”) customers to treat and reuse produced water, thereby reducing the demand for fresh water while also reducing the volumes of saltwater that must be disposed by injection. In many areas, we have also acquired sources of non-potable water, such as brackish water or municipal or industrial effluent. We work withThrough our expertise in chemical technologies and our FluidMatch™ design solutions, we provide water profiling and fluid assessment services for our customers to optimizesupport the optimization of their fluid systems, to economically enableenabling the economic use of these alternative sources. We also work with our E&P customers to reduce the environmental footprint of their operations through the use of temporary hose and permanent pipeline systems.systems, which are supported by extensive monitoring and automation technology solutions that provide safer and more efficient water resource management. These solutions significantly reduce the demand for trucking operations, thereby reducing gasoline and diesel exhaust emissions, increasing safety and decreasing traffic congestion in nearby communities.
Environmental Consciousness
We are one of the few large public oilfield services companies whose primary focus is on the management of water and water logistics in the oil and gas industry. Accordingly, the importance of responsibly managing water resources through both our operations and recycling efforts to help conserve water and protect the environment is paramount to our continued success. We view our unique position as an opportunity to transform water management by leveraging our oilfield chemicals business to develop produced water management solutions that increase our customers’ ability to reuse this produced water and add value to their operations. As for management of water logistics, our Company was founded with a focus on water transfer through temporary and permanent pipeline, which substantially reduces the industry’s use of traditional trucking services for water transfer operations, thereby significantly reducing emissions generated by semi-trucks moving water and reducing the level of truck traffic on the roads in the areas in which we operate. We estimate that we eliminate over 3,800 truckloads that would have been necessary to deliver water during a single well completion job using our temporary and permanent pipeline. We estimate that in 2020 alone, Select
35
reduced CO2 emissions by more than 48,000 metric tons by displacing 1.6 million truckloads from the roads. We also work diligently to implement “green” initiatives when possible that reduce our environmental footprint. For example, we continue to reduce emissions through efficiency gains from our investments in automation technology and are deploying specialized flowback and production technology dedicated to capturing and reducing methane emissions on-site. Additionally, we already deploy solar power on the majority of our automation fleet, and we continue to look for ways to build solutions to replace diesel with natural gas, electric or solar powered solutions.
Separate from our water solutions business, our oilfield chemicals business utilizes environmentally-conscious chemistry when possible, such as using non-detectable solvents, replacing nonylphenol ethoxylates with alcohol ethoxylates, and replacing crude oil-derived raw materials with cleaner, natural gas derived materials. The chemistries we have developed allow for extended use of produced water and the reuse of produced water without the need for extensive reconditioning measures. We have made significant changes in our operations to improve our water management and chemical solutions to support environmental protection, and while we are proud of what we have accomplished, we are constantly striving to improve in these areas. We regularly interact with local, state, and federal governments in order to promote compliance with applicable laws and regulations, and we aim to develop partnerships with officials to enhance the responsible use of natural resources as oil and gas development matures.
Recent Developments
Significant challenges that emerged during the Current Period, and that are expected to continue, have had and will likely continue to have a negative impact on our results of operations. The COVID-19 pandemic has caused significant disruptions in global oil demand and impacted economic growth in the U.S. as well as internationally. In response, volatility in financial markets has also significantly increased, making it more difficult for companies to access capital at a reasonable cost. As a result of these market disruptions, oilfield activity has declined significantly, and our Current Quarter and Current Period results have been negatively impacted. With continued production cuts from the Organization of the Petroleum Exporting Countries (“OPEC”), combined with some recovery in oil demand during the Current Quarter, the average WTI price per barrel increased from $27.96 during the second quarter of 2020 to an average price of $40.89 per barrel in the Current Quarter. In conjunction with improved prices, we believe the activity levels of our customers and the demand for our services appear to have already reached their lowest points for the time being, and we began to see some activity recovery in the Current Quarter. However, we do not anticipate an immediate recovery to levels seen in the Prior Period, and can make no assurance that any further recovery will continue into the future.
44
We believe the ongoing effects of the COVID-19 pandemic on our operations have had and will likely continue to have, a material negative impact on our financial results, and while vaccine deployment is rapidly underway, such negative impact may continue well beyond the containment of the pandemic until economies, associated oil demand and resulting oilfield activity recovers. Weimproves. While we have seen activity improve considerably since the low points experienced in 2020, there remains uncertainty, and we believe global oil demand is expected to remain challenged at least until the COVID-19 pandemic can be contained globally, and any material increases to oil supply in the near-term could further challenge oil prices and subsequently the activity levels of our customers and the resulting demand for our services. We cannot assure youprovide assurance that our assumptions used to estimate our future financial results will be correct given the unpredictable nature of the current market environment after the rapid decline in the demand for oil and demand for our services. As a consequence, our ability to accurately forecast our activity and profitability is uncertain.
The magnitude and ultimate duration of the COVID-19 pandemic is also uncertain. Therefore, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty. However, at this time,During 2020, we expect a net loss for 2020. We have taken furthertook actions to protect our balance sheet and maintain our liquidity, including significantly decreasing our operating expenses by reducing headcount, reducing salaries and director compensation, closing yard locations, idling facilities, reducing third-party expenses and streamlining operations, as well as reducing capital expenditures. We are also deferringdeferred employer payroll tax payments for the remainder of 2020, in accordance with the provisions of the CARES Act, and may take advantage of future legislation passed by the United StatesU.S. Congress in response to the COVID-19 pandemic. In this environment, the duration of which remains uncertain, the Company has planned for a range of scenarios and has taken a number of actions. To protect our workforce during the COVID-19 pandemic, we have taken steps to keepsupport our people safewho are affected by supporting those affected, managingthe virus, manage work-from-home scheduling as appropriate, limitinglimit on-site visitors, and monitoringmonitor and consistently communicatingcommunicate with those who are required to be at a work location, while also providing these employees with additional personal protective equipment.
Based on our current cash position, lack of bank debt,and cash equivalents balance, operating cash flow, available borrowing capacityborrowings under our Credit Agreement and the ongoing actions discussed above, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants forthrough the next twelve months, prior to giving effect to any future financing that may occur.
As a result of reduced production and economic recovery in much of the world, oil and gas prices improved in the Current Quarter. During the Current Quarter, the average spot price of West Texas Intermediate (“WTI”) (Cushing) crude oil was $40.89 $58.09versus an average price of $56.34$45.34 for the Prior Quarter. The average Henry Hub natural gas spot price during the Current Quarter, was $2.00$3.56 versus an average of $2.38$1.91 for the Prior Quarter. The significant decline in oil and gas prices in the Current Quarter relative to the Prior Quarter, as well as the more recent oil pricing volatility driven by market dislocation, has been driven largely by decreased demand due to the COVID-19 pandemic, as well as increased utilization
36
Many of our customers have also pledged to prioritize managing their capital spending to within cash flow from operations with some targeting reinvestment rates below 80%and increase debt repayment and/or returns of their 2019 budgets, and this trend may extend beyond 2020. Consolidationcapital to investors. Additionally, consolidation among our customers’customers and decreases in our customers’ capital budgeting can impact the size ofdisrupt our market in the near term and the resulting demand for our services. Additionally, both debtRecent market conditions have resulted in a number of consolidation, restructuring and equitybankruptcy activities in the industry. While the broader capital markets do not appear favorably disposed towards raising new capital for the oil and gas industry at this time. In light of these factors,have recovered considerably, recent market conditions combined with the downward revisions made to many of our customers’ respective annual capital budgets and financial outlooks, we do not anticipate large incremental sums of capital entering the market to create higher demand for our services for the remainder of 2020, which has led to decreased activity for us relative to prior year levels. Additionally, this lack of available capital in the current market environment willinvestor sentiment may make it challenging for additional distressed oil and gas companies, specifically, to resolve their debt covenant and liquidity challenges in the near-term, potentially resulting in a number of restructuring activities, including bankruptcies, in the industry. While we see no immediate need for additional capital given our liquidity position, this difficulty in accessing capital markets may negatively impact some of our highly leveraged customers and competitors.
Outside of the macroeconomic challenges, from an operational standpoint, many of the recent trends still apply to ongoing unconventional oil and gas development. For example, while we believe leading-edge lateral lengths and
45
proppant use are plateauing, the average operator continues to catch up to this leading edge and many smaller operators with less robust completion designs may be challenged in this environment.edge. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing frac efficiency and the use of lower costlower-cost in-basin sand all of which has decreased total costs for our customers.
This multi-well pad development, combined with recent upstream acreage consolidation and the emerging trends around the reuse applications of produced water, particularly in the Permian Basin, provides significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production life of wells over the long-term. However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and therefore, negatively impact the total revenue opportunity for certain of our services utilizing day-rate pricing models.
