Filed pursuant to Rule 424(b)(3)

Registration No. 333-222679

 

PROSPECTUS SUPPLEMENT No. 1

(To Prospectus Dated March 30, 2018)

 

6,653,777 Shares

 

 

Select Energy Services, Inc.

 

Class A Common Stock

 

 

This prospectus supplement No. 1 supplements the prospectus dated March 30, 2018 filed pursuant to Rule 424(b)(1) (the “Prospectus”) by Select Energy Services, Inc. Pursuant to the Prospectus, this prospectus supplement relates to the offering of 6,653,777 shares of Class A common stock by the selling shareholders named in the Prospectus.

 

This prospectus supplement incorporates into the Prospectus the information contained in our attached:

 

·                  Quarterly Report on Form 10-Q, for the quarter ended March 31, 2018, which was filed with the Securities and Exchange Commission (the “SEC”) on May 11, 2018; and

 

·                  Current Reports on Form 8-K, which were filed with the SEC on May 7, 2018 and May 14, 2018.

 

You should read this prospectus supplement in conjunction with the Prospectus, including any supplements and amendments thereto. This prospectus supplement is qualified by reference to the Prospectus except to the extent that the information in this prospectus supplement supersedes the information contained in the Prospectus.

 

This prospectus supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus.

 

Our Class A common stock are traded on the New York Stock Exchange under the symbol “WTTR.”

 

Investing in our Class A common stock involves risks. Please see “Risk Factors” beginning on page 3 of the Prospectus.

 

Neither the SEC nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus supplement is May 18, 2018.

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

or

 

o              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)

 

 

(713)  235-9500

(Registrant’s telephone number, including area code)

 

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 x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes x     No o

 

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 o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o
		(Do not check if a smaller reporting company)	Emerging growth company x

 

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. o

 

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

 

As of May 7, 2018, the registrant had 66,254,863 shares of Class A common stock and 40,331,989 shares of Class B common stock outstanding.

 

 

 

SELECT ENERGY SERVICES, INC.

 

TABLE OF CONTENTS

 

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	51
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53

 

2

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K and under the heading “Item 1A. Risk Factors” in this Quarterly Report. 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 ultimate outcome and results of integrating our operations with the operations of Rockwater (as defined herein);

 

·                  the effects of our business combination with Rockwater, including the combined company’s future financial condition, results of operations, strategy and plans;

 

·                  potential adverse reactions or changes to business relationships resulting from the completion of the Rockwater Merger (as defined herein);

 

·                  expected benefits from the Rockwater Merger and the ability of the combined company to realize those benefits;

 

·                  the level of capital spending by U.S. and Canadian oil and gas companies;

 

·                  trends and volatility in oil and gas prices;

 

·                  demand for our services;

 

·                  regional impacts to our business, including our key infrastructure assets within the Bakken;

 

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

 

·                  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 safety performance;

 

·                  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 and various environmental matters;

 

·                  our ability to retain key management and employees;

 

3

 

·                 the impacts of competition on our operations;

 

·                 our ability to hire and retain skilled labor;

 

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

 

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

 

·                 the impacts of advancements in drilling and well service technologies;

 

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

 

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

 

·                 the other risks identified in our most recent Annual Report on Form 10-K, and under the headings “Item 1A. Risk Factors,” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”).

 

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

 

4

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

		March 31, 2018			December 31, 2017
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	6,117		$	2,774
Accounts receivable trade, net of allowance for doubtful accounts of $3,341 and $2,979, respectively		407,046			373,633
Accounts receivable, related parties		7,206			7,669
Inventories		44,501			44,598
Prepaid expenses and other current assets		20,295			17,842
Total current assets		485,165			446,516
Property and equipment		1,051,970			1,034,995
Accumulated depreciation		(578,220		)	(560,886		)
Property and equipment, net		473,750			474,109
Goodwill		275,795			273,421
Other intangible assets, net		152,215			156,066
Other assets		4,084			6,256
Total assets		$	1,391,009		$	1,356,368
Liabilities and Equity
Current liabilities
Accounts payable		$	62,415		$	52,579
Accounts payable and accrued expenses, related parties		2,600			2,772
Accrued salaries and benefits		20,222			21,324
Accrued insurance		11,928			12,510
Sales tax payable		12,570			12,931
Accrued expenses and other current liabilities		91,400			81,112
Current portion of capital lease obligations		1,706			1,965
Total current liabilities		202,841			185,193
Accrued lease obligations		18,321			18,979
Other long term liabilities		13,577			13,827
Long-term debt		75,000			75,000
Total liabilities		309,739			292,999
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 66,258,163 shares issued and outstanding as of March 31, 2018; 350,000,000 shares authorized and 59,182,176 shares issued and outstanding as of December 31, 2017		662			592
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of March 31, 2018; 40,000,000 shares authorized, 6,731,845 shares issued and outstanding as of December 31, 2017		—			67
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 40,331,989 shares issued and outstanding as of March 31, 2018; 150,000,000 shares authorized and 40,331,989 shares issued and outstanding as of December 31, 2017		404			404
Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2018 and December 31, 2017		—			—
Additional paid-in capital		675,895			673,141
Accumulated deficit		(7,760		)	(17,859		)
Accumulated other comprehensive income		43			302
Total stockholders’ equity		669,244			656,647
Noncontrolling interests		412,026			406,722
Total equity		1,081,270			1,063,369
Total liabilities and equity		$	1,391,009		$	1,356,368

