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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 March 31, 2022

or

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

For the transition period from _______________ to ________________

Commission File Number 001-38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware

81-4561945

(State of incorporation)

(IRS Employer

Identification Number)

1233 W. Loop South, Suite 1400

Houston, TX

77027

(Address of principal executive offices)

(Zip Code)

(713) 235-9500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

WTTR

New York Stock Exchange

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of May 2, 2022, the registrant had 98,111,119 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

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, 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 Securities and Exchange Commission (the “SEC”). These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

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

the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, which 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, to which our exploration and production (“E&P”) customers responded by cutting capital spending, leading to fewer oil and gas well completions and thus reduced demand for our services, all of which had a negative impact on our financial results;
global economic distress resulting from sustained Russia-Ukraine war and related economic sanctions, which may decrease demand for oil and demand for our services or contribute to volatility in the prices for oil and natural gas;
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+”) 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;
actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the U.S. and may adversely affect our future operations;
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 in response to changes in commodity prices or reduced demand;
operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, measures taken to protect the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;
any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, which if enacted, could reduce labor availability or add additional

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operational costs as we may experience constraints on our workforce and the workforce of our supply chain, which could have a negative impact on our operations;
the degree to which consolidation among our customers may affect spending on U.S. drilling and completions;
trends and volatility in oil and gas prices, and our ability to manage through such volatility;
the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals, 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 decrease in the demand for our services in our core markets;
regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services;
new or expanded regulations that materially limit our customers’ access to federal and 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;
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 Sustainability-Linked Credit Facility (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;

4

changes in global political or economic conditions, generally, and in the markets we serve;
acts of terrorism, war or political or civil unrest in the U.S. or elsewhere;
the ability to source certain raw materials globally on a timely basis from economically advantaged sources;
accidents, weather, natural disasters or other events affecting our business; and
the other risks identified in our most recent Annual Report on Form 10-K and under the headings “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Item 1A. Risk Factors” in this Quarterly Report.

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

March 31, 2022

December 31, 2021

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

24,797

$

85,801

Restricted cash

2,602

Accounts receivable trade, net of allowance for credit losses of $4,972 and $4,401, respectively

 

293,595

 

232,824

Accounts receivable, related parties

 

157

 

219

Inventories

 

43,074

 

44,456

Prepaid expenses and other current assets

 

33,979

 

31,486

Total current assets

 

398,204

 

394,786

Property and equipment

 

997,229

 

943,515

Accumulated depreciation

 

(556,764)

 

(551,727)

Total property and equipment, net

 

440,465

 

391,788

Right-of-use assets, net

54,933

47,732

Other intangible assets, net

 

105,881

 

108,472

Other long-term assets, net

 

12,437

 

7,414

Total assets

$

1,011,920

$

950,192

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

57,311

$

36,049

Accrued accounts payable

49,935

52,051

Accounts payable and accrued expenses, related parties

 

2,375

 

1,939

Accrued salaries and benefits

 

16,517

 

22,233

Accrued insurance

 

18,664

 

13,408

Sales tax payable

2,609

2,706

Accrued expenses and other current liabilities

 

20,100

 

19,544

Current operating lease liabilities

18,101

13,997

Current portion of finance lease obligations

 

57

 

113

Total current liabilities

 

185,669

 

162,040

Long-term operating lease liabilities

 

55,464

 

53,198

Other long-term liabilities

 

47,395

 

39,780

Total liabilities

 

288,528

 

255,018

Commitments and contingencies (Note 9)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 98,111,119 shares issued and outstanding as of March 31, 2022; 350,000,000 shares authorized and 94,172,920 shares issued and outstanding as of December 31, 2021

 

981

 

942

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of March 31, 2022 and December 31, 2021

 

 

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, 2022 and December 31, 2021

 

162

 

162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021

 

 

Additional paid-in capital

 

971,282

 

950,464

Accumulated deficit

 

(352,670)