This multi-well pad development, combined with recent upstream acreage consolidation and the emerging trends around the reuse applications of produced water, particularly in the Permian Basin, however, 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.
The trend of increased use of produced water maywill require additional chemical treatment solutions, whichand we are well positioned to provide givenhave a dedicated team of specialists focused every day on developing and deploying innovative water treatment and reuse services for our customers. With our water treatment capabilities, our WCS acquisitionWell Chemical Services (“WCS”) team and our knowledge base within our Oilfield Chemicals segment. Additionally, thissegment, we are well positioned to advance these solutions. This trend also supports more complex “on the fly” solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions that are able to economically compete with alternative historical solutions. Ultimately, Select intends to play an important role in the advancement of water and chemical solutions that are designed to meet the sustainability goals of all stakeholders.
RegardlessOur water logistics, treatment, and chemical application expertise, in combination with advanced technology solutions, are applicable to other industries beyond oil and gas. We have a significant customer in the paper industry, and are working to further commercialize our services in the pulp and paper industry, as well as in other industrial businesses.
Permian Basin Recycling Facility Projects
We were recently awarded two new produced water recycling facility contracts serving key customers in the Permian Basin. These state-of-the-art facilities will allow us to leverage our expertise in frac chemistry and fluid optimization to provide customers with a consistent water quality standard for use in completion activities. These investments will bring our total centralized produced water recycling capacity in the Permian Basin to approximately 250,000 barrels of these operational trends,water per day, which is supplemented by our mobile recycling technologies and capabilities that are currently supporting nearly 150,000 barrels per day of active produced water recycling projects.
The first facility is a new fixed infrastructure produced water recycling facility project serving the current environment is onecore of the most challengingMidland Basin in decadesboth Martin and Midland Counties, Texas. We have invested approximately $6 million in this facility, which was fully operational at the end of Current Quarter. This project is supported by a long-term contract with a leading, large independent operator in the Midland Basin for the oilfield services industry duepurchase and delivery of recycled produced water. This facility supports the recycling of up to 50,000 barrels of water per day while providing 2 million barrels of recycled
37
water storage capacity. Additional incremental capacity beyond the largecontracted volumes creates an opportunity for growth with the contracted customer, as well as the opportunity to further commercialize the facility to support the needs of other operators in the area. Since the facility began operations, we have successfully commercialized this incremental capacity, having already received volumes from a second customer and sudden declinehaving contracted future volumes with a third customer.
We also developed a centralized produced water recycling facility for a major integrated operator in oil demandLoving County, Texas in the Delaware Basin. This facility is designed to recycle up to 30,000 barrels of produced water per day and consequent decline in oil prices. Many operators are prioritizing decreasing their activity levels and pursuing near-term cost savings, which negatively impacts the demand and pricing for our services. While we enjoy an advantaged position relative to many other oilfield services companies due to our cash position and absenceis supported by 1 million barrels of debt on the balance sheetadjacent recycled water storage capacity. This facility was fully operational at the end of the Current Quarter. This project supplements our sizable existing footprint of water storage, distribution and recycling infrastructure in the Delaware Basin.
February 2021 Severe Weather
Severe winter weather in February 2021 negatively impacted our Current Quarter results, equating to approximately one lost week of operations across most of our full year 2020 financial results are likelylocations, with extended raw material shortages that impacted our Oilfield Chemicals segment into March. We estimate that this negatively impacted Current Quarter revenue by an amount ranging from $9 million to be materially worse than those of recent years.$12 million.
Our Segments
Our services are offered through three reportable segments: (i) Water Services; (ii) Water Infrastructure; and (iii) Oilfield Chemicals.
● | Water Services. The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business as well as the Company’s industrial solutions business. |
● | Water Infrastructure. The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions and infrastructure, and our produced water gathering systems and saltwater disposal wells, primarily serving E&P companies. |
● | Oilfield Chemicals. The Oilfield Chemicals segment provides technical solutions and expertise related to chemical applications in the oil and gas industry. We also have significant capabilities in supplying logistics for chemical applications. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completions. Given the breadth of chemicals and application expertise we provide, our customers range from pressure pumpers to major integrated and independent U.S. and international oil and gas producers. This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to |
46
How We Generate Revenue
We currently generate the majority of our revenue through our water-management services associated with hydraulic fracturing, provided through our Water Services and Water Infrastructure segments. The majority of this revenue is realized through customer agreements with fixed pricing terms and is recognized when delivery of services is provided, generally at our customers’ sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer.
38
We also generate revenue by providing completion, specialty chemicals and production chemicals through our Oilfield Chemicals segment. We invoice the majority of our Oilfield Chemicals customers for services provided based on the quantity of chemicals used or pursuant to short-term contracts as the customers’ needs arise.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, vehicle and equipment costs (including depreciation, repair, rental and maintenance and leasing costs), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low. Most of the costs of serving our customers are variable, i.e., they are incurred only incurred when we provide water and water-related services, or chemicals and chemical-related services to our customers.
Labor costs associated with our employees and contract labor representcomprise the most significantlargest portion of our costs of ourdoing business. We incurred labor and labor-related costs of $44.8 million, $116.7 million, $193.0$57.9 million and $375.7$101.6 million for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively. The majority of our recurring labor costs are variable and are incurred only while we are providing our operational services. We also incur costs to employ personnel to sell and supervise our services and perform maintenance on our assets, which is not directly tied to our level of business activity. Additionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters. In light of the challenging activity and pricing trends, management has takentook direct action during the Current Period2020 to reduce operating and equipment costs, as well as selling, general and administrative costs, to proactively manage these expenses as a percentage of revenue.
We incur significant vehicle and equipment costs in connection with the operation of our business,services we provide, including depreciation, repairs and maintenance, rental and leasing costs. We incurred vehicle and equipment costs of $33.5 million, $62.4 million, $122.4$34.7 million and $191.2$53.7 million for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively. Due to current market conditions and the decreased demand for our services, we have takentook significant direct action during the Current Period2020 to reduce ongoing rental and leasing costs and will continue to evaluate further reductions to these costs in the coming quarters.costs.
We incur significantvariable transportation costs associated with our service lines, includingpredominately fuel and freight. We incurred fuel and freight costs of $5.9 million, $20.3 million, $28.1$10.9 million and $62.8$18.1 million for the Current Quarter Prior Quarter, Current Period and Prior Period,Quarter, respectively. Fuel prices impact our transportation costs, which affect the pricing and demand for our services and have an impact ontherefore our results of operations.
We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred raw material costs of $25.2 million, $71.2 million, $115.3$45.0 million and $207.5$70.1 million for the Current Quarter and Prior Quarter, respectively. Rising naphtha prices during the Current Period and Prior Period, respectively.Quarter had a negative impact on our Oilfield Chemicals margins, prior to passing these increased costs on to our customers.
How We Evaluate Our Operations
We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:
● | Revenue; |
47
Revenue
We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our reportable segments to identify potential areas for improvement, as well as to determine whether segment performance is meeting management’s expectations.
Gross Profit
To measure our financial performance, we analyze our gross profit, which we define as revenues less direct operating expenses (including depreciation and amortization expenses). We believe gross profit provides insight into profitability and true operating performance of our assets. We also compare gross profit to prior periods and across segments to identify trends as well as underperforming segments.
Gross Margins
Gross margins provide an important gauge of how effective we are at converting revenue into profits. This metric works in tandem with gross profit to ensure that we do not increase gross profit at the expense of lower margins, nor pursue higher gross margins at the expense of declining gross profits. We track gross margins by segment and service line and compare them across prior periods and across segments and service lines to identify trends as well as underperforming segments.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income/(loss), plus interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to accounting principles generally accepted in the U.S. (“GAAP”), plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures and plus/(minus) foreign currency losses/(gains). The adjustments to EBITDA are generally consistent with such adjustments described in our Credit Facility. See “—Note Regarding Non-GAAP Financial Measures—EBITDA and Adjusted EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below and those described in “—Industry Overview” above.
4840
Acquisition and Divestiture Activity
As described above, we are continuously evaluating potential investments. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.
Well Chemical Services Acquisition
On September 30, 2019, we completed our acquisition of WCS. Our historical financial statements for periods prior to September 30, 2019 do not include the results of operations of WCS.
Affirm Divestitures
We sold the Affirm crane and field services businesses on February 26, 2019 and June 28, 2019, respectively. Affirm accounted for $21.8 million of revenue during 2019. Following the two divestitures, the divested operations were not included in the consolidated results of operations.
Canadian Operations Divestitures
On March 19, 2019, we sold over half of our Canadian operationsand on April 1, 2019, we sold and wound down the rest of the Canadian operations. Canadian operations accounted for $8.2 million of annual revenue during 2019. Following the divestitures, the divested Canadian operations were not included in the consolidated results of operations.
