UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

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

For the transition period from _______________ to ________________

Commission File Number 001-38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)


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

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

(713) 235-9500

(Registrant’s telephone number, including area code)

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


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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


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

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

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

As of ~~November 2, 2020,~~May 3, 2021, the registrant had ~~86,824,127~~87,856,767 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

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SELECT ENERGY SERVICES, INC.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K, ~~in our subsequently filed Quarterly Reports on Form 10-Q,~~ under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report and those set forth from time to time in our other filings with the SEC. 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 ~~has~~ caused a sharp decline in economic activity in the ~~United States~~U.S. and around the world, resulting in lower demand for oil and gas, oversupply and therefore lower oil and gas prices, to which our exploration and production (“E&P”) customers have responded by cutting capital spending, leading to fewer oil and gas well completions and thus reduced demand for our services, all of which has had, and will likely continue to have, a negative impact on our financial results;

●

actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, ~~(“OPEC+~~“OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with announced supply limitations;

●

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

●

the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;

●

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

●

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

●

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

●

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

●

our customers’ ability to complete and produce new wells;

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●

the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

our health, safety and environmental performance;

●

the impact of competition on our operations;

●

the degree to which our E&P customers may elect to operate their water-management services in-house rather than source these services from companies like us;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

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●

the other risks identified in our most recent Annual Report on Form 10-K ~~and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020,~~ and under the headings “Part I―Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II―Item 1A. Risk Factors” in this Quarterly Report.

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

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any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2020		December 31, 2019		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.

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	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.

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three months ended September 30,

Nine months ended September 30,


2020

2019

2020

2019
Net (loss) income

$
(36,260)

$
7,172

$
(380,524)

$
16,640
Other comprehensive (loss) income





Foreign currency translation adjustment, net of tax of $0

—

380

—

368
Comprehensive (loss) income

(36,260)

7,552

(380,524)

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

5,719

(1,888)

59,823

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

$
(30,541)

$
5,664

$
(320,701)

$
12,995


	Three months ended 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.

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the ~~nine~~three 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~~

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~~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

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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.

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SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

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

We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the ~~United States (“~~U.S.~~”).~~ We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production operations. ~~Through~~As a ~~combination of organic growth and acquisitions over the last decade, we have developed a leading position~~leader in the water solutions ~~industry. We believe~~industry, we ~~are~~place the ~~only company in~~utmost importance on safe, environmentally responsible management of oilfield water throughout the ~~oilfield services industry that combines comprehensive water-management services with related chemical products. Furthermore,~~lifecycle of a well. Additionally, we believe we are one of the few large oilfield services companies whose primary focus is on the management and treatment of water and water resources in the oil and gas production industry. Accordingly, the importance ofthat responsibly managing water resources through our operations to help conserve ~~fresh water~~ and protect the environment in the communities in which we operate is paramount to our continued success.

~~Select 144A Offering and Initial Public Offering.~~Rockwater Merger: On ~~December 20, 2016, Select Inc.~~November 1, 2017, the Company completed a ~~private placement~~merger 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 of~~our Class A common stock ~~par value $0.01 per share (“Class A Common Stock”) following the Company’s initial public offering (“IPO”). SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc.,~~ and ~~Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its~~ Class B common stock ~~par value $0.01~~are 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 ~~subject~~presented to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Inc. based onour stockholders for their ~~ownership of Class B Common Stock.~~

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

Exchange rights:Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner ~~Holdco~~Holdco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B Common Stock will be cancelled. ~~During the year ended December 31, 2019, a total of 9,805,742 SES Holdings LLC Units were exchanged for 9,805,742 shares of Class A~~

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~~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, 2020~~March 31, 2021 (the “Current Quarter” ~~and the “Current Period”, respectively)~~) and the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 (the “Prior Quarter” ~~and the “Prior Period”, respectively)~~). The Company’s ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”) filed with the SEC on February ~~25, 2020~~24, 2021, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter ~~and Current Period~~ may not be indicative of the results to be expected for the full year, in part due to the COVID-19 ~~pandemic.~~pandemic and continued progress in the distribution and uptake of remedies such as vaccines.