 

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

 

5

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

 

		Three Months Ended March 31,
		2018			2017
Revenue
Water solutions and related services		$	281,555		$	78,377
Accommodations and rentals		14,744			9,515
Wellsite completion and construction services		16,466			12,033
Oilfield chemical product sales		63,630			—
Total revenue		376,395			99,925
Costs of revenue
Water solutions and related services		215,425			60,621
Accommodations and rentals		10,665			7,923
Wellsite completion and construction services		14,390			10,419
Oilfield chemical product sales		57,084			—
Depreciation and amortization		30,882			21,204
Total costs of revenue		328,446			100,167
Gross profit (loss)		47,949			(242		)
Operating expenses
Selling, general and administrative		25,681			9,957
Depreciation and amortization		541			446
Impairment of investment		2,000			—
Lease abandonment costs		1,124			1,863
Total operating expenses		29,346			12,266
Income (loss) from operations		18,603			(12,508		)
Other income (expense)
Interest expense, net		(1,151		)	(730		)
Foreign currency losses, net		(400		)	—
Other (expense) income, net		(458		)	1,064
Income (loss) before tax expense		16,594			(12,174		)
Tax expense		(462		)	(106		)
Net income (loss)		16,132			(12,280		)
Less: net (income) loss attributable to noncontrolling interests		(6,033		)	8,108
Net income (loss) attributable to Select Energy Services, Inc.		$	10,099		$	(4,172	)
Net income (loss) per share attributable to common stockholders (Note 15):
Class A—Basic		$	0.15		$	(0.21	)
Class A-1—Basic		$	—		$	(0.21	)
Class A-2—Basic		$	0.15		$	—
Class B—Basic		$	—		$	—
Net income (loss) per share attributable to common stockholders (Note 15):
Class A—Diluted		$	0.15		$	(0.21	)
Class A-1—Diluted		$	—		$	(0.21	)
Class A-2—Diluted		$	0.15		$	—
Class B—Diluted		$	—		$	—

 

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

 

6

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

 

		Three Months Ended March 31,
		2018			2017
Net income (loss)		$	16,132		$	(12,280	)
Other comprehensive income (loss)
Foreign currency translation adjustment, net of tax of $0		(259		)	—
Net change in unrealized loss		(259		)	—
Comprehensive income (loss)		15,873			(12,280		)
Less: comprehensive (income) loss attributable to noncontrolling interests		(5,936		)	8,108
Comprehensive income (loss) attributable to Select Energy Services, Inc.		$	9,937		$	(4,172	)

 

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

 

7

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(in thousands, except share data)

 

		Class A						Class A-2						Class B						Preferred												Accumulated
		Stockholders						Stockholders						Stockholders						Stockholders												Other
					Class A						Class A-2						Class B									Additional						Comprehensive			Total
					Common						Common						Common						Preferred			Paid-In			Accumulated			Income			Stockholders’			Noncontrolling
		Shares			Stock			Shares			Stock			Shares			Stock			Shares			Stock			Capital			Deficit			(Loss)			Equity			Interests			Total
Balance as of December 31, 2017		59,182,176			$	592		6,731,845			$	67		40,331,989			$	404		—			$	—		$	673,141		$	(17,859	)	$	302		$	656,647		$	406,722		$	1,063,369
Conversion of Class A-2 to Class A		6,731,839			67			(6,731,839		)	(67		)	—			—			—			—			—			—			—			—			—			—
Equity-based compensation		—			—			—			—			—			—			—			—			1,542			—			—			1,542			939			2,481
Issuance of restricted shares		331,389			3			—			—			—			—			—			—			1,421			—			—			1,424			(1,424		)	—
Exercise of restricted stock units		27,235			—			—			—			—			—			—			—			2			—			—			2			(2		)	—
Stock options exercised		19,398			—			—			—			—			—			—			—			81			—			—			81			49			130
Repurchase of common stock		(15,234		)	—			(6		)	—			—			—			—			—			(222		)	—			—			(222		)	(42		)	(264		)
Restricted shares forfeited		(18,640		)	—			—			—			—			—			—			—			(70		)	—			—			(70		)	70			—
Noncontrolling interest in subsidiary		—			—			—			—			—			—			—			—			—			—			—			—			(161		)	(161		)
Foreign currency translation adjustment		—			—			—			—			—			—			—			—			—			—			(259		)	(259		)	(158		)	(417		)
Net income		—			—			—			—			—			—			—			—			—			10,099			—			10,099			6,033			16,132
Balance as of March 31, 2018		66,258,163			$	662		—			$	—		40,331,989			$	404		—			$	—		$	675,895		$	(7,760	)	$	43		$	669,244		$	412,026		$	1,081,270