 

(359,472)

Total stockholders’ equity

 

619,755

 

592,096

Noncontrolling interests

 

103,637

 

103,078

Total equity

 

723,392

 

695,174

Total liabilities and equity

$

1,011,920

$

950,192

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

6

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three months ended March 31, 

    

2022

    

2021

Revenue

 

  

 

  

Water Services

$

163,606

$

64,223

Water Infrastructure

58,554

37,803

Oilfield Chemicals

 

72,609

 

41,716

Total revenue

 

294,769

 

143,742

Costs of revenue

 

  

 

  

Water Services

137,046

62,324

Water Infrastructure

44,378

26,399

Oilfield Chemicals

 

62,163

37,766

Depreciation and amortization

 

26,500

21,650

Total costs of revenue

 

270,087

 

148,139

Gross profit (loss)

 

24,682

 

(4,397)

Operating expenses

 

  

 

  

Selling, general and administrative

 

28,315

19,894

Depreciation and amortization

 

567

649

Lease abandonment costs

 

91

104

Total operating expenses

 

28,973

 

20,647

Loss from operations

 

(4,291)

 

(25,044)

Other income (expense)

 

  

 

  

Gain (loss) on sales of property and equipment and divestitures, net

1,653

(579)

Interest expense, net

 

(720)

(435)

Foreign currency gain, net

3

3

Bargain purchase gain

11,434

Other

 

249

(1,629)

Income (loss) before income tax (expense) benefit

 

8,328

 

(27,684)

Income tax (expense) benefit

 

(214)

263

Equity in losses of unconsolidated entities

(129)

Net income (loss)

 

7,985

 

(27,421)

Less: net (income) loss attributable to noncontrolling interests

 

(1,183)

4,314

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

$

6,802

$

(23,107)

Net income (loss) per share attributable to common stockholders (Note 15):

 

Class A—Basic

$

0.07

$

(0.27)

Class B—Basic

$

$

Net income (loss) per share attributable to common stockholders (Note 15):

 

Class A—Diluted

$

0.07

$

(0.27)

Class B—Diluted

$

$

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

7

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three months ended March 31, 

    

2022

    

2021

    

Net income (loss)

$

7,985

$

(27,421)

Comprehensive income (loss)

 

7,985

 

(27,421)

Less: comprehensive (income) loss attributable to noncontrolling interests

 

(1,183)

 

4,314

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

$

6,802

$

(23,107)

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

8

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended March 31, 2022 and 2021

(unaudited)

(in thousands, except share data)

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of December 31, 2021

 

94,172,920

$

942

 

16,221,101

$

162

 

$

950,464

$

(359,472)

$

592,096

$

103,078

$

695,174

ESPP shares issued

1,549

11

11

1

12

Equity-based compensation

2,805

2,805

470

3,275

Issuance of restricted shares

 

2,337,795

 

23

 

 

 

 

2,049

 

 

2,072

 

(2,072)

 

 

Stock options exercised

 

70,000

 

1

 

 

 

 

583

 

 

584

 

24

 

 

608

Issuance of shares for acquisitions

4,203,323

42

34,456

34,498

1,356

35,854

Repurchase of common stock

(2,660,328)

(27)

(19,080)

(19,107)

(409)

(19,516)

Restricted shares forfeited

(14,140)

(13)

(13)

13

NCI income tax adjustment

7

7

(7)

Net income

 

 

 

 

 

 

 

6,802

 

6,802

 

1,183

 

 

7,985

Balance as of March 31, 2022

 

98,111,119

$

981

 

16,221,101

$

162

 

$

971,282

$

(352,670)

$

619,755

$

103,637

$

723,392

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

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

2,145

14

14

14

Equity-based compensation

1,202

1,202

220

1,422

Issuance of restricted shares

1,487,448

15

1,529

1,544

(1,544)

Repurchase of common stock

(144,078)

(1)

(888)

(889)

15

(874)