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

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost ~~method.~~method or other appropriate basis as applicable. As of ~~September 30, 2020,~~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, manufactures~~provides technical solutions and ~~provides~~expertise related to chemical applications in the oil and gas industry. We also have significant capabilities in supplying logistics for chemical applications. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completion and production services, 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 by~~product line, combined with our ~~customers to increase oil and gas production and lower production costs over the life of a well. Given the breadth of~~expertise in oilfield chemicals ~~and~~ application, ~~expertise~~ we ~~provide, our Oilfield Chemicals customers are primarily~~serve pressure pumpers ~~but also include~~and 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.

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

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, ~~2019,~~2020, included in the ~~2019~~2020 Form 10-K.

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

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

Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred where 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 to~~change 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

~~Table~~The Company also has a $3.1 million note receivable resulting from an investment in the fourth quarter of ~~Contents~~2020, with 0 allowance for credit losses as of March 31, 2021. See Note 11 – Related Party Transactions for additional information.

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

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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 in~~Quarter or the Prior ~~Quarter and Prior Period, respectively.~~Quarter.

Payroll Tax Deferral: In ~~the Current Period,~~2020, the Company ~~began taking~~took 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 included~~amounts 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

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modified retrospective transition approach. After reviewing the new standard and reexamining current and prior year bad debt expense from trade receivables, as well as updating future expectations, the adoption of the new standard in the first quarter of 2020 did not have a material impact to the Company’s financial statements.

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

~~NOTE 3—IMPAIRMENTS AND OTHER COSTS~~

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

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

~~Table of Contents~~

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

~~Table of Contents~~

~~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 ~~December~~March 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

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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 ~~nine~~three months of ~~2020~~2021 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 ~~five~~six 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.

Table of Contents

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.

~~Table of Contents~~

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 ~~lasted~~in 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.

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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 ~~$0.2~~immaterial 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, 2020~~March 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

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

Total depreciation and amortization expense related to property and equipment and finance leases presented in the table above, as well as amortization of intangible assets presented in Note 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 for~~During 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.

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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 with~~related to the ~~resulting~~ significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil and the related global economic impacts resulting from the OPEC+ disputes as well as the COVID-19 pandemic. This included uncertainty regarding oil prices and the length of the recovery following the significant market disruption in the oil and gas industry. Given the volatile 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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 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 ~~all~~indefinite-lived intangible assets for impairment during the first quarter of 2020. These evaluations included significant judgment, including discount rates based on our weighted-average cost of capital and the royalty rate. This resulted in $9.1 million of impairment to trademarks using the relief from royalty method, which was recorded in the Oilfield Chemicals segment. Further, the Company tested all other long-lived assets for impairment, including definite-lived intangible assets, using an undiscounted test for recoverability at the asset group level which resulted in no additional impairments.

2219

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The weighted-average amortization period for customer relationships, patents, and other ~~definite lived~~definite-lived assets was ~~9.9~~9.4 years, ~~7.0~~6.5 years, and ~~2.6~~2.5 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 lived~~indefinite-lived water rights and trademarks are generally subject to renewal every five to ten years at immaterial renewal costs. Annual amortization of intangible assets for the next five years and beyond is as follows:


	Amount		Amount
	(in thousands)		(in thousands)
Remainder of 2020	$	2,722
Year ending December 31, 2021		10,466
Remainder of 2021			$	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

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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.

~~Table of Contents~~

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

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In addition, the Credit Agreement restricts SES Holdings’ and Select LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5 million or (b) if SES Holdings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0 million. Additionally, the Credit Agreement generally permits Select LLC to make distributions to allow Select Inc. to make payments required under the existing Tax Receivable Agreements. See “Note ~~13—~~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, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. As of ~~September 30, 2020~~March 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, 2020~~March 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, 2020~~March 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.