 

		Class A					Class A-1					Class A-2					Class B					Preferred											Accumulated
		Stockholders					Stockholders					Stockholders					Stockholders					Stockholders											Other
				Class A					Class A-1					Class A-2					Class B								Additional						Comprehensive			Total
				Common					Common					Common					Common					Preferred			Paid-In			Accumulated			Income			Stockholders’			Noncontrolling
		Shares		Stock			Shares		Stock			Shares		Stock			Shares		Stock			Shares		Stock			Capital			Deficit			(Loss)			Equity			Interests			Total
Balance as of December 31, 2016		3,802,972		$	38		16,100,000		$	161		—		$	—		38,462,541		$	385		—		$	—		$	113,175		$	(1,043	)	$	—		$	112,716		$	221,992		$	334,708
Issuance of shares for acquisition		274,998		3			—		—			—		—			—		—			—		—			2,495			—			—			2,498			3,002			5,500
Equity-based compensation		—		—			—		—			—		—			—		—			—		—			221			—			—			221			422			643
Net loss		—		—			—		—			—		—			—		—			—		—			—			(4,172		)	—			(4,172		)	(8,108		)	(12,280		)
Balance as of March 31, 2017		4,077,970		$	41		16,100,000		$	161		—		$	—		38,462,541		$	385		—		$	—		$	115,891		$	(5,215	)	$	—		$	111,263		$	217,308		$	328,571

 

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

 

8

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

		Three Months Ended March 31,
		2018			2017
Cash flows from operating activities
Net income (loss)		$	16,132		$	(12,280	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		31,423			21,650
Loss (gain) on disposal of property and equipment		554			(1,105		)
Bad debt expense		485			334
Amortization of debt issuance costs		172			309
Equity-based compensation		2,481			643
Impairment of investment		2,000			—
Other operating items, net		117			—
Changes in operating assets and liabilities
Accounts receivable		(33,691		)	(21,157		)
Prepaid expenses and other assets		(1,017		)	1,337
Accounts payable and accrued liabilities		16,549			2,333
Net cash provided by (used in) operating activities		35,205			(7,936		)
Cash flows from investing activities
Acquisitions, net of cash received		—			(49,004		)
Purchase of property and equipment		(32,612		)	(10,806		)
Proceeds received from sale of property and equipment		1,609			1,753
Net cash used in investing activities		(31,003		)	(58,057		)
Cash flows from financing activities
Proceeds from revolving line of credit and issuance of long-term debt		—			34,000
Payments of capital lease obligations		(511		)	—
Proceeds from share issuance		130			—
Distributions to noncontrolling interests		(161		)	—
Share repurchases		(264		)	—
Net cash (used in) provided by financing activities		(806		)	34,000
Effect of exchange rate changes on cash		(53		)	—
Net increase (decrease) in cash and cash equivalents		3,343			(31,993		)
Cash and cash equivalents, beginning of period		2,774			40,041
Cash and cash equivalents, end of period		$	6,117		$	8,048
Supplemental cash flow disclosure:
Cash paid for interest		$	991		$	427
Cash paid for taxes		$	344		$	12
Supplemental disclosure of noncash investing activities:
Capital expenditures included in accounts payable and accrued liabilities		$	9,632		$	4,766

 

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

 

9

 

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 a membership interest in SES Holdings, LLC (“SES Holdings”).

 

On November 1, 2017, the Company completed the transactions in which subsidiaries of Select Inc. and SES Holdings merged with Rockwater Energy Solutions, Inc. (“Rockwater”) and Rockwater Energy Solutions, LLC (“Rockwater LLC”), respectively, in a stock-for-stock or unit-for-unit transaction (the “Rockwater Merger”). See Note 3—Acquisitions for further discussion.