Sand Hauling Wind-Down
During 2019, we wound down our sand hauling operations and sold certain of our sand hauling property and equipment. Sand hauling accounted for $3.3 million of annual revenue during 2019.
Proceeds received from Divestitures and Wind-Down
During 2019, we received $30.1 million from divestitures and fixed asset sale activity in connection with the sale and wind-down of our Affirm subsidiary and the sand hauling and Canadian operations.
49
Results of Operations
The following tables set forth our results of operations for the periods presented, including revenue by segment.
Current Quarter Compared to the Prior Quarter
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Change |
| | | Three months ended March 31, | | Change |
| | ||||||||||||||
|
| 2020 |
| 2019 |
| Dollars |
| Percentage |
| |
| 2021 |
| 2020 |
| Dollars |
| Percentage |
| | ||||||
| | | (in thousands) | | | | | |
| | | | (in thousands) | | | | | |
| | ||||||
Revenue |
| |
|
| |
|
| |
|
|
| | |
| |
|
| |
|
| |
|
|
| | |
Water Services | | $ | 54,516 | | $ | 196,782 | | $ | (142,266) |
| (72.3) | % | | | $ | 64,223 | | $ | 149,511 | | $ | (85,288) |
| (57.0) | % | |
Water Infrastructure | | | 16,165 | | | 63,953 | | | (47,788) | | (74.7) | % | | | | 37,803 | | | 57,762 | | | (19,959) | | (34.6) | % | |
Oilfield Chemicals | | | 30,561 | | | 67,932 | |
| (37,371) |
| (55.0) | % | | | | 41,716 | | | 71,012 | |
| (29,296) |
| (41.3) | % | |
Other | | | — | | | 301 | | | (301) |
| (100.0) | % | | |||||||||||||
Total revenue | |
| 101,242 | |
| 328,968 | |
| (227,726) |
| (69.2) | % | | |
| 143,742 | |
| 278,285 | |
| (134,543) |
| (48.3) | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs of revenue | |
|
| |
|
| |
| |
| | | | |
|
| |
|
| |
| |
| | | |
Water Services | |
| 52,861 | |
| 153,741 | |
| (100,880) |
| (65.6) | % | | |
| 62,324 | |
| 129,114 | |
| (66,790) |
| (51.7) | % | |
Water Infrastructure | | | 12,816 | | | 46,748 | |
| (33,932) |
| (72.6) | % | | | | 26,399 | | | 47,813 | |
| (21,414) |
| (44.8) | % | |
Oilfield Chemicals | | | 28,558 | | | 57,357 | | | (28,799) | | (50.2) | % | | | | 37,766 | | | 59,876 | | | (22,110) | | (36.9) | % | |
Other | | | 30 | | | 1,865 | | | (1,835) | | (98.4) | % | | | | — | | | 4 | | | (4) | | NM | | |
Depreciation and amortization | |
| 23,877 | |
| 28,263 | |
| (4,386) |
| (15.5) | % | | |
| 21,650 | |
| 26,182 | |
| (4,532) |
| (17.3) | % | |
Total costs of revenue | |
| 118,142 | |
| 287,974 | |
| (169,832) |
| (59.0) | % | | |
| 148,139 | |
| 262,989 | |
| (114,850) |
| (43.7) | % | |
Gross (loss) profit | |
| (16,900) | |
| 40,994 | |
| (57,894) |
| (141.2) | % | | |
| (4,397) | |
| 15,296 | |
| (19,693) |
| (128.7) | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | |
|
| |
|
| |
| |
| | | | |
|
| |
|
| |
| |
| | | |
Selling, general and administrative | |
| 15,955 | |
| 27,280 | |
| (11,325) |
| (41.5) | % | | |
| 19,894 | |
| 25,289 | |
| (5,395) |
| (21.3) | % | |
Depreciation and amortization | |
| 685 | |
| 952 | |
| (267) |
| (28.0) | % | | |
| 649 | |
| 685 | |
| (36) |
| (5.3) | % | |
Impairment of goodwill and trademark | | | — | | | 276,016 | | | (276,016) | | NM | | | |||||||||||||
Impairment and abandonment of property and equipment | | | — | | | 49 | | | (49) | | NM | | | | | — | | | 3,184 | | | (3,184) | | NM | | |
Lease abandonment costs | |
| 672 | |
| 238 | |
| 434 |
| NM | | | |
| 104 | |
| 953 | |
| (849) |
| NM | | |
Total operating expenses | |
| 17,312 | |
| 28,519 | |
| (11,207) |
| (39.3) | % | | |
| 20,647 | |
| 306,127 | |
| (285,480) |
| (93.3) | % | |
(Loss) income from operations | |
| (34,212) | |
| 12,475 | |
| (46,687) |
| NM | | | |||||||||||||
Loss from operations | |
| (25,044) | |
| (290,831) | |
| 265,787 |
| NM | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | |
|
| |
|
| |
| |
| | | | |||||||||||||
Gains (losses) on sales of property and equipment and divestitures, net | | | 891 | | | (2,033) | | | 2,924 |
| (143.8) | % | | |||||||||||||
Other (expense) income | |
|
| |
|
| |
| |
| | | | |||||||||||||
Losses on sales of property and equipment and divestitures, net | | | (579) | | | (435) | | | (144) |
| 33.1 | % | | |||||||||||||
Interest expense, net | |
| (789) | |
| (438) | |
| (351) |
| 80.1 | % | | |
| (435) | |
| (331) | |
| (104) |
| 31.4 | % | |
Foreign currency gain (loss), net | | | 13 | | | (59) | | | 72 |
| NM | | | | | 3 | | | (46) | | | 49 |
| NM | | |
Other expense, net | |
| (2,364) | |
| (272) | |
| (2,092) |
| NM | | | |||||||||||||
(Loss) income before income tax benefit (expense) | |
| (36,461) | |
| 9,673 | |
| (46,134) |
| NM | | | |||||||||||||
Income tax benefit (expense) | |
| 201 | |
| (2,501) | |
| 2,702 |
| NM | | | |||||||||||||
Net (loss) income | | $ | (36,260) | | $ | 7,172 | | $ | (43,432) |
| NM | | | |||||||||||||
Other (expense) income, net | |
| (1,629) | |
| 259 | |
| (1,888) |
| NM | | | |||||||||||||
Loss before income tax benefit | |
| (27,684) | |
| (291,384) | |
| 263,700 |
| NM | | | |||||||||||||
Income tax benefit | |
| 263 | |
| 164 | |
| 99 |
| NM | | | |||||||||||||
Net loss | | $ | (27,421) | | $ | (291,220) | | $ | 263,799 |
| NM | | |
Revenue
Our revenue decreased $227.7$134.5 million, or 69.2%48.3%, to $101.2$143.7 million for the Current Quarter compared to $329.0$278.3 million for the Prior Quarter. The decrease was driven by a $142.3an $85.3 million decline in Water Services revenue, a $47.8$20.0 million decline in Water Infrastructure revenue and a $37.4$29.3 million decline in Oilfield Chemicals revenue. These declines were primarily due to lower demand for our services resulting from a reduction in drilling and completions activity lower oil prices andimpacted by the COVID-19 pandemic, as well assevere winter weather in the Current Quarter and reduced pricing for some of our services. For the Current Quarter, our Water Services, Water Infrastructure and Oilfield Chemicals constituted 53.8%44.7%, 16.0%26.3% and 30.2%29.0% of our total revenue, respectively, compared to 59.8%53.7%, 19.420.8% and 20.7%25.5%, respectively, for the Prior Quarter. The revenue changes by reportable segment are as follows:
5041
Water Services. Revenue decreased $142.3$85.3 million, or 72.3%57.0%, to $54.5$64.2 million for the Current Quarter compared to $196.8$149.5 million for the Prior Quarter. The decrease was primarily attributable to lower demand for our services resulting from a reduction in drilling and completions activity lower oil prices andimpacted by the COVID-19 pandemic, as well assevere winter weather in the Current Quarter and reduced pricing for some of our services.
Water Infrastructure. Revenue decreased by $47.8$20.0 million, or 74.7%34.6%, to $16.2$37.8 million for the Current Quarter compared to $64.0$57.8 million for the Prior Quarter. The decrease was primarily attributable to lower demand for our services resulting from a reduction in completions activity lower oil prices andimpacted by the COVID-19 pandemic.pandemic and severe winter weather in the Current Quarter.
Oilfield Chemicals. Revenue decreased $37.4$29.3 million, or 55.0%41.3%, to $30.6$41.7 million for the Current Quarter compared to $67.9$71.0 million for the Prior Quarter. The decrease was primarily attributable to lower demand for our services resulting from a reduction in completions activity lower oil prices andimpacted by the COVID-19 pandemic, as well assevere winter weather in the Current Quarter and reduced pricing for some of our services, partially offset by incremental revenue from the WCS acquisition.services.