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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 ~~merger~~Merger are under investigation by the U.S. Attorney's Office for the Middle District of Pennsylvania and the U.S. Environmental Protection ~~Agency.~~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 payment~~payments 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.

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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 ~~Select~~private placement of 16,100,000 shares of the Company’s Class A Common Stock on December 20, 2016 (the “Select 144A ~~Offering,~~Offering”), the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan.

On ~~July 18, 2017,~~May 8, 2020, the Company’s ~~board of directors~~stockholders approved ~~the First Amendment~~an amendment to the 2016 Plan (the “ First Equity Plan Amendment”), which clarified the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Rockwater merger which occurred on November 1, 2017) and allowed for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which the Company’s Class A Common Stock is listed. The effectiveness of the First Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement for the Rockwater merger. Stockholders holding a majority of the Company’s outstanding common stock approved the First Equity Plan Amendment on July 18, 2017, and such amendment became effective on November 1, 2017 upon the consummation of the Rockwater merger.

~~On February 28, 2020, the Company’s board of directors approved the Second Amendment to the 2016 Plan (the “Second Equity Plan Amendment”), which increases~~increase the number of shares of the Company’s Class A ~~Common Stock~~common stock that may be issued under the 2016 Plan by 4,000,000 ~~shares.~~shares and to make certain other administrative changes. The ~~effectiveness~~2016 Plan includes share recycling provisions that allow shares subject to an award that expires or is cancelled, forfeited or otherwise terminated without actual delivery of the ~~Second Equity Plan Amendment was subject to approval by the Company's stockholders. Stockholders holding a majority~~underlying shares of ~~the Company’s outstanding~~Class A common stock ~~approved~~to 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.~~

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A summary of the Company’s stock option activity and related information as of and for the Current ~~Period~~Quarter 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, 2020~~March 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 unrecognized~~March 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

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$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 ~~unit~~awards activity and related information for the Current ~~Period~~Quarter 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.~~

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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 ~~reduction~~credit 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, ~~2019~~2020		~~1,014,990~~1,763,909
Target shares granted		~~753,378~~613,842
Target shares forfeited		(242,087)
Target shares outstanding as of ~~September 30, 2020~~March 31, 2021		~~1,768,368~~2,135,664

~~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:

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

~~(1)~~

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

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

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

The Company recognized stock compensation expense related to stock-settled incentive awards of $0.1 million, $0.1 million and $0.4 million in the Prior Quarter, Current Period and Prior Period, respectively.

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

Award Value

Value at Target

Being Recognized
Nonvested as of December 31, 2019

$
2,937

$
1,122
Forfeited during 2020

(410)

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

(2,527)

—
Cumulative expense recognized

$
—

$
965

Employee Stock Purchase Plan (ESPP)

The Company has an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of Class A Common Stock at a discount. The plan provides for four offering periods for purchases: December 1 through February 28, March 1 through May 31, June 1

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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.

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

Share Repurchases

During the Current Quarter, ~~and the Current Period,~~ the Company repurchased ~~0 and 1,989,440~~144,078 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 ~~1,443,409~~849,711 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 71,649~~129,680 shares in connection with employee minimum tax withholding requirements.

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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 ~~nine~~three months ended ~~September 30, 2020~~March 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, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, due to the short-term maturity of these instruments. The Company did not have any bank debt

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as of ~~September 30, 2020~~March 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 ~~elected~~uses 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 and~~publicly-traded equity. The Company

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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 ~~gain~~loss on the nonmonetary exchange during the Current Quarter based on the value of the equity at ~~September 30, 2020~~March 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.

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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 ~~related~~relating to inventory and consumables.

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

Tax Receivable Agreements

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

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

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

~~Table of Contents~~

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

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

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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.