 

We are a leading provider of total water management and chemical solutions to the oil and gas industry in the United States and Western Canada. The oilfield water services market has grown rapidly over the past decade, driven by advances in drilling, completion and production technologies. Within the major onshore oil and gas plays in the United States, we believe we are a market leader in sourcing, transfer (both by permanent pipeline and temporary hose) and temporary containment of water prior to its use in drilling and completion activities associated with hydraulic fracturing or “fracking,” which we collectively refer to as “pre-frac water services.” We also provide well testing and flowback services immediately following the well completion and in most of our areas of operations, we provide additional complementary water-related services that support oil and gas well completion and production activities including monitoring, treatment, hauling, recycling and disposal. In addition to our water-related services, we also develop and manufacture specialty chemicals used in frac fluid systems and production chemicals used to enhance performance over the life of a well. Furthermore, we develop and manufacture chemicals required by oil and gas companies to maintain and enhance oil and gas production over the life of a typical well. We believe we are the only oilfield services company that provides total water solutions together with complementary chemical products and related expertise, which we believe gives us a unique competitive advantage in our industry.

 

We also offer wellsite services that complement our total water management and chemical solutions offering. These services include equipment rental, accommodations, crane and logistics services, wellsite and pipeline construction, field and well services, sand hauling and fluids logistic services. In addition, we provide water transfer, fluids hauling, containment and rental services in Canada.

 

Reorganization:  On December 20, 2016, Select Inc. completed a private placement (the “Select 144A Offering”) of 16,100,000 shares of Select Inc. Class A-1 common stock, par value $0.01 per share (“Class A-1 Common Stock”) at an offering price of $20.00 per share. In conjunction with the Select 144A Offering, SES Holdings’ then existing Class A and Class B units were converted into a single class of common units (the “SES Holdings LLC Units”) and SES Holdings effected a 10.3583 for 1 unit split. In exchange for the contribution of all net proceeds from the Select 144A Offering to SES Holdings, SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Inc., and Select Inc. became the sole managing member of SES Holdings. Select Inc. issued 38,462,541 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”), to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”) or one share for each SES Holdings LLC Unit held by Legacy Owner Holdco. Select Inc. also acquired 3,802,972 SES Holdings LLC Units from certain legacy owners (the “Contributing Legacy Owners”) in exchange for the issuance of 3,802,972 shares of Select Inc. Class A common stock, par value $0.01 per share (“Class A Common Stock”). Upon the effectiveness on June 13, 2017 of a shelf registration statement registering such shares for resale, all shares of Class A-1 Common Stock converted into shares of Class A Common Stock on a one-for-one basis. Refer below for further discussion. Shareholders of Class A Common Stock, and Class B Common Stock vote together as a single class on all matters, subject 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 on their ownership of Class B Common Stock. The reorganization transactions were treated as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests.

 

10

 

Initial Public Offering: On April 26, 2017, the Company completed its initial public offering (“IPO”) of 8,700,000 shares of Class A Common Stock at a price of $14.00 per share. On May 10, 2017, the underwriters of the IPO exercised their over-allotment option to purchase an additional 1,305,000 shares of Class A Common Stock at the IPO price of $14.00 per share. After deducting underwriting discounts and commissions and estimated offering expenses payable by it, the Company received $128.5 million of the aggregate net proceeds from the IPO (including the over-allotment option). The Company contributed all of the net proceeds received by it to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds in the following manner: (i) $34.0 million was used to repay borrowings incurred under the Company’s Previous Credit Facility (as defined and discussed in Note 8) to fund the cash portion of the purchase price of the GRR Acquisition, as defined below, (ii) $7.8 million was used for the cash settlement of outstanding phantom unit awards and (iii) the remaining net proceeds were intended to be used for general corporate purposes, including funding capital expenditures.

 

Rockwater Merger: On November 1, 2017, we completed the Rockwater Merger, as contemplated by the Agreement and Plan of Merger, dated as of July 18, 2017 (the “Merger Agreement”), by and among us, SES Holdings, Raptor Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary, Raptor Merger Sub, LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of SES Holdings, Rockwater and Rockwater LLC. Pursuant to the Merger Agreement, we combined with Rockwater in a stock-for-stock transaction in which we issued approximately 25.9 million shares of Class A Common Stock, 6.7 million shares of Select Inc. Class A-2 common stock, par value $0.01 (the “Class A-2 Common Stock”) and 4.4 million shares of Class B Common Stock to the former holders of Rockwater common stock and a unit-for-unit transaction in which SES Holdings issued approximately 37.3 million common units of SES Holdings (each, an “SES Holdings LLC Unit”) to the former holders of units in Rockwater LLC (each, a “Rockwater LLC Unit”). See Note 3 — Acquisitions for further discussion.