Costs of Revenue
Costs of revenue decreased $169.8$114.9 million, or 59.0%43.7%, to $118.1$148.1 million for the Current Quarter compared to $288.0$263.0 million for the Prior Quarter. The decrease was primarily due to a $100.9$66.8 million decline in Water Services costs, a $33.9$21.4 million decline in Water Infrastructure costs, and a $28.8$22.1 million decline in Oilfield Chemicals costs due to lower revenue discussed above. Also, depreciation and amortization expense decreased by $4.4$4.5 million, primarily due to a lower capital expenditures in the Current Period.fixed asset base.
Water Services. Cost of revenue decreased $100.9$66.8 million, or 65.6%51.7%, to $52.9$62.3 million for the Current Quarter compared to $153.7$129.1 million for the Prior Quarter. Cost of revenue as a percent of revenue increased from 78.1%86.4% to 97.0% due to significant reductions in revenue-generating activity and pricing reductions we could not fully offset with cost reductions.
Water Infrastructure. Cost of revenue decreased $33.9$21.4 million, or 72.6%44.8%, to $12.8$26.4 million for the Current Quarter compared to $46.7$47.8 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 82.8% to 69.8% primarily due to a higher relative contribution from high-margin pipeline revenue as well as a discrete cost in the Prior Quarter related to a customer bankruptcy that did not recur.
Oilfield Chemicals. Costs of revenue decreased $22.1 million, or 36.9%, to $37.8 million for the Current Quarter compared to $59.9 million for the Prior Quarter. Cost of revenue as a percent of revenue increased from 73.1%84.3% to 79.3%90.5% primarily due to significant reductions in revenue-generating activity we could not fully offset with cost reductions.
Oilfield Chemicals. Costs of revenue decreased $28.8 million, or 50.2%, to $28.6 million for the Current Quarter compared to $57.4 million for the Prior Quarter. Cost of revenuereductions, as a percent of revenuewell as increased from 84.4% to 93.4% primarily due to significant reductions in revenue-generating activity weraw material pricing that could not fully offset with cost reductions.be immediately passed on to our customers.
Depreciation and Amortization. Depreciation and amortization expense decreased $4.4$4.5 million, or 15.5%17.3%, to $23.9$21.7 million for the Current Quarter compared to $28.3$26.2 million for the Prior Quarter, primarily due to a significant reduction in capital expenditures during recent quarters.lower fixed asset base.
Gross (Loss) Profit
Gross (loss) profit decreased by $57.9$19.7 million, or 141.2%128.7%, to a gross loss of $16.9$4.4 million for the Current Quarter compared to a gross profit of $41.0$15.3 million for the Prior Quarter primarily due to lower revenue in all three segments resulting from decreased activity levels combined with decreased pricing that could not be fully offset with reductions in cost. Gross profit decreased by $41.4 million, $13.9$18.5 million and $8.6$7.2 million in our Water Services Water Infrastructure and Oilfield Chemicals segments, respectively. This was partially offset by a $4.4$4.5 million decrease in depreciation and amortization expense.expense and Water Infrastructure gross profit increase of $1.5 million. Gross margin as a percent of revenue was (16.7%(3.1%) and 12.5%5.5% in the Current Quarter and Prior Quarter, respectively.
5142
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $11.3$5.4 million, or 41.5%21.3%, to $16.0$19.9 million for the Current Quarter compared to $27.3 $25.3 million for the Prior Quarter. The decrease was primarily due to $4.4$3.3 million lower wages and associated payroll taxes, a $2.1 million decrease in bad debt expense, reductions of $2.5$0.9 million in incentive compensation costs, $1.3 million in equity-based compensation costs, $1.2$0.3 million in travel, meals and entertainment costs, $0.8$0.3 million in professional fees, and $1.9$0.8 million of other expense reductions from cost-cutting measures in response to lower oil pricesdemand partially offset by a $0.8$1.5 million increase in bad debt expense.non-recurring severance charges and a $0.8 million increase in equity-based compensation costs.
Impairment
Goodwill and trademark impairment costs were zero and $276.0 million for the Current Quarter and Prior Quarter, respectively. During the Prior Quarter, all of our goodwill was impaired due to the significant decline in oil prices and the uncertainty associated with the future recovery. We also recorded a $9.1 million partial impairment of our Rockwater trademark.
Lease Abandonment Costs
Lease abandonment costs were $0.7$0.1 million and $0.2$1.0 million in the Current Quarter and Prior Quarter, respectively. During the Current Quarter, lease abandonment costs primarily related to leased facilities abandoned in the first half of 2020, including updated sublease expectationsexpenses associated with realignment and combining operational activity on fewer leased properties.facilities previously abandoned. The Prior Quarter costs were primarily due to leases abandoned during the wind-down of impaired right-of-use assets from previously abandonedPrior Quarter associated with realignment and combining activity on fewer leased properties.
Net Interest Expense
Net interest expense increased by $0.1 million, or 31.4%, to $0.4 million or 80.1%, to $0.8 million duringfor the Current Quarter compared to $0.4$0.3 million in the Prior Quarter primarily due to lower interest income earned on cash balances as a result of lower interest rates.
Other Expense/(Income)
Other expense/(income) increased by $1.9 million to $1.6 million in the Current Quarter interest payments relatedversus $0.3 million of other income in the Prior Quarter primarily due to sales tax audits covering prior years.the mark-to-market of equities using the fair value option.
Net (Loss) IncomeLoss
Net incomeloss decreased by $43.4$263.8 million, to a net loss of $36.3$27.4 million for the Current Quarter compared to a net incomeloss of $7.2$291.2 million for the Prior Quarter, primarily due to lower gross profit due to lower revenue,driven by the $276.0 million in goodwill and trademark impairment costs in the Prior Quarter partially offset by lower selling, general and administrative costs.the impact of the severe winter weather experienced in the Current Quarter.
5243
Current Period Compared to the Prior Period
| | | | | | | | | | | | | |
| | Nine months ended September 30, | | Change |
| | |||||||
|
| 2020 |
| 2019 |
| Dollars |
| Percentage |
| | |||
| | | (in thousands) | | | | | |
| | |||
Revenue |
| |
|
| |
|
| |
|
|
| | |
Water Services | | $ | 259,834 | | $ | 619,388 | | $ | (359,554) |
| (58.0) | % | |
Water Infrastructure | | | 89,227 | | | 169,279 | | | (80,052) | | (47.3) | % | |
Oilfield Chemicals | | | 122,705 | | | 197,762 | |
| (75,057) |
| (38.0) | % | |
Other | | | — | | | 29,072 | | | (29,072) |
| (100.0) | % | |
Total revenue | |
| 471,766 | |
| 1,015,501 | |
| (543,735) |
| (53.5) | % | |
| | | | | | | | | | | | | |
Costs of revenue | |
|
| |
|
| |
| |
| | | |
Water Services | |
| 235,989 | |
| 472,013 | |
| (236,024) |
| (50.0) | % | |
Water Infrastructure | | | 74,500 | | | 126,634 | |
| (52,134) |
| (41.2) | % | |
Oilfield Chemicals | | | 110,996 | | | 170,935 | | | (59,939) | | (35.1) | % | |
Other | | | 37 | | | 30,365 | | | (30,328) | | (99.9) | % | |
Depreciation and amortization | |
| 75,567 | |
| 88,624 | |
| (13,057) |
| (14.7) | % | |
Total costs of revenue | |
| 497,089 | |
| 888,571 | |
| (391,482) |
| (44.1) | % | |
Gross (loss) profit | |
| (25,323) | |
| 126,930 | |
| (152,253) |
| (120.0) | % | |
| | | | | | | | | | | | | |
Operating expenses | |
|
| |
|
| |
| |
| | | |
Selling, general and administrative | |
| 58,902 | | | 86,953 | |
| (28,051) |
| (32.3) | % | |
Depreciation and amortization | |
| 2,204 | | | 2,858 | |
| (654) |
| (22.9) | % | |
Impairment of goodwill and trademark | | | 276,016 | | | 4,396 | | | 271,620 | | NM | | |
Impairment and abandonment of property and equipment | | | 7,910 | | | 942 | | | 6,968 | | NM | | |
Lease abandonment costs | |
| 2,493 | | | 1,494 | |
| 999 |
| NM | | |
Total operating expenses | |
| 347,525 | |
| 96,643 | |
| 250,882 |
| NM | | |
(Loss) income from operations | |
| (372,848) | |
| 30,287 | |
| (403,135) |
| NM | | |
| | | | | | | | | | | | | |
Other expense | |
|
| |
|
| |
| |
| | | |
Losses on sales of property and equipment and divestitures, net | | | (1,727) | | | (8,233) | | | 6,506 |
| (79.0) | % | |
Interest expense, net | |
| (1,633) | | | (2,370) | |
| 737 |
| (31.1) | % | |
Foreign currency (loss) gain, net | | | (6) | | | 268 | | | (274) |
| NM | | |
Other expense, net | |
| (4,805) | | | (62) | |
| (4,743) |
| NM | | |
(Loss) income before income tax benefit (expense) | |
| (381,019) | |
| 19,890 | |
| (400,909) |
| NM | | |
Income tax benefit (expense) | |
| 495 | |
| (3,250) | |
| 3,745 |
| NM | | |
Net (loss) income | | $ | (380,524) | | $ | 16,640 | | $ | (397,164) |
| NM | | |
53
Revenue
Our revenue decreased $543.7 million, or 53.5%, to $471.8 million for the Current Period compared to $1.0 billion for the Prior Period. The decrease was driven by a $359.6 million decline in Water Services revenue, a $80.1 million decline in Water Infrastructure revenue, and a $75.1 million decline in Oilfield Chemicals revenue. These declines were primarily due to lower demand for our services resulting from a reduction in drilling and completions activity, lower oil prices and the COVID-19 pandemic, as well as reduced pricing for some of our services. Also impacting the decline was $29.1 million lower revenue from the combination of our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were fully divested and wound down during 2019. For the Current Period, our Water Services, Water Infrastructure, Oilfield Chemicals and Other segments constituted 55.1%, 18.9%, 26.0% and 0.0% of our total revenue, respectively, compared to 61.0%, 16.6%, 19.5% and 2.9%, respectively, for the Prior Period. The revenue changes by reportable segment are as follows:
Water Services. Revenue decreased $359.6 million, or 58.0%, to $259.8 million for the Current Period compared to $619.4 million for the Prior Period. The decrease was primarily attributable to lower demand for our services resulting from a reduction in drilling and completions activity, lower oil prices and the COVID-19 pandemic, as well as reduced pricing for some of our services.