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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)

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NOTE ~~16—(LOSS) EARNINGS~~14—LOSS PER SHARE

~~(Loss) earnings~~Loss per share are based on the amount of ~~(loss) income~~loss allocated to the stockholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase ~~3,536,778, 2,956,610, 3,536,778~~2,272,441 and ~~2,956,837~~3,777,228 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) earnings~~loss per share for the Current and Prior Quarter ~~and the Current and Prior Period~~ (dollars in thousands, except share and per share amounts):


	Three months ended September 30, 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)	$	—

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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

$
—

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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 ~~three~~3 reportable segments:

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

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

Oilfield Chemicals — The Oilfield Chemicals segment ~~develops, manufactures~~provides technical solutions and ~~provides~~expertise related to chemical applications in the oil and gas industry. We also have significant capabilities 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~~completions. Given the breadth of chemicals and production services, including polymer slurries, crosslinkers, friction reducers, biocides, dry and liquid scale inhibitors, corrosion inhibitors, buffers, breakers and other chemical technologies. This segment also provides chemicals needed byapplication expertise we provide, our customers ~~to increase oil and gas production and lower production costs over the life of a well. Our Oilfield Chemicals customers are primarily~~range from pressure pumpers ~~but also include~~to major integrated and independent 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 combined~~water used in ~~the “Other” category.~~well completions.

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


	For the three months ended September 30, 2020								For the three months ended 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

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	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.

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~~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

~~Table of Contents~~

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the Securities and Exchange Commission on February ~~25, 2020~~24, 2021 (our ~~“2019~~“2020 Form 10-K”). This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements” and other cautionary statements described under the heading “Risk Factors” included in our ~~2019~~2020 Form 10-K and ~~under the heading “Part II—Item 1A. Risk Factors” in our~~this Quarterly ~~Reports~~Report 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, 2020~~March 31, 2021 (the “Current Quarter” ~~and the “Current Period”, respectively)~~) and the three ~~and nine~~ months ended ~~September 30, 2019~~March 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 industry~~a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.

In many regions of the country, there has been growing concern about the volumes of water required for new oil and gas well completions. Working with our customers and local communities, we strive to be an industry leader in the development of cost-effective alternatives to fresh water. Specifically, we offer services that enable our exploration and production (“E&P&P”) customers to treat and reuse produced water, thereby reducing the demand for fresh water while also reducing the volumes of saltwater that must be disposed by injection. In many areas, we have also acquired sources of non-potable water, such as brackish water or municipal or industrial effluent. ~~We work with~~Through our expertise in chemical technologies and our FluidMatch™ design solutions, we provide water profiling and fluid assessment services for our customers to ~~optimize~~support the optimization of their fluid systems, ~~to economically enable~~enabling the economic use of these alternative sources. We also work with our E&P customers to reduce the environmental footprint of their operations through the use of temporary hose and permanent pipeline ~~systems.~~systems, which are supported by extensive monitoring and automation technology solutions that provide safer and more efficient water resource management. These solutions significantly reduce the demand for trucking operations, thereby reducing ~~gasoline and~~ diesel exhaust emissions, increasing safety and decreasing traffic congestion in nearby communities.

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

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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.

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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. We~~improves. 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 you~~provide assurance that our assumptions used to estimate our future financial results will be correct given the unpredictable nature of the current market environment after the rapid decline 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 further~~took actions to protect our balance sheet and maintain our liquidity, including significantly decreasing our operating expenses by reducing headcount, reducing salaries and director compensation, closing yard locations, idling facilities, reducing third-party expenses and streamlining operations, as well as reducing capital expenditures. We ~~are~~ also ~~deferring~~deferred 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~~U.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 ~~keep~~support our people ~~safe~~who are affected by ~~supporting those affected, managing~~the virus, manage work-from-home scheduling as appropriate, ~~limiting~~limit on-site visitors, and ~~monitoring~~monitor and consistently ~~communicating~~communicate with those who are required to be at a work location, while also providing these employees with additional personal protective equipment.

Based on our current cash ~~position, lack of bank debt,~~and cash equivalents balance, operating cash flow, available ~~borrowing capacity~~borrowings under our Credit Agreement and the ongoing actions discussed above, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants ~~for~~through the next twelve months, prior to giving effect to any future financing that may occur.