 

Credit Agreement:  Concurrent with the Rockwater Merger, the Company entered into the Credit Agreement, a $300.0 million senior secured revolving credit facility. In addition, the obligations under the Previous Credit Facility were repaid in full and the Previous Credit Facility was terminated. See Note 8—Debt for further discussion.

 

Exchange rights:  Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), 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.

 

11

 

Registration rights:  In December 2016, in connection with the closing of the Select 144A Offering, Select Inc. entered into a registration rights agreement with FBR Capital Markets & Co. for the benefit of the investors in the Select 144A Offering. Under this registration rights agreement, the Company agreed, at its expense, to file with the U.S Securities and Exchange Commission (“SEC”), in no event later than April 30, 2017, a shelf registration statement registering for resale the 16,100,000 shares of Class A Common Stock issuable upon conversion of the Class A-1 Common Stock sold in the Select 144A Offering plus any additional shares of Class A-1 Common Stock issued in respect thereof whether by stock dividend, stock distribution, stock split or otherwise, and to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 60 days after the closing of the IPO. The Company filed this registration statement with the SEC on April 28, 2017 and this registration statement was declared effective by the SEC on June 13, 2017. Accordingly, each share of Class A-1 Common Stock outstanding automatically converted into a share of Class A Common Stock on a one-for-one basis at that time. In addition, Legacy Owner Holdco has the right, under certain circumstances, to cause the Company to register the shares of Class A Common Stock obtained pursuant to the Exchange Right.

 

Rockwater Registration Rights Agreement: In connection with the closing of the Rockwater Merger, pursuant to that certain Assignment and Assumption Agreement (the “Assignment and Assumption Agreement”), dated as of November 1, 2017, by and between Rockwater and Select Inc., Rockwater assigned, and Select Inc. assumed, Rockwater’s rights and obligations under that certain Registration Rights Agreement made and entered into as of February 16, 2017, between Rockwater and FBR Capital Markets & Co. (as assumed by Select Inc. pursuant to the Assignment and Assumption Agreement, the “Rockwater Registration Rights Agreement”). Under the Rockwater Registration Rights Agreement, Select Inc. agreed, at its expense, to file with the SEC a shelf registration statement registering for resale shares of Class A Common Stock into which the outstanding shares of Class A-2 Common Stock were convertible, and to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 180 days after the initial filing of such registration statement

 

On January 12, 2018, the Company, pursuant to the Rockwater Registration Rights Agreement, filed with the SEC a shelf registration statement registering for resale of 6,653,777 shares of Class A Common Stock into which certain of the outstanding shares of Class A-2 Common Stock registered under such registration statement were convertible. Pursuant to the Company’s Third Amended and Restated Certificate of Incorporation, upon the effectiveness of this registration statement on March 29, 2018,  each outstanding share of Class A-2 Common Stock converted automatically into a share of Class A Common Stock on a one-for-one basis. No shares of Class A-2 Common Stock are currently outstanding.

 

Tax receivable agreements:  In connection with the Company’s restructuring at the Select 144A Offering, Select Inc. entered into two 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 12—Related Party Transactions for further discussion.

 

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 United States (“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. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Company’s annual consolidated financial statements and related notes included in the annual report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”), filed with the SEC on March 19, 2018.  The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

12

 

In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary for a fair presentation of the Company’s interim financial statements have been included in these unaudited interim consolidated financial statements. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.

 

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. As of March 31, 2018, the Company has no equity method investees and one cost method investee. 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. During the three months ended March 31, 2018, the Company determined that its cost method investee was no longer fully recoverable and was written down to its estimated fair value of $0.5 million. The impairment expense of $2.0 million is included in impairment of investment within the consolidated statement of operations.

 

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

 

13

 

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 years ended December 31, 2017, 2016 and 2015 included in the Company’s most recent Annual Report on Form 10-K. There have been no significant changes in such policies or the application of such policies during the quarter ended March 31, 2018.

 

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 recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, income taxes, self-insurance liabilities, share-based compensation and contingent liabilities. 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.

 

Change in depreciable lives of property and equipment: In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the economic lives of the assets were longer than the historic asset lives previously used by Select Inc. As a result, effective January 1, 2018, the Company changed its estimates of the useful lives of certain assets included in vehicles & equipment and machinery & equipment to better reflect the estimated periods during which these assets will remain in service. The average estimated useful lives of the assets impacted in vehicles and equipment category increased from 6.0 to 8.1 years while the average estimated useful lives of assets impacted in machinery & equipment increased from 5.5 years to 6.9 years. The change in the estimated useful lives of fixed assets is change implemented on a prospective basis and does not require restatement of previously reported depreciation and amortization. The effect of this change in accounting estimates was to reduce depreciation and amortization expense by $4.7 million, increase net income by $4.7 million and increase basic and diluted earnings per share by $0.04 each attributable to Class A and Class A-2 stockholders.