Water Infrastructure. Revenue decreased by $80.1 million, or 47.3%, to $89.2 million for the Current Period compared to $169.3 million for the Prior Period. The decrease was primarily attributable to lower demand for our services resulting from a reduction in completions activity, lower oil prices and the COVID-19 pandemic.
Oilfield Chemicals. Revenue decreased $75.1 million, or 38.0%, to $122.7 million for the Current Period compared to $197.8 million for the Prior Period. The decrease was primarily attributable to lower demand for our products and services resulting from a reduction in completions activity, lower oil prices and the COVID-19 pandemic, as well as reduced pricing for some of our services, partially offset by incremental revenue from the WCS acquisition.
Other. There was no Other revenue for the Current Period compared to $29.1 million in the Prior Period as our Affirm subsidiary, sand hauling operations and Canadian operations were divested and wound down during 2019.
Costs of Revenue
Costs of revenue decreased $391.5 million, or 44.1%, to $497.1 million for the Current Period compared to $888.6 million for the Prior Period. The decrease was primarily due to a $236.0 million decline in Water Services costs, an $52.1 million decline in Water Infrastructure costs, and a $59.9 million decline in Oilfield Chemicals costs due to lower revenue discussed above. Also contributing to the decline was $30.3 million lower combined costs from our Affirm subsidiary, sand hauling operations and Canadian operations, all of which were divested and wound down during 2019. Further, depreciation and amortization expense decreased by $13.1 million, primarily due to the 2019 divestitures and lower capital expenditures in the Current Period.
Water Services. Cost of revenue decreased $236.0 million, or 50.0%, to $236.0 million for the Current Period compared to $472.0 million for the Prior Period. Cost of revenue decreased due to reduced customer drilling and completions activity levels in the Current Period. Costs of revenue as a percent of revenue increased from 76.2% to 90.8% due to significant reductions in revenue-generating activity and pricing reductions we could not fully offset with cost reductions as well as yard closure costs in connection with our efforts to reduce and consolidate operational yards. Additionally, in conjunction with certain cost savings measures that were implemented during the Current Period in response to current market conditions, costs of revenue were impacted during the Current Period by certain one-time costs totaling $5.6 million, including severance and yard closure costs.
Water Infrastructure. Cost of revenue decreased $52.1 million, or 41.2%, to $74.5 million for the Current Period compared to $126.6 million for the Prior Period. Cost of revenue as a percent of revenue increased from 74.8% to 83.5% primarily due to decreased pricing on non-pipeline water sources as well as the acceleration of certain prepaid expenses relating to water rights secured for a customer, due to the bankruptcy of such customer. Additionally, in conjunction with certain cost savings measures that were implemented during the Current Period in response to current
54
market conditions, costs of revenue were impacted during the Current Period by certain one-time costs totaling $0.5 million, including severance and yard closure costs.
Oilfield Chemicals. Costs of revenue decreased $59.9 million, or 35.1%, to $111.0 million for the Current Period compared to $170.9 million for the Prior Period. Cost of revenue as a percent of revenue increased from 86.4% to 90.5% primarily due to significant reductions in revenue-generating activity we could not fully offset with cost reductions. Additionally, in conjunction with certain cost savings measures that were implemented during the Current Period in response to current market conditions, costs of revenue were impacted during the Current Period by inventory adjustments and reserve additions of $0.6 million, non-recurring severance costs of $0.6 million, and yard closure and equipment rental return costs of $0.5 million, including costs associated with idling our Tyler manufacturing facility to consolidate production in Midland.
Other. Other costs were nominal for the Current Period compared to $30.4 million in the Prior Period, primarily due to the 2019 divestitures discussed above.
Depreciation and Amortization. Depreciation and amortization expense decreased $13.1 million, or 14.7%, to $75.6 million for the Current Period compared to $88.6 million for the Prior Period, primarily due to a significant reduction in capital expenditures during recent quarters as well as a $1.7 million decrease related to the 2019 divestitures discussed above.
Gross (Loss) Profit
Gross profit decreased by $152.3 million, or 120.0%, to a gross loss of $25.3 million for the Current Period compared to a gross profit of $126.9 million for the Prior Period primarily due to lower revenue in all three segments resulting from decreased activity levels combined with decreased pricing that could not be fully offset with reductions in costs. Gross profit decreased by $123.5 million, $27.9 million and $15.1 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. This was partially offset by a $13.1 million decrease in depreciation and amortization expense. Gross margin as a percent of revenue was (5.4%) and 12.5% in the Current Period and Prior Period, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $28.1 million, or 32.3%, to $58.9 million for the Current Period compared to $87.0 million for the Prior Period. The decrease was primarily due to reductions of $7.8 million in equity-based compensation costs, $7.2 million in incentive compensation costs, $7.1 million lower wages and associated payroll taxes, $3.3 million in travel, meals and entertainment costs, $3.2 million in professional fees and $7.0 million of other expense reductions from cost cutting measures in response to lower oil prices. The decrease was partially offset by a $4.3 million increase in bad debt expense and $3.2 million of severance expense associated with cost savings measures implemented in response to current market conditions.
Impairment
Goodwill and trademark impairment costs were $276.0 million and $4.4 million in the Current Period and Prior Period, respectively. During the Current Period, all of our goodwill was impaired due to the significant decline in oil prices during the first quarter of 2020, coupled with the uncertainty associated with the future recovery. We also recorded a $9.1 million partial impairment of our Rockwater trademark. During the Prior Period, we incurred $4.4 million of goodwill impairment in connection with divesting Affirm.
Impairment and abandonment of property and equipment costs were $7.9 million and $0.9 million in the Current Period and Prior Period, respectively. Current Period impairment costs were comprised of leasehold improvements related to abandoned facilities, abandonment of certain saltwater and fresh water wells and obsolete machinery and equipment. Prior Period impairment costs related to the divestiture of our Canadian operations.
55
Lease Abandonment Costs
Lease abandonment costs were $2.5 million and $1.5 million in the Current Period and Prior Period, respectively. During the Current Period, lease abandonment costs were primarily related to newly abandoned properties associated with realignment and combining operational activity on fewer leased properties. The Prior Period costs were primarily due to early lease terminations in connection with the wind-down and divestiture of Canadian operations.
Net Interest Expense
Net interest expense decreased by $0.7 million, or 31.1%, to $1.6 million during the Current Period compared to $2.4 million in the Prior Period primarily due to lower average borrowings resulting from the repayment of all remaining borrowings on our credit facility since the Prior Period, partially offset by interest payments relating to sales tax audits covering prior years.
Net (Loss) Income
Net income decreased by $397.2 million, to a net loss of $380.5 million for the Current Period compared to net income of $16.6 million for the Prior Period primarily due to goodwill, trademark and fixed asset impairments and lower gross profit. This was partially offset by lower selling, general and administrative costs, lower losses on sales of property and equipment and lower interest expense.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures and plus/(minus) foreign currency losses/(gains). The adjustments to EBITDA are generally consistent with such adjustments described in our Credit Facility. See “—Note Regarding Non-GAAP Financial Measures—EBITDA and Adjusted EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Our board of directors, management and many investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.