Restricted shares forfeited

(301,395)

(3)

(315)

(318)

318

Noncontrolling interest in subsidiary

(140)

(140)

(934)

(1,074)

NCI income tax adjustment

8

8

(8)

Net loss

 

 

 

 

 

 

 

(23,107)

 

(23,107)

 

(4,314)

 

 

(27,421)

Balance as of March 31, 2021

 

87,856,767

$

879

 

16,221,101

$

162

 

$

910,688

$

(340,354)

$

571,375

$

106,574

$

677,949

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

9

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Three months ended March 31, 

    

2022

    

2021

Cash flows from operating activities

 

Net income (loss)

$

7,985

$

(27,421)

Adjustments to reconcile net income (loss) to net cash used in operating activities

 

 

Depreciation and amortization

 

27,067

 

22,299

(Gain) loss on disposal of property and equipment and divestitures

 

(1,653)

 

579

Equity in losses of unconsolidated entities

129

Bad debt expense

 

571

 

300

Amortization of debt issuance costs

 

294

 

172

Inventory write-downs

54

Equity-based compensation

 

3,275

 

1,422

Bargain purchase gain

 

(11,434)

 

Unrealized loss on short-term investment

40

1,831

Other operating items, net

 

99

 

(129)

Changes in operating assets and liabilities

 

 

Accounts receivable

 

(46,622)

 

(11,187)

Prepaid expenses and other assets

 

4,554

 

(2,696)

Accounts payable and accrued liabilities

 

(2,855)

 

10,903

Net cash used in operating activities

 

(18,550)

 

(3,873)

Cash flows from investing activities

 

 

Purchase of property and equipment

 

(15,463)

 

(4,534)

Purchase of equity method investments

(3,467)

 

(2,000)

Collection of note receivable

184

 

Distribution from cost method investment

20

Acquisitions, net of cash and restricted cash received

 

6,941

 

Proceeds received from sales of property and equipment

 

12,123

 

2,316

Other

(429)

 

Net cash used in investing activities

 

(91)

 

(4,218)

Cash flows from financing activities

 

 

Borrowings from revolving line of credit

20,000

Payments on revolving line of credit

 

(20,000)

 

Payments on long-term debt

 

(18,780)

 

Payments of finance lease obligations

(61)

(75)

Payment of debt issuance costs

 

(2,031)

 

Proceeds from share issuance

12

14

Repurchase of common stock

 

(18,908)

 

(874)

Net cash used in financing activities

 

(39,768)

 

(935)

Effect of exchange rate changes on cash

 

7

 

8

Net decrease in cash, cash equivalents, and restricted cash

 

(58,402)

 

(9,018)

Cash, cash equivalents, and restricted cash beginning of period

 

85,801

 

169,039

Cash, cash equivalents, and restricted cash end of period

$

27,399

$

160,021

Supplemental cash flow disclosure:

 

 

Cash paid for interest

$

402

$

367

Cash refunds received for income taxes, net

$

(721)

$

(650)

Supplemental disclosure of noncash investing activities:

 

 

Issuance of shares for acquisitions

$

35,854

$

Capital expenditures included in accounts payable and accrued liabilities

$

14,922

$

6,490

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

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SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

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

We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the 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. As 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.

Class A and Class B Common Stock:  As of March 31, 2022, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of our Class A common stock, par value $0.01 per share (“Class A Common Stock”) and Class B common stock, par value $0.01 per share (“Class B Common Stock”) are entitled to one vote per share and vote together as a single class on all matters presented to our stockholders for their 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”) 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.

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 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 months ended March 31, 2022 (the “Current Quarter”) and the three months ended March 31, 2021 (the “Prior Quarter”). The Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) filed with the SEC on February 23, 2022, 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 may not be indicative of the results to be expected for the full year, in part due to the initiation of war between Russia and Ukraine, the continuing effects of the COVID-19 pandemic and large variations in oil and natural gas prices during the Current Quarter.