 

Emerging Growth Company status:  Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company is an “emerging growth company,” or an “EGC,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. The Company’s election to use the phase-in periods permitted by this election may make it difficult to compare the Company’s financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. If the Company was to subsequently elect to immediately comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

 

The Company will remain an emerging growth company until, at the latest, December 31, 2022, the last day of the fiscal year following the fifth anniversary of our IPO, although we will lose that status sooner if we have $1.07 billion or more in revenues in a fiscal year, have more than $700 million in market value of our common stock held by non-affiliates as of any June 30 or issue more than $1.0 billion of non-convertible debt over a rolling three-year period.

 

14

 

Recent accounting pronouncements:  In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) on a comprehensive new revenue recognition standard that will supersede Accounting Standards Codification (“ASC”) 605, Revenue Recognition. ASU 2014-09, Revenue from Contracts with Customers, creates a framework under which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period. In August 2015, the FASB decided to defer the original effective date by one year to be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. In accordance with the JOBS Act, the Company is afforded the extended transition period and therefore is not required to adopt the ASU until January 1, 2019. The Company has assembled a team to scope the project, identify relevant revenue streams and understand the revenue recognition implications of the new guidance. The Company is currently evaluating whether the adoption of the ASU will have a material impact on its consolidated financial statements and related disclosures, and internal controls over financial reporting, and the Company has not yet determined the method by which it will adopt the standard.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the current accounting guidance as well as the FASB’s new revenue recognition standard. However, the ASU eliminates the use of bright-line tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, using a modified retrospective approach. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment award transactions. ASU 2016-09 was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement was effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Certain amendments in this update should be applied prospectively, while other amendments in the update should be applied retrospectively, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

15

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practices. The amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied using a retrospective approach. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update was effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this ASU should be applied prospectively. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This pronouncement provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. This update was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The pronouncement should be applied prospectively to an award modified on or after the adoption date. This ASU became effective for the Company in 2018, and the adoption of this guidance did not materially affect its consolidated financial statements and related disclosures.

 

In January 2018, the FASB issued ASU 2018-01, Land Easements. The amendments in this update permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

16

 

NOTE 3— ACQUISITIONS

 

Business combinations

 

Rockwater Merger

 

On November 1, 2017, the Company completed the Rockwater Merger in which the Company combined with Rockwater. Total consideration was $620.2 million based on the closing price of the Company’s shares of Class A Common Stock on November 1, 2017. Consideration transferred consisted of shares of Class A Common Stock, shares of Class A-2 Common Stock, shares of Class B Common Stock, and SES Holdings LLC Units. Consideration transferred also included the Company’s previously held interest in Rockwater, which was acquired as consideration in a sale of assets by Select’s predecessor to Rockwater’s predecessor in 2008 prior to the contribution of those assets to Rockwater and the related conversion of the ownership interests received by Select’s predecessor to ownership interests in Rockwater in 2011, and the fair value of Rockwater’s replaced share-based payments attributed to pre-acquisition service. In addition, the Company’s previously held interest in Rockwater was cancelled pursuant to the Merger Agreement. The previously held interest in Rockwater was previously included in other assets in the consolidated balance sheet. It was remeasured to a fair value of $2.3 million, which resulted in a gain of $1.2 million recognized in the fourth quarter of 2017 in other income in the consolidated statement of operations. For the three months ended March 31, 2018, the Company expensed $2.3 million of transaction-related costs which are included in selling, general and administrative within the consolidated statement of operations.

 

The Rockwater Merger was accounted for as a business combination under the acquisition method of accounting. Assets acquired and liabilities assumed in the Rockwater Merger were recorded at their estimated fair values as of the merger date. The Company has not finalized these estimates; therefore, the fair value estimates set forth below are subject to adjustment during a one-year measurement period following the merger date. The final allocation of purchase consideration could include changes in the estimated fair value of working capital, property and equipment, intangible assets, other long-term assets, deferred tax liabilities and other long-term liabilities. Adjustments in the purchase price allocation may require a change in the amount allocated to goodwill during the period in which the adjustments are determined.