5644
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to the exclusion of some but not all items that affect the most directly comparable GAAP financial measures. One should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Item 6. Selected Financial Data” in our 20192020 Form 10-K.
The following table presents asets forth our reconciliation of EBITDA and Adjusted EBITDA to our net (loss) income, which is the most directly comparable GAAP measure for the periods presented:
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, | | ||||||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 |
| 2021 |
| 2020 | | ||||||
| | (in thousands) | | (in thousands) | |||||||||||||||
Net (loss) income | | $ | (36,260) | | $ | 7,172 | | $ | (380,524) | | $ | 16,640 | |||||||
Net loss | | $ | (27,421) | | $ | (291,220) | | ||||||||||||
Interest expense, net | | | 789 | | | 438 | | | 1,633 | | | 2,370 | | | 435 | | | 331 | |
Income tax (benefit) expense | | | (201) | | | 2,501 | | | (495) | | | 3,250 | |||||||
Income tax benefit | | | (263) | | | (164) | | ||||||||||||
Depreciation and amortization | | | 24,562 | | | 29,215 | | | 77,771 | | | 91,482 | | | 22,299 | | | 26,867 | |
EBITDA | | | (11,110) | | | 39,326 | | | (301,615) | | | 113,742 | | | (4,950) | | | (264,186) | |
Impairment of goodwill and trademark(1) | | | — | | | — | | | 276,016 | | | 4,396 | |||||||
Non-recurring severance expenses(1) | | | — | | | — | | | 7,168 | | | 1,680 | | | 3,225 | | | 3,502 | |
Impairment and abandonment of property and equipment(1) | | | — | | | 49 | | | 7,910 | | | 942 | |||||||
Yard closure costs related to consolidating operations(1) | | | — | | | — | | | 2,961 | | | — | |||||||
Non-cash compensation expenses | | | 1,422 | | | 574 | | ||||||||||||
Non-cash loss on sale of assets or subsidiaries(2) | | | 1,400 | | | 3,648 | | | 6,901 | | | 16,868 | | | 697 | | | 1,627 | |
Lease abandonment costs(1) | | | 672 | | | 238 | | | 2,493 | | | 1,494 | |||||||
Non-cash compensation expenses | | | 2,242 | | | 3,566 | | | 4,058 | | | 11,874 | |||||||
Non-recurring transaction costs(3) | | | 412 | | | 12 | | ||||||||||||
Lease abandonment costs(4) | | | 104 | | | 953 | | ||||||||||||
Impairment of goodwill and trademark(4) | | | — | | | 276,016 | | ||||||||||||
Impairment and abandonment of property and equipment(4) | | | — | | | 3,184 | | ||||||||||||
Yard closure costs related to consolidating operations(4) | | | — | | | 1,950 | | ||||||||||||
Foreign currency (gain) loss, net | | | (13) | | | 59 | | | 6 | | | (268) | | | (3) | | | 46 | |
Non-recurring transaction costs(3) | | | 527 | | | 2,025 | | | 3,150 | | | 3,099 | |||||||
Other non-recurring charges(3) | | | 1,622 | | | — | | | 1,622 | | | 75 | |||||||
Adjusted EBITDA | | $ | (4,660) | | $ | 48,911 | | $ | 10,670 | | $ | 153,902 | | $ | 907 | | $ | 23,678 | |
(1) | For the Current |
(2) | For the Current Quarter, the losses were primarily due to sales of real estate and underutilized or obsolete property and equipment. For the Prior Quarter, the losses were primarily due to sales of underutilized or obsolete property and equipment. |
(3) | For the Current Quarter, these costs were primarily legal related due diligence costs as well as costs related to certain subsidiaries acquired in the Rockwater Merger. |
(4) | For the Prior Quarter, these costs were due to the significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil. |
EBITDA was ($11.1)5.0) million for the Current Quarter compared to $39.3($264.2) million for the Prior Quarter. The $50.4$259.2 million decreaseincrease in EBITDA was primarily driven by a decrease of $62.3the $276.0 million in gross profit offset by a $11.3goodwill and trademark impairment
5745
costs in the Prior Quarter, a decrease of $24.2 million in gross profit offset by a $5.4 million decrease in selling, general and administrative costs. Adjusted EBITDA was ($4.7)$0.9 million for the Current Quarter compared to $48.9$23.7 million for the Prior Quarter. The $53.6$22.8 million decrease is primarily attributable to the items discussed above.
EBITDA was ($301.6) million for the Current Period compared to $113.7 million for the Prior Period. The $415.3 million decrease in EBITDA was primarily driven by a $271.6 million increase in goodwill and trademark impairment costs, a decrease of $165.3 million in gross profit, an increase of $7.0 million in impairment and abandonment of property and equipment costs and a $2.6 million accrual related to certain subsidiaries acquired in the Rockwater merger offset by a $28.1 million decrease in selling, general and administrative costs and a $6.5 million decrease in loss on sale of property and equipment. Adjusted EBITDA was $10.7 million for the Current Period compared to $153.9 million for the Prior Period. The $143.2 million decrease is primarily attributable to the items discussed above.
Liquidity and Capital Resources
Overview
The impacts of the COVID-19 pandemic on oil prices and the resulting sharp decline in U.S. onshore drilling and completion activity, and the uncertainty about the timing of a recovery, have already had and will likely continue to have, a negative impact on our financial results in the coming quarters.results. We have taken and continue to take actions to manage costs and cash, including but not limited to significantly reducing headcount, cutting salaries, closing operational yards, reducing forecasted capital expenditures, streamlining operational and back-office functions and selling excess equipment, deferringequipment. During 2020, we also deferred $6.0 million of payroll tax payments for the rest of 2020 in accordance with the CARES Act, and deferring applicable lease payments.which are required to be fully paid by December 31, 2022.
Our primary sources of liquidity are cash on hand, borrowing capacity under our current Credit Agreement and cash flows from operations. Our primary uses of capital have been to fund current operations, maintain our asset base, implement technological advancements, make capital expenditures to support organic growth, fund acquisitions, and when appropriate, repurchase shares of Class A common stock in the open market. Depending on market conditions and other factors, we may also issue debt and equity securities, in the future, if needed.
As of September 30, 2020,March 31, 2021, we had no outstanding bank debt and a positive net cash position. We prioritize sustained positive free cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers.
We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash on hand, cash generated from operations and borrowings under our Credit Agreement. For a discussion of the Credit Agreement, see “—Credit Agreement” below. Although we cannot provide any assurance, we believe that our current cash balance, operating cash flow and available borrowings under our Credit Agreement will be sufficient to fund our operations for at least the next twelve months.
As of September 30, 2020,March 31, 2021, cash and cash equivalents totaled $185.4$160.0 million and we had approximately $48.0$102.2 million of available borrowing capacity under our Credit Agreement. As of September 30, 2020,March 31, 2021, the borrowing base under the Credit Agreement was $63.6$117.8 million, we had no outstanding borrowings and outstanding letters of credit totaling $15.6 million. The significant reduction in our borrowing base since December 31, 2019 was primarily driven by the meaningful reductions in our accounts receivable, which represent the primary collateral for the borrowing base, during the Current Period, due to largely successful collections efforts combined with significantly reduced revenue levels. As of November 2, 2020,May 3, 2021, we had no outstanding borrowings, the borrowing base under the Credit Agreement was $73.3$119.3 million, the outstanding letters of credit totaled $15.6 million, and the available borrowing capacity under the Credit Agreement was $57.7$103.7 million.
58
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | Change | | | Three months ended March 31, | | Change | | ||||||||||||||
|
| 2020 |
| 2019 |
| Dollars |
| Percentage | |
| 2021 |
| 2020 |
| Dollars |
| Percentage | | ||||||
| | (in thousands) | | | | | | | | (in thousands) | | | | | | | ||||||||
Net cash provided by operating activities | | $ | 119,828 | | $ | 142,216 | | $ | (22,388) | | (15.7) | % | ||||||||||||
Net cash (used in) provided by operating activities | | $ | (3,873) | | $ | 46,711 | | $ | (50,584) | | (108.3) | % | ||||||||||||
Net cash used in investing activities | | | (3,049) | | | (57,198) | | | 54,149 | | 94.7 | % | | | (4,218) | | | (5,485) | | | 1,267 | | 23.1 | % |
Net cash used in financing activities | | | (10,623) | | | (59,383) | | | 48,760 | | 82.1 | % | | | (935) | | | (6,291) | | | 5,356 | | 85.1 | % |
Subtotal | | | 106,156 | | | 25,635 | | | | | | | | | (9,026) | | | 34,935 | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 14 | | | 127 | | | (113) | | NM | | | | 8 | | | (61) | | | 69 | | NM | |
Net increase in cash and cash equivalents | | $ | 106,170 | | $ | 25,762 | | | | | | | ||||||||||||
Net (decrease) increase in cash and cash equivalents | | $ | (9,018) | | $ | 34,874 | | | | | | |
46
Analysis of Cash Flow Changes between the NineThree Months Ended September 30,March 31, 2021 and 2020 and 2019
Operating Activities. Net cash used in operating activities was $3.9 million for the Current Quarter, compared to $46.7 million provided by operating activities was $119.8 million for the Current Period, compared to $142.2 million forin the Prior Period.Quarter. The $22.4$50.6 million decrease in netis primarily due to $31.3 million lower cash provided by operating activities related primarily to decreased net income resultingfrom working capital activity. Also impacting the decrease was $19.3 million less cash from the adverse change tocombination of net loss plus non-cash expenses, as we generated higher Prior Quarter revenue and gross profits as the majority of Prior Quarter operations occurred before the sharp decline in demand for the Company’s services in connection with a significant decline indue to the price of oil, partially offset by increased cash inflows from reduced working capital balances.COVID-19 pandemic.