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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 or other appropriate basis as applicable. As of March 31, 2022, the Company had three equity-method investments, one cost-method investment and one investment in publicly traded securities accounted for using the fair value option. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:

Year

As of March 31,

As of December 31,

Type of Investment

attained

Accounting method

Balance Sheet Location

2022

 

2021

(in thousands)

20% minority interest

2011

Cost-method

Other long-term assets, net

$

100

$

120

Notes receivable (1)

2020

Amortized cost basis

Other long-term assets, net

4,446

21% minority interest (1)

2021

Equity-method

Other long-term assets, net

4,442

33% minority interest

2021

Equity-method

Other long-term assets, net

3,316

1,779

45% minority interest

2021

Equity-method

Other long-term assets, net

1,942

142

Publicly traded securities

2020

Fair value option

Prepaid expenses and other current assets

35

75

(1)Investment in notes receivable converted to equity-method investment during the Current Quarter.

Segment reporting: The Company has three reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. See “Note 16—Segment Information” for additional information.

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

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 our produced water gathering systems and saltwater disposal wells, primarily serving E&P companies.

The Oilfield Chemicals segment provides technical solutions and expertise related to chemical applications in the oil and gas industry. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completions. We also have significant capabilities in supplying logistics for chemical applications. Given the breadth of chemicals and application expertise we provide, our customers range from pressure pumpers to major integrated and independent oil and gas producers. 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 water used in well completions.

12

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, 2021, included in the 2021 Form 10-K.

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, lease-related reasonably certain option exercise assessments, 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.

Restricted cash: Restricted cash consists primarily of cash that serves as collateral for letters of credit assumed as part of the acquisition of Nuverra Environmental Solutions, Inc. (“Nuverra”). Any cash that is legally restricted from use is classified as restricted cash.

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 when a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. 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 change in the allowance for credit losses is as follows:

Three months ended March 31, 2022

(in thousands)

Balance at December 31, 2021

$

4,401

Increase to allowance based on a percentage of revenue

 

571

Balance at March 31, 2022

$

4,972

13

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

    

Three months ended March 31, 2022

 

(in thousands)

Balance at December 31, 2021

 

$

29,551

Accretion expense, included in depreciation and amortization expense

 

329

Acquired ARO's

 

8,104

Payments

(335)

Balance at March 31, 2022

 

$

37,649

Short-term ARO liability

4,753

Long-term ARO liability

32,896

Balance at March 31, 2022

$

37,649

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

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

Three months ended March 31, 

    

2022

    

2021

(in thousands)

Category

Classification

Lessor income

Costs of revenue

$

116

$

66

Sublease income

Lease abandonment costs and Costs of revenue

346

243

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

Defined Contribution Plan: During 2020, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) plan and the suspension continued into the first half of 2021. Effective July 1, 2021, the Company reinstated matching contributions of 50% of employee contributions, up to 4% of eligible earnings. The Company incurred $0.5 million and no match expense in the Current Quarter and Prior Quarter, respectively.

Payroll Tax Deferral: In 2020, the Company took advantage of the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and deferred the payment of $6.0 million of payroll taxes. Half of the deferral was paid during the fourth quarter of 2021 and the remaining balance of $3.0 million must be repaid by December 31, 2022. The remaining deferral is reported under accrued salaries and benefits on the accompanying consolidated balance sheets as of March 31, 2022.