 

When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. The Company also engaged third-party valuation experts to assist in the purchase price allocation and the recorded valuation of property and equipment. The Company has received preliminary reports from these experts including estimates, judgments and assumptions for the valuation of the tangible and intangible assets acquired and liabilities assumed. These preliminary reports along with the analysis and expertise of management have formed the basis for the preliminary allocation. Detailed analysis and review of the assets acquired, including confirmation of the condition, existence and utility of the assets is currently ongoing. Management believes that the current information provides a reasonable basis for estimating fair values of assets acquired and liabilities assumed. These estimates, judgments and assumptions are subject to change and should be treated as preliminary values as there could be significant changes upon final valuation. Management currently believes that its valuation work and the work of its third-party experts will be completed and a final purchase price allocation will be recorded by June 30, 2018. Included in the working capital figure in the table below is accounts receivable acquired with a fair value of $196.9 million, and a gross contractual amount of $199.1 million. The Company expects $2.2 million of the gross contractual amount to be uncollectible. Management estimated that total consideration paid exceeded the fair value of the net assets acquired and liabilities assumed by $249.6 million, which excess was recognized as goodwill. The goodwill recognized was primarily attributable to synergies driven by expanding into new geographies and service offerings, strengthening existing service lines, acquiring an established, trained workforce and expected cost reductions. Goodwill of $233.4 million and $16.2 million was allocated to the Company’s Water Solutions and Oilfield Chemicals segments, respectively.

 

17

 

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
		(in thousands)
Consideration transferred
Class A Common Stock (25,914,260 shares)		$	423,957
Class A-2 Common Stock (6,731,845 shares)		110,133
Class B Common Stock (4,356,477 shares) and SES Holdings common units issued (4,356,477 units)		71,272
Fair value of previously held interest in Rockwater		2,310
Fair value of Rockwater share-based awards attributed to pre-acquisition service		12,529
Total consideration transferred		620,201
Less: identifiable assets acquired and liabilities assumed
Working capital(1)		144,509
Property and equipment		185,601
Intangible assets
Customer relationships		89,007
Trademarks and patents		31,215
Non-compete agreements		3,810
Other long-term assets		62
Deferred tax liabilities		(408		)
Long-term debt		(80,555		)
Other long-term liabilities		(2,650		)
Total identifiable net assets acquired		370,591
Goodwill		249,610
Fair value allocated to net assets acquired		$	620,201

 

(1)        During the three months ended March 31, 2018, the Company obtained additional information related to the working capital which led to a decrease of $2.4 million. The impact of this change resulted in a corresponding increase of $2.4 million in goodwill.

 

18

 

Resource Water Acquisition

 

On September 15, 2017, the Company completed its acquisition (the “Resource Water Acquisition”) of Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”). Resource Water provides water transfer services to exploration and production (“E&P”) operators in West Texas and East Texas. Resource Water’s assets include 24 miles of layflat hose as well as numerous pumps and ancillary equipment required to support water transfer operations. Resource Water has longstanding customer relationships across its operating regions which are viewed as strategic to the Company’s water solutions business.

 

The total consideration for the Resource Water Acquisition was $9.0 million, with $6.6 million paid in cash and $2.4 million paid in shares of Class A Common Stock valued at $15.17 per share, subject to customary post-closing adjustments. The Company funded the cash portion of the consideration for the Resource Water Acquisition with $6.6 million of cash on hand. The Resource Water Acquisition was accounted for as a business combination under the acquisition method of accounting. The allocation of the consideration transferred was based on management’s estimates, judgments and assumptions. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. Working capital estimates are based on provisional amounts. Management estimated that total consideration paid exceeded the fair value of the net assets acquired by $1.9 million, which excess was recognized as goodwill. The goodwill recognized was attributable to Resource Water’s assembled workforce as well as synergies related to the Company’s comprehensive water solutions strategy. The goodwill was included in the assets of the Company’s Water Solutions segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:

 

Purchase price allocation		Amount
		(in thousands)
Consideration  transferred
Cash paid		$	6,586
Class A Common Stock (156,909 shares)		2,380
Total consideration transferred		8,966
Less: identifiable assets acquired and liabilities assumed
Working capital		1,189
Fixed assets		3,485
Customer relationship intangible assets		1,933
Other intangible assets		465
Total identifiable net assets acquired		7,072
Goodwill		1,894
Fair value allocated to net assets acquired		$	8,966

 

19

 

GRR Acquisition

 

On March 10, 2017, the Company completed its acquisition (the “GRR Acquisition”) of Gregory Rockhouse Ranch, Inc. and certain other affiliated entities and assets (collectively, the “GRR Entities”). The GRR Entities provide water and water-related services to E&P companies in the Permian Basin and own and have rights to a vast array of fresh, brackish and effluent water sources with access to significant volumes of water annually and water transport infrastructure, including over 1,200 miles of temporary and permanent pipeline infrastructure and related storage facilities and pumps, all located in the northern Delaware Basin portion of the Permian Basin.