As a result of reduced 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

Table of existing storage capacity, which has resulted in many of our E&P customers being forced to shut-in production for some time period. Much of this shut-in production has since come back online during the second quarter of 2020 and the Current Quarter.Contents

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. Consolidation~~capital to investors. Additionally, consolidation among our ~~customers’~~customers and decreases in our customers’ capital budgeting can ~~impact the size of~~disrupt our market in the near term and the resulting demand for our services. ~~Additionally, both debt~~Recent market conditions have resulted in a number of consolidation, restructuring and ~~equity~~bankruptcy 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 will~~investor 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

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proppant use are plateauing, the average operator continues to catch up to this leading ~~edge and many smaller operators with less robust completion designs may be challenged in this environment.~~edge. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing frac efficiency and the use of ~~lower cost~~lower-cost in-basin sand ~~all of which~~ has decreased total costs for our customers.

This multi-well pad development, combined with recent upstream acreage consolidation and the emerging trends around the reuse applications of produced water, particularly in the Permian Basin, provides significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production life of wells over the long-term. However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and therefore, negatively impact the total revenue opportunity for certain of our services utilizing day-rate pricing models.

The trend of increased use of produced water ~~may~~will require additional chemical treatment solutions, ~~which~~and we ~~are well positioned to provide given~~have 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 acquisition~~Well Chemical Services (“WCS”) team and our knowledge base within our Oilfield Chemicals ~~segment. Additionally, this~~segment, we are well positioned to advance these solutions. This trend also supports more complex “on the fly” solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions that are able to economically compete with alternative historical solutions. Ultimately, 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.

~~Regardless~~Our 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 one~~core of the ~~most challenging~~Midland Basin in ~~decades~~both 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 due~~purchase 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

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water storage capacity. Additional incremental capacity beyond the ~~large~~contracted 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 decline~~having contracted future volumes with a third customer.

We also developed a centralized produced water recycling facility for a major integrated operator in ~~oil demand~~Loving 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 sheet~~adjacent 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 likely~~locations, 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.

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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.

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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.

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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 ~~maximize the effectiveness of and~~ optimize ~~the efficiencies of~~ the fracturing fluid system in conjunction with the quality of water used in well completions.

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How We Generate Revenue

We currently generate the majority of our revenue through our water-management services associated with hydraulic fracturing, provided through our Water Services and Water Infrastructure segments. The majority of this revenue is realized through customer agreements with fixed pricing terms and is recognized when delivery of services is provided, generally at our customers’ sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer.

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

Costs of Conducting Our Business

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

Labor costs associated with our employees and contract labor ~~represent~~comprise the ~~most significant~~largest portion of our costs of ~~our~~doing business. We incurred labor and labor-related costs of ~~$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 taken~~took direct action during ~~the Current Period~~2020 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 taken~~took significant direct action during ~~the Current Period~~2020 to reduce ongoing rental and leasing ~~costs and will continue to evaluate further reductions to these costs in the coming quarters.~~costs.

We incur ~~significant~~variable transportation costs associated with our service lines, ~~including~~predominately 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 on~~therefore our results of operations.

We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred raw material costs of ~~$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:

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Revenue;

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Gross Profit;

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Gross Margins;

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EBITDA; and

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Adjusted EBITDA.

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Revenue

We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our 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.

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

~~Sand Hauling Wind-Down~~

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

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

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

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Results of Operations

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

Current Quarter Compared to the Prior Quarter


	Three months ended September 30,				Change				Three months ended 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 $142.3~~an $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 and~~impacted by the COVID-19 pandemic, ~~as well as~~severe 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%, ~~19.4~~20.8% and ~~20.7%~~25.5%, respectively, for the Prior Quarter. The revenue changes by reportable segment are as follows:

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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 and~~impacted by the COVID-19 pandemic, ~~as well as~~severe 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 and~~impacted 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 and~~impacted by the COVID-19 pandemic, ~~as well as~~severe 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 revenue~~reductions, as ~~a percent of revenue~~well as increased ~~from 84.4% to 93.4% primarily due to significant reductions in revenue-generating activity we~~raw 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.