Investing Activities. Net cash used in investing activities was $3.0$4.2 million for the Current Period,Quarter, compared to $57.2$5.5 million for the Prior Period.Quarter. The $54.1$1.3 million decrease in net cash used in investing activities was primarily due to a $67.3$6.8 million reduction in purchases of property and equipment partially offset by a $10.4$3.5 million reduction in acquisitions and a $1.9 million increasedecrease in proceeds received from sales of property and equipment partially offset byand a $24.7$2.0 million decrease of proceeds primarily related to the divestiture and wind-down of our Affirm subsidiary and the sand hauling and Canadian operations as well as a $0.7 million working capital settlement in the Prior Period.equity method investment.
Financing Activities. Net cash used in financing activities was $10.6$0.1 million for the Current PeriodQuarter compared to $59.4$6.3 million for the Prior Period.Quarter. The decrease in cash used in financing activities was primarily due to $45.0 million of net debt repayments in the Prior Period compared to zero in the Current Period and a $2.5$5.8 million decrease in repurchases of shares of Class A Common Stock during the Current Period.Quarter compared to the Prior Quarter.
Credit Agreement
On November 1, 2017, in connection with the closing of the Rockwater merger (the “Closing”),Merger, SES Holdings and Select LLC entered into a $300.0 million senior secured revolving credit facility (the “Credit Agreement”), by and among SES Holdings, as parent, Select LLC, as borrower, certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The Credit Agreement has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, we have the option to increase the maximum amount under the Credit Agreement by $150.0 million during the first three years following the Closing.
The maturity date of the Credit Agreement is the earlier of (a) November 1, 2022, and (b) the termination in whole of the Commitments pursuant to Section 2.1(b) of Article VII of the Credit Agreement.
The Credit Agreement permits extensions of credit up to the lesser of $300.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85.0% of the Eligible Billed Receivables (as defined in the Credit Agreement), plus (ii) 75.0% of Eligible Unbilled Receivables (as defined in the Credit Agreement), provided that this amount will not equal more than 35.0% of the borrowing base, plus (iii) the lesser of (A) the product of 70.0% multiplied by the value of Eligible Inventory (as defined in the Credit Agreement) at such time and (B) the product of 85.0% multiplied by the Net Recovery Percentage (as defined in the Credit Agreement) identified in the most recent
59
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) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”) or (b) the greatest of (i) the federal funds rate plus 0.5%, (ii) the one-month Eurocurrency Rate plus 1.0% and (iii) the Administrative Agent’s prime rate (the “Base Rate”), in each case plus an applicable margin, and interest shall be payable monthly in arrears. The applicable margin for Eurocurrency Rate loans ranges from 1.50% to 2.00% and the applicable margin for Base Rate loans ranges from 0.50% to 1.00%, in each case, depending on Select LLC’s average excess availability under the Credit Agreement. During the continuance of a bankruptcy event of default, automatically and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the Credit Agreement will bear interest at 2.00% plus the otherwise applicable interest rate.
47
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.
In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements.
The Credit Agreement also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 at any time availability under the Credit Agreement is less than the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through and including the first day after such time that availability under the Credit Agreement has equaled or exceeded the greater of (i) 10.0% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
We were in compliance with all debt covenants as of September 30, 2020.March 31, 2021.
Contractual Obligations
Our contractual obligations include, among other things, our Credit Agreement and operating leases. Refer to Note 5—6—Leases in our 20192020 Form 10-K for operating lease obligations as of December 31, 20192020 and Note 9—7—Debt in Part I, Item 1 of this Quarterly Report for an update to our Credit Agreement as of September 30, 2020.March 31, 2021.
60
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our 20192020 Form 10-K.
Recent Accounting Pronouncements
For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Note 2—Significant Accounting Policies in Part I, Item 1 of this Quarterly Report.None.
Off-Balance-Sheet Arrangements
As of September 30, 2020,March 31, 2021, we had no material off-balance-sheet arrangements. As such, we are not exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
6148
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The demand, pricing and terms for oilfield services provided by us are largely dependent upon the level of drilling and completion activity forin the U.S. oil and gas industry. Industry conditions areThe level of drilling and completion activity is influenced by numerous factors over which we have no control, including, but not limited to: global epidemics or pandemics,health events, including the COVID-19 pandemic; the supply of and demand for oil and gas; current pricesprice levels as well as expectations about future prices of oil and gas; the magnitude and timing of capital spending by our customers; the cost of exploring for, developing, producing and delivering oil and gas; the expectedextent to which our E&P customers choose to drill and complete new wells to offset decline in rates of currentfrom their existing wells; the extent to which our E&P customers choose to invest to grow production; discoveries of new oil and gas reserves; available storage capacity and pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances affectingin alternative forms of energy consumption;(e.g. wind and solar electricity, electric vehicles) that encourage substitution for or displacement of oil and gas consumption in end-use markets; the price and availability of alternative fuels; the ability of oil and gas producers to raise equity capital and debt financing; and merger and divestitureacquisition activity among oil and gas producers.consolidation in our industry, and other factors.
The levelAny combination of activitythese factors that results in the U.S. oil and gas industry is historically volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Sustainedsustained low oil and gas prices have affected, and, will likely continue to affect, oiltherefore, lower capital spending and gas/ or reduced drilling and completion activity and therefore, demand forby our services. Sustained low oil and gas prices or U.S. activity levels couldcustomers, would likely have a material adverse effect on our business, financial condition, results of operations and cash flows, and we are currently experiencing the significant negative effects of the severe disruption in the oil and gas industry from the COVID-19 pandemic and other factors.flows.
Interest Rate Risk
As of September 30, 2020,March 31, 2021, we had no outstanding borrowings under our Credit Agreement. As of November 2, 2020,May 3, 2021, we had no outstanding borrowings and approximately $57.7$103.7 million of available borrowing capacity under our Credit Agreement. Interest is calculated under the terms of our Credit Agreement based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
Foreign Currency Exchange Risk
We have been exposed to fluctuations between the U.S. dollar and the Canadian dollar with regard to the activities of our former Canadian subsidiary, which had designated the Canadian dollar as its functional currency. With the recent divestitures of our Canadian operations, we anticipate minimal future exposure to foreign currency exchange risk.
6249
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020.March 31, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2020March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
6350
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,As previously disclosed, certain subsidiaries acquired in the Rockwater was notifiedMerger were under investigation by the U.S. Attorney’sAttorney'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. DepartmentEnvironmental Protection Agency since December 2016 regarding the alleged alteration 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 constitutedemissions controls systems on less than 5% of ourthe vehicles in the fleet at such time. We are cooperating within violation of the Clean Air Act. On April 20, 2021, an entity acquired in the Rockwater Merger formally pled guilty to violations of the Clean Air Act that occurred prior to the Rockwater Merger and entered a plea agreement before the U.S. 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 OfficeDistrict Court for the Middle District of PennsylvaniaPennsylvania. Entry into this plea agreement has resolved the government’s prosecution related to begin discussions regarding a resolutionRockwater’s altering emissions controls systems on less than 5% of the vehicles in the fleet. The Company made final payments in April totaling $2.6 million, which was the amount accrued as of both March 31, 2021 and December 31, 2020, and did not incur additional monetary penalties or fines. The total amount paid in settlement of this matter and these discussions are ongoing. During the Current Quarter, we made an initial payment of $1.2 million and at this time, we do not believe the ultimate resolution of this matter will be material to the Company.was $4.3 million. See Note 10—Commitments and Contingencies in Part I, Item 1 of this Quarterly Report16 – Subsequent Events for further discussion of this investigation.additional information.