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Severance: During the Prior Quarter, the Company incurred $3.2 million of severance in connection with the termination of its former chief executive officer, which was paid in full during the first quarter of 2021. A summary of severance costs for the Current Quarter and Prior Quarter are as follows:

Three months ended March 31, 

2022

    

2021

(in thousands)

Severance

Selling, general and administrative

3,225

Total severance expense

$

$

3,225

NOTE 3—ACQUISITIONS

Business combinations

The following table presents key information connected with our 2022 and 2021 acquisitions (dollars in thousands, except share amounts):

Assets and Operations Acquired

Acquisition Date

Shares Issued

Cash Consideration

Contingent Consideration

Value of Shares Issued

Total Consideration

Segments

Nuverra

February 23, 2022

4,203,323

$

$

$

35,854

$

35,854

Water Services & Water Infrastructure

HB Rentals

December 3, 2021

1,211,375

2,610

7,135

9,745

Water Services

Agua Libre and Basic

October 1, 2021

902,593

16,394

4,684

21,078

Water Services & Water Infrastructure

UltRecovery

August 2, 2021

2,500

1,058

3,558

Oilfield Chemicals

Complete

July 9, 2021

3,600,000

14,356

20,304

34,660

Water Services & Water Infrastructure

Total

9,917,291

$

35,860

$

1,058

$

67,977

$

104,895

Nuverra Acquisition

On February 23, 2022, the Company completed the acquisition of Nuverra for total consideration of $35.9 million based on the closing price of the Company’s shares of Class A Common Stock on February 23, 2022 (the “Nuverra Acquisition”). Consideration transferred consisted of 4,203,323 shares of Class A Common Stock. The acquisition strengthens Select’s geographic footprint with a unique set of water logistics and infrastructure assets, particularly in the Bakken, Haynesville and Northeast, while continuing to expand Select’s production-related revenues. Select also acquired a 60-mile underground twin pipeline network in the Haynesville Shale in Texas and Louisiana. This pipeline network is used for the collection of produced water for transport to interconnected disposal wells and the delivery or re-delivery of water from water sources to operator locations for use in well completion activities. Additionally, Nuverra operates a landfill facility in North Dakota located on a 50-acre site. The facility provides a unique opportunity for Select to expand its logistics capabilities into a new service offering. The acquisition is expected to result in a bargain purchase gain based on our preliminary evaluation, as Nuverra was experiencing financial distress and actively evaluating strategic alternatives leading up to the transaction.

15

The Nuverra 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 estimates, judgments and assumptions. The Company has engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the property and equipment acquired, current assets, current liabilities and long-term liabilities have not been finalized as of March 31, 2022. The Nuverra debt, including accrued interest, totaled $18.8 million, and was repaid during the Current Quarter after the acquisition was completed. The assets acquired and liabilities assumed are included in the Company’s Water Services and Water Infrastructure segments. For the Current Quarter, the Company incurred $2.7 million of transaction-related costs related to this acquisition, which are included in selling, general and administrative within the consolidated statement of operations.

The Company assumed $1.6 million of severance liabilities in connection with the Nuverra acquisition and $0.4 million is included in accrued salaries and benefits as of March 31, 2022.

The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:

Preliminary purchase price allocation

Amount

Consideration transferred

(in thousands)

Class A Common Stock (4,203,323 shares)

$

35,854

Total consideration transferred

 

35,854

Less: identifiable assets acquired and liabilities assumed

 

Working capital

 

8,093

Property and equipment

 

65,138

Right-of-use assets

 

2,931

Other long-term assets

229

Long-term debt

(18,780)

Long-term ARO

(8,104)

Long-term lease liabilities

(1,189)

Deferred tax liabilities

(120)

Other long-term liabilities

(500)

Total identifiable net assets acquired

47,698

Bargain Purchase Gain

 

(11,844)

Fair value allocated to net assets acquired, net of bargain purchase gain

 

$

35,854

HB Rentals Acquisition

On December 3, 2021, the Company, through its subsidiary Peak Oilfield Services, LLC, completed the acquisition of certain assets of H.B. Rentals, L.C. (“HB Rentals”), an operating subsidiary of Superior Energy Services, Inc. (“Superior”), for total initial consideration of $8.7 million based on the closing price of the Company’s shares of Class A Common Stock on December 2, 2021 (the “HB Rentals Acquisition”). Consideration transferred consisted of 1,211,375 shares of Class A Common Stock and $