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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 prices~~demand 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 expectations~~expenses associated with ~~realignment and combining operational activity on fewer leased properties.~~facilities previously abandoned. The Prior Quarter costs were primarily due to leases abandoned during the ~~wind-down of impaired right-of-use assets from previously abandoned~~Prior 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 during~~for 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 related~~versus $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) Income~~Loss

Net ~~income~~loss 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 ~~income~~loss 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.

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~~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

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~~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

~~Table of Contents~~

~~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.

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~~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.

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Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to the exclusion of some but not all items that affect the most directly comparable GAAP financial measures. One should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Item 6. Selected Financial Data” in our ~~2019~~2020 Form 10-K.

The following table ~~presents a~~sets forth our reconciliation of EBITDA and Adjusted EBITDA to our net (loss) income, 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 ~~Period,~~Quarter, these costs related to severance costs associated with our former CEO. For the Prior Quarter, these costs related to severance due to the significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil.

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

~~(2)~~

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

~~(3)~~

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

EBITDA was ($~~11.1)~~5.0) million for the Current Quarter compared to ~~$39.3~~($264.2) million for the Prior Quarter. The ~~$50.4~~$259.2 million ~~decrease~~increase in EBITDA was primarily driven by ~~a decrease of $62.3~~the $276.0 million in ~~gross profit offset by a $11.3~~goodwill and trademark impairment

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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, deferring~~equipment. During 2020, we also deferred $6.0 million of payroll tax payments ~~for the rest of 2020~~ in accordance with the CARES Act, ~~and deferring applicable lease payments.~~which are required to be fully paid by December 31, 2022.

Our primary sources of liquidity are cash on hand, borrowing capacity under our current 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.

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Cash Flows

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


	Nine months ended September 30,				Change				Three months ended March 31,				Change
	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

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Analysis of Cash Flow Changes between the ~~Nine~~Three 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 for~~in the Prior ~~Period.~~Quarter. The ~~$22.4~~$50.6 million decrease ~~in net~~is primarily due to $31.3 million lower cash ~~provided by operating activities related primarily to decreased net income resulting~~from working capital activity. Also impacting the decrease was $19.3 million less cash from the ~~adverse change to~~combination 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 in~~due 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 increase~~decrease in proceeds received from sales of property and equipment ~~partially offset by~~and 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 ~~Period~~Quarter 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

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Acceptable Appraisal of Inventory (as defined in the Credit Agreement), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30.0% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the Credit Agreement), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the Credit Agreement). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by Select LLC to the Administrative Agent.

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

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

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

We were in compliance with all debt covenants as of ~~September 30, 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 ~~2019~~2020 Form 10-K for operating lease obligations as of December 31, ~~2019~~2020 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.

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Critical Accounting Policies and Estimates

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

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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The demand, pricing and terms for oilfield services provided by us are largely dependent upon the level of drilling and completion activity ~~for~~in the U.S. oil and gas industry. ~~Industry conditions are~~The level of drilling and completion activity is influenced by numerous factors over which we have no control, including, but not limited to: global ~~epidemics or pandemics,~~health events, including the COVID-19 pandemic; the supply of and demand for oil and gas; current ~~prices~~price levels as well as expectations about future prices of oil and gas; the magnitude and timing of capital spending by our customers; the cost of exploring for, developing, producing and delivering oil and gas; the ~~expected~~extent to which our E&P customers choose to drill and complete new wells to offset decline ~~in rates of current~~from their existing wells; the extent to which our E&P customers choose to invest to grow production; discoveries of new oil and gas reserves; available storage capacity and pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances ~~affecting~~in alternative forms of energy ~~consumption;~~(e.g. wind and solar electricity, electric vehicles) that encourage substitution for or displacement of oil and gas consumption in end-use markets; the price and availability of alternative fuels; the ability of oil and gas producers to raise equity capital and debt financing; ~~and~~ merger and ~~divestiture~~acquisition activity ~~among oil~~ and ~~gas producers.~~consolidation in our industry, and other factors.