 

The total consideration for the GRR Acquisition was $59.6 million, subject to customary post-closing adjustments, with $53.0 million paid in cash, $1.1 million in assumed tax liabilities and $5.5 million paid to the sellers in shares of Class A Common Stock valued at $20.00 per share. The Company funded the cash portion of the consideration for the GRR Acquisition with $19.0 million of cash on hand and $34.0 million of borrowings under the Company’s Previous Credit Facility. For the three months ended March 31, 2017, the Company expensed $0.7 million of transaction-related costs, which are included in selling, general and administrative expenses within the consolidated statement of operations. The GRR 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. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $12.0 million was recorded. The goodwill recognized was primarily attributable to synergies related to the Company’s comprehensive water solutions strategy that are expected to arise from the GRR Acquisition and was attributable to the Company’s Water Solutions segment. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:

 

Purchase price allocation		Amount
		(in thousands)
Consideration  transferred
Cash paid		$	53,032
Class A Common Stock (274,998 shares)		5,500
Assumed liabilities		1,106
Total consideration transferred		59,638
Less: identifiable assets acquired and liabilities assumed
Working capital		7,728
Fixed assets		13,225
Customer relationship intangible assets		21,484
Other intangible assets		5,152
Total identifiable net assets acquired		47,589
Goodwill		12,049
Fair value allocated to net assets acquired		$	59,638

 

20

 

The GRR Acquisition contributed revenue and net income of $1.9 million and $0.3 million, respectively, to the consolidated results of the Company for the period from March 10, 2017, the date of completion of the GRR Acquisition, to March 31, 2017.  The following unaudited consolidated pro forma information is presented as if the GRR Acquisition had occurred on January 1, 2016:

 

		Pro Forma
		Three Months Ended March 31, 2017
		(unaudited)
		(in thousands)
Revenue		$	229,235
Net loss		(24,144		)
Less: net loss attributable to noncontrolling interests(1)		9,784
Net loss attributable to Select Energy Services, Inc.(1)		$	(14,360	)

 

(1) The allocation of net loss attributable to noncontrolling interests and Select Inc. gives effect to the equity structure as of March 31, 2017 as though the Select 144A Offering, the IPO, the Rockwater Merger, the Resource Water Acquisition and the GRR Acquisition occurred as of January 1, 2016. However, the calculation of pro forma net loss does not give effect to any other pro forma adjustments for the Select 144A Offering or the subsequent IPO.

 

The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Rockwater Merger, GRR Acquisition and Resource Water Acquisition results to reflect the increase to depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2016 and other related pro forma adjustments.

 

The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the Rockwater Merger, the GRR Acquisition or the Resource Water Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Rockwater Merger, the GRR Acquisition and the Resource Water Acquisition had occurred as of January 1, 2016 or of future operating performance.

 

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NOTE 4—EXIT AND DISPOSAL ACTIVITIES

 

Due to a reduction in industry activity from 2014, the Company made the decision during the year ended December 31, 2016 to close 15 facilities and consolidate operations for the purpose of improving operating efficiencies. In addition, the Company has decided to consolidate or close additional facilities in relation to its Rockwater Merger.  During the three months ended March 31, 2018, the Company recorded $0.9 million of charges related to exit and disposal activities. During the three months ended March 31, 2017, the Company recorded $1.9 million of charges related to exit and disposal activities and reclassified $0.2 million of deferred rent related to accrued lease obligations related to exited facilities. The Company had a remaining balance of $21.6 million, inclusive of a short-term balance of $3.3 million in accrued expenses and other current liabilities, as of March 31, 2018 related to accrued lease obligations and terminations at exited facilities within its Water Solutions segment. As of March 31, 2018, the Company has completed its exit from underperforming facilities but will continue to make non-cancelable lease payments for related facilities through the year ended 2027. The Company’s abandonment of these facilities is not a part of a formalized exit plan. The changes in the abandoned lease obligations for the three months ended March 31, 2018 and 2017 are as follows:

 

					Provision during  the			Usage during the three months			Balance as of
		Balance as of			three months ended			ended			March 31,
		December 31, 2017			March 31, 2018			March 31, 2018			2018
		(in thousands)
Lease obligations and terminations		$	21,350		$	871		$	1,838		$	20,383
Reclassification of deferred rent		1,254									1,254
Total		$	22,604								$	21,637

 

					Provision during  the			Usage during the three months
		Balance as of			three months ended			ended			Balance as of
		December 31, 2016			March 31, 2017			March 31, 2017			March 31, 2017
		(in thousands)
Lease obligations and terminations		$	18,000		$	1,863		$	712		$	19,151
Reclassification of deferred rent		1,069									1,254
Total		$	19,069								$	20,405

 

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