Item 1A. Risk Factors
Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and in our Quarterly Reports for the quarters ended March 31, 2020 and June 30, 2020. 10-K. We may experience additional risks and uncertainties not currently known to us. Furthermore, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect us. Any such risks, in addition to those described below and in our 20192020 Form 10-K, and our Quarterly Reports for the quarters ended March 31, 2020 and June 30, 2020, may materially and adversely affect our business, financial condition, cash flows and results of operations.
Our business depends on capital spending by the oil and gas industry in the U.S. and reductions in capital spending could haveGovernment regulators issued a material adverse effect on our liquidity, results of operations and financial condition. We expect capital spending by our customers to decrease for the remainder of 2020, relative to prior year levels, duenotice to the impacts of the COVID-19 pandemic on demand for oil and reduced prices resulting from the current oversupply of oil.Company that could, if not withdrawn or significantly modified, impair its ability to acquire additional federal contracts or limit its ability to receive federal-related benefits or assistance activities in connection with its operations.
Demand for our services is directly affectedIn February 2021, the Company, and certain subsidiaries, received Notices of Proposed Debarment (“Notices”) from the U.S. Environmental Protection Agency’s (“EPA”) Suspension and Debarment Official (“SDO”). The Notices propose a debarment from participation in future federal contracts, non-procurement covered transactions such as grants, and other assistance activities, and would render the Company ineligible to receive any federal contracts or approved subcontracts in excess of $35,000 or to act as an agent or representative on behalf of another in such transaction, or receive certain federal benefits. The Notices stem from a non-prosecution agreement dated September 21, 2020 entered into by currentthe Company as successor in interest to Rockwater Energy Solutions, Inc., and anticipated oil and natural gas prices and related capital spending by our customers to explore for, develop and produce oil and gasa plea agreement filed on September 24, 2020 in the U.S.Prices District Court for oil and gas historically have been extremely volatile and are expectedthe Middle District of Pennsylvania wherein Rockwater Northeast, LLC agreed to continueplead guilty to be volatile, particularly in lightcounts 1 through 31 of the impactsCriminal Information statement each charging Rockwater Northeast, LLC with a violation of the COVID-19 pandemic. In March 2020, Saudi ArabiaClean Air Act. The underlying investigation resulting in this non-prosecution agreement and Russia failed to reach a decision to cut production of oil and gas along with OPEC. Subsequently, Saudi Arabia significantly reducedplea is disclosed in the prices at which it sells oil and announced plans to increase production. These events, combinedCompany’s Annual Report on Form 10-K for the year ended December 31, 2020. The Company has commenced discussions with the COVID-19 pandemic, contributedEPA Suspension and Debarment Division to seek a sharp dropresolution to remove the proposed debarment in prices for oila cooperative fashion as soon as practicable, and made responsive filings to the SDO to oppose the findings in the first quarter of 2020 continuing intoNotices. If the second quarter of 2020. In April 2020, OPEC (which includes Saudi Arabia), Russia (together with OPEC and other allied producing countries, “OPEC+”) agreedCompany is unsuccessful in its efforts to curtailoppose the proposed debarment or
6451
oil production by approximately 10 million barrels per day. Further, some U.S. producers chosereach a resolution to shut-inavoid debarment, the imposition of a debarment period, or choke back production on specific wells to reduce production but the impact of these cuts on the market price for oil and natural gas remains uncertain. During the quarter ended September 30, 2020, the average WTI spot price was $40.89, versus an average price of $56.33 for the quarter ended September 30, 2019. While oil prices have improved since their lows in April 2020, closing at $40.05 on September 30, 2020, the continued impact of the COVID-19 pandemic and the associated impacts to oil demand will result in continued uncertainty around the near-term price of oil.
If oil and gas prices remain at current levelsfederal assistance or continue to decline, our customers may further reduce their exploration, development and production activities and demand lower rates for our services or delay, modify, or terminate their use of our services. Volatility or weakness in oil prices or natural gas prices (or the perception that oil prices or natural gas prices will decrease) affects the spending patterns of our customers and may resultcontracting disability as set forth in the drillingNotices could impair the Company’s ability to acquire additional federal contracts or completioncommercial contracts with firms that have entered into certain covered transactions with federal agencies, or limit its ability to receive federal-related benefits or assistance activities including, any one or more of fewer new wells or lower production spending on existing wells. This, in turn, could lead to lower demand for our services and may cause lower rates and lower utilization of our assets. For example, multiple leading international and national oil companies, as well as public and private independent oil and gas producers, have reduced capital expenditures in 2020, and most of our customers have reduced their capital expenditures budget. Even in an environment of stronger oil and gas prices, reduced completion rates of new oil and gas production in our market areas as a result of decreased capital spending may have a negative long-term impact on our business. Any of these conditions or events could adversely affect our operating results, and they currently are doing so. If a recovery does not materialize and our customers fail to increase their capital spending, itwhich developments could have a material adverse effect on our liquidity, results of operations and financial condition.
Industry conditions are influenced by numerous factors over which we have no control, including:
65
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as the COVID-19 pandemic, could adversely affect ourCompany’s business, results of operations andor financial condition.position.
The global or national outbreak of an illness or any other communicable disease, or any other public health crisis, such as the COVID-19 pandemic, may cause disruptions to our business and operational plans, which may include (i) shortages of qualified employees in a given area, (ii) unavailability of contractors and subcontractors, (iii) interruption of supplies from third parties upon which we rely, (iv) recommendations of, or restrictions imposed by, government and health authorities, including quarantines, to address the COVID-19 pandemic and (v) restrictions that we and our contractors and subcontractors impose, including facility shutdowns or access restrictions, to ensure the safety of employees and (vi) reductions, delays or cancellations of planned operations by our customers. Additionally, these disruptions could negatively impact our financial results. For example, in response to the COVID-19 pandemic, we temporarily closed our corporate offices and restricted all non-critical personnel to work remotely for a period of time, reduced headcount and employee salaries both temporarily and permanently, closed certain yard locations, reduced third-party expenses, streamlined operations, reduced capital expenditures and recorded impairment expenses.
Further, the effects of the COVID-19 pandemic and concerns regarding its global spread have negatively impacted the global economy, reduced global oil demand, disrupted global supply chains and created significant volatility and disruption of financial and commodities markets, which could lead to our customers curtailing existing production due to lack of downstream demand or storage capacity as well as reducing or eliminating the number of wells completed in the near to medium term. Additionally, a significant majority of states as well as local jurisdictions have imposed, and others in the future may impose, "stay-at-home" orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions, and the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives, will depend on future developments, including the duration and spread of COVID-19 and related restrictions on travel and general mobility, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption, as well as significantly decreased demand for oil and gas, could materially affect our business, results of operations, access to sources of liquidity and financial condition, and we have experienced the negative impacts of such disruption since March 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
During the Current Quarter, we repurchased the shares of Class A Common Stock as shown in the table below. The shares were repurchased to satisfy tax withholding obligations related to restricted stock previously awarded to certain of our current and former employees.
| | | | | | | | | | |
| | Total Number of | | Weighted-Average Price | | Total Number of | | Weighted-Average Price | ||
Period |
| Shares Purchased |
| Paid Per Share |
| Shares Purchased |
| Paid Per Share | ||
July 1, 2020 to July 31, 2020 | | — | | $ | — | |||||
August 1, 2020 to August 31, 2020 | | — | | $ | — | |||||
September 1, 2020 to September 30, 2020 | | 43,923 | | $ | 5.41 | |||||
January 1, 2021 to January 31, 2021 | | 73,622 | | $ | 5.74 | |||||
February 1, 2021 to February 28, 2021 | | — | | $ | — | |||||
March 1, 2021 to March 31, 2021 | | 70,456 | | $ | 6.40 | |||||
Total | | 43,923 | | $ | 5.41 | | 144,078 | | $ | 6.06 |
Item 3. Defaults Upon Senior Securities.
None.
66
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
The following exhibits are filed, furnished or incorporated by reference, as applicable, as part of this report.
6752
HIDDEN_ROW | | |
Exhibit |
| Description |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
| | |
| | |
†10.2 | | |
| | |
†10.3 | | |
| | |
†*10.4 | | Employment Agreement between Brian Szymanski and Select Energy Services, LLC, dated March 1, 2021. |
| | |
*10.5 | | |
| | |
*10.6 | | |
| | |
*10.7 | | |
| | |
*10.8 | | |
| | |
*10.9 | | |
| | |
*†10.10 | | |
| | |
*31.1 | | |
| | |
*31.2 | | |
| | |
**32.1 | | |
| | |
53
**32.2 | | |
| | |
*101 | | Interactive Data Files |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith
**Furnished herewith
†Management contract or compensatory plan or arrangement.
68
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: | By: | /s/ |
| |
|
| | Chairman, President and Chief Executive Officer |
| | |
| | |
Date: | By: | /s/ Nick Swyka |
| | Nick Swyka |
| | Senior Vice President and Chief Financial Officer |
6954