~~The level~~Any combination of ~~activity~~these factors that results in the U.S. oil and gas industry is historically volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Sustainedsustained low oil and gas prices ~~have affected,~~ and, ~~will likely continue to affect, oil~~therefore, lower capital spending and ~~gas~~/ or reduced drilling and completion activity ~~and therefore, demand for~~by our ~~services. Sustained low oil and gas prices or U.S. activity levels could~~customers, would likely have a material adverse effect on our business, financial condition, results of operations and cash ~~flows, and we are currently experiencing the significant negative effects of the severe disruption in the oil and gas industry from the COVID-19 pandemic and other factors.~~flows.

Interest Rate Risk

As of ~~September 30, 2020,~~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.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~September 30, 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, 2020~~March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

~~In December 2016,~~As previously disclosed, certain subsidiaries acquired in the Rockwater ~~was notified~~Merger were under investigation by the U.S. ~~Attorney’s~~Attorney's Office for the Middle District of Pennsylvania ~~that it is being investigated for altering emissions control systems on several of its vehicles. We are cooperating with the investigation~~ and have determined that mechanics servicing our vehicle fleet may have installed software on certain vehicles and modified a few other vehicles to deactivate or bypass the factory-installed emissions control systems. At present, it appears that 31 vehicles in Pennsylvania were modified in this manner, apparently to improve vehicle performance and reliability. As a result of a company-wide investigation undertaken voluntarily and in cooperation with the U.S. ~~Department~~Environmental 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 ~~our~~the vehicles in the fleet ~~at such time. We are cooperating with~~in 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 ~~Pennsylvania~~Pennsylvania. Entry into this plea agreement has resolved the government’s prosecution related to ~~begin discussions regarding a resolution~~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 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 Report~~16 – 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 ~~2019~~2020 Form 10-K, ~~and our Quarterly Reports for the quarters ended March 31, 2020 and June 30, 2020,~~ may materially and adversely affect our business, financial condition, cash flows and results of operations.

~~Our business depends on capital spending by the oil and gas industry in the~~ U.S. ~~and reductions in capital spending could have~~Government 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 affected~~In 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 ~~current~~the 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 gas~~a 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 expected~~the Middle District of Pennsylvania wherein Rockwater Northeast, LLC agreed to ~~continue~~plead guilty to ~~be volatile, particularly in light~~counts 1 through 31 of the ~~impacts~~Criminal Information statement each charging Rockwater Northeast, LLC with a violation of the ~~COVID-19 pandemic. In March 2020, Saudi Arabia~~Clean 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 reduced~~plea is disclosed in the ~~prices at which it sells oil and announced plans to increase production. These events, combined~~Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The Company has commenced discussions with the ~~COVID-19 pandemic, contributed~~EPA Suspension and Debarment Division to seek a ~~sharp drop~~resolution to remove the proposed debarment in ~~prices for oil~~a cooperative fashion as soon as practicable, and made responsive filings to the SDO to oppose the findings in the ~~first quarter of 2020 continuing into~~Notices. If the ~~second quarter of 2020. In April 2020, OPEC (which includes Saudi Arabia), Russia (together with OPEC and other allied producing countries, “OPEC+”) agreed~~Company is unsuccessful in its efforts to ~~curtail~~oppose the proposed debarment or

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~~oil production by approximately 10 million barrels per day. Further, some U.S. producers chose~~reach a resolution to ~~shut-in~~avoid 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 levels~~federal 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 ~~drilling~~Notices could impair the Company’s ability to acquire additional federal contracts or ~~completion~~commercial 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:~~

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

~~taxation and royalty charges;~~

●

~~political and economic conditions in oil and gas producing countries;~~

●

~~global weather conditions, pandemics and natural disasters;~~

●

~~worldwide political, military and economic conditions;~~

●

~~the cost of producing and delivering oil and gas;~~

●

~~the discovery rates of new oil and gas reserves;~~

●

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

●

~~the ability of oil and gas producers to access capital;~~

●

~~technical advances affecting production efficiencies and overall energy consumption; and~~

●

~~the potential acceleration of the development of alternative fuels.~~

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~~The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as~~ the ~~COVID-19 pandemic, could adversely affect our~~Company’s business, results of operations ~~and~~or 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.

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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.

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HIDDEN_ROW
Exhibit Number		Description

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

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

**†10.1		~~Separation~~Letter Agreement between John D. Schmitz and ~~Consulting~~Select Energy Services, LLC, dated March 1, 2021 (incorporated by reference herein to Exhibit 10.1 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed March 1, 2021).

†10.2		Amended and Restated Employment Agreement between Michael Skarke and Select Energy Services, LLC, dated March 1, 2021 (incorporated by reference herein to Exhibit 10.2 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed March 1, 2021).

†10.3		Letter Agreement between Michael Skarke and Select Energy Services, Inc., dated March 1, 2021 (incorporated by reference herein to Exhibit 10.3 to Select Energy Services, Inc.’s Current Report on Form 8-K, filed March 1, 2021).

†*10.4		Employment Agreement between Brian Szymanski and Select Energy Services, LLC, dated March 1, 2021.

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

*10.6		Form of Restricted Stock Grant Notice and Restricted Stock Agreement between John D. Schmitz and Select Energy Services, Inc. under the Select Energy Services, Inc. 2016 Equity Incentive Plan.

*10.7		Form of Special Restricted Stock Grant Notice and Restricted Stock Agreement between John D. Schmitz and Select Energy Services, Inc. under the Select Energy Services, Inc. 2016 Equity Incentive Plan.

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

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

*†10.10		Release Agreement by and between Select Energy Services, LLC and ~~Mitchell M. Shauf,~~Holli C. Ladhani, dated ~~August 31, 2020.~~January 3, 2021.

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

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

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

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

*101		Interactive Data Files

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

*Filed herewith

**Furnished herewith

†Management contract or compensatory plan or arrangement.

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SIGNATURE

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


	SELECT ENERGY SERVICES, INC.

Date: ~~November 4, 2020~~May 5, 2021	By:	/s/ ~~Holli Ladhani~~John D. Schmitz
		~~Holli Ladhani~~John D. Schmitz
		Chairman, President and Chief Executive Officer


Date: ~~November 4, 2020~~May 5, 2021	By:	/s/ Nick Swyka
		Nick Swyka
		Senior Vice President and Chief Financial Officer

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PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	56

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4435

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6249

Item 4.	Controls and Procedures	6350

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	6451

Item 1A.	Risk Factors	6451

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6652

Item 3.	Defaults upon Senior Securities	6652

Item 4.	Mine Safety Disclosures	6752

Item 5.	Other Information	6752

Item 6.	Exhibits	6752


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


	Water		Water
	Services		Infrastructure		Total

Balance as of December 31, 2019		186,468		80,466		266,934
Impairment		(186,468)		(80,466)		(266,934)
Balance as of September 30, 2020	$	—	$	—	$	—


			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


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


	For the three months ended September 30, 2019
			Income (loss)		Depreciation and		Capital
	Revenue		before taxes		Amortization		Expenditures

	(in thousands)
Water Services	$	196,772	$	13,787	$	19,418	$	10,061
Water Infrastructure		63,953		8,234		6,410		13,873
Oilfield Chemicals		67,933		5,514		2,435		3,162
Other		310		(2,347)		—		—
Eliminations		—		—		—		—
Income from operations				25,188
Corporate		—		(12,713)		952		—
Interest expense, net		—		(438)		—		—
Other expense, net		—		(2,364)		—		—
	$	328,968	$	9,673	$	29,215	$	27,096

For the nine months ended

For the three months ended

September 30, 2020

March 31, 2021

Cash received for shares issued

Shares issued