May 5, 2021 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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, 2021

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

For the transition period from _______________ to ________________

Commission File Number 001-38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)


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

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

(713) 235-9500

(Registrant’s telephone number, including area code)

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


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

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

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

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


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

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

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

As of May 3, 2021, the registrant had 87,856,767 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

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SELECT ENERGY SERVICES, INC.

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		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

Item 4.	Controls and Procedures	50

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	52

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

●

following his inauguration on January 20, 2021, President Biden issued several executive orders and made other announcements which may negatively impact the future production of oil and natural gas in the United States (“U.S.”) and may adversely affect our future operations;

●

the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic, which caused a sharp decline in economic activity in the U.S. and around the world, resulting in lower demand for oil and gas, oversupply and therefore lower oil and gas prices, to which our exploration and production (“E&P”) customers have responded by cutting capital spending, leading to fewer oil and gas well completions and thus reduced demand for our services, all of which has had, and will likely continue to have, a negative impact on our financial results;

●

actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) 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;

●

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

●

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

●

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

●

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

●

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

●

our customers’ ability to complete and produce new wells;

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●

the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters;

●

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

●

capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown 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 Credit Agreement (as defined herein) or future debt instruments;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

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●

the other risks identified in our most recent Annual Report on Form 10-K and 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. 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, 2021		December 31, 2020
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	160,021	$	169,039
Accounts receivable trade, net of allowance for credit losses of $8,617 and $9,157, respectively		140,016		129,392
Accounts receivable, related parties		332		69
Inventories		34,410		33,384
Prepaid expenses and other current assets		20,774		19,621
Total current assets		355,553		351,505
Property and equipment		870,091		878,902
Accumulated depreciation		(537,199)		(528,537)
Total property and equipment, net		332,892		350,365
Right-of-use assets, net		49,881		52,331
Other intangible assets, net		113,463		116,079
Other long-term assets, net		6,869		5,079
Total assets	$	858,658	$	875,359
Liabilities and Equity
Current liabilities
Accounts payable	$	24,847	$	12,995
Accrued accounts payable		23,177		21,359
Accounts payable and accrued expenses, related parties		946		519
Accrued salaries and benefits		14,996		16,279
Accrued insurance		9,458		9,788
Sales tax payable		2,488		1,415
Accrued expenses and other current liabilities		13,325		12,077
Current operating lease liabilities		13,968		14,019
Current portion of finance lease obligations		287		307
Total current liabilities		103,492		88,758
Long-term operating lease liabilities		57,834		60,984
Other long-term liabilities		19,383		19,735
Total liabilities		180,709		169,477
Commitments and contingencies (Note 8)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 87,856,767 shares issued and outstanding as of March 31, 2021; 350,000,000 shares authorized and 86,812,647 shares issued and outstanding as of December 31, 2020		879		868
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of March 31, 2021 and December 31, 2020		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of March 31, 2021 and December 31, 2020		162		162
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2021 and December 31, 2020		—		—
Additional paid-in capital		910,688		909,278
Accumulated deficit		(340,354)		(317,247)
Total stockholders’ equity		571,375		593,061
Noncontrolling interests		106,574		112,821
Total equity		677,949		705,882
Total liabilities and equity	$	858,658	$	875,359

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three months ended March 31,
	2021		2020
Revenue
Water Services	$	64,223	$	149,511
Water Infrastructure		37,803		57,762
Oilfield Chemicals		41,716		71,012
Total revenue		143,742		278,285
Costs of revenue
Water Services		62,324		129,114
Water Infrastructure		26,399		47,813
Oilfield Chemicals		37,766		59,876
Other		—		4
Depreciation and amortization		21,650		26,182
Total costs of revenue		148,139		262,989
Gross (loss) profit		(4,397)		15,296
Operating expenses
Selling, general and administrative		19,894		25,289
Depreciation and amortization		649		685
Impairment of goodwill and trademark		—		276,016
Impairment and abandonment of property and equipment		—		3,184
Lease abandonment costs		104		953
Total operating expenses		20,647		306,127
Loss from operations		(25,044)		(290,831)
Other (expense) income
Losses on sales of property and equipment and divestitures, net		(579)		(435)
Interest expense, net		(435)		(331)
Foreign currency gain (loss), net		3		(46)
Other (expense) income, net		(1,629)		259
Loss before income tax benefit		(27,684)		(291,384)
Income tax benefit		263		164
Net loss		(27,421)		(291,220)
Less: net loss attributable to noncontrolling interests		4,314		45,358
Net loss attributable to Select Energy Services, Inc.	$	(23,107)	$	(245,862)

Net loss per share attributable to common stockholders (Note 14):
Class A—Basic	$	(0.27)	$	(2.86)
Class B—Basic	$	—	$	—

Net loss per share attributable to common stockholders (Note 14):
Class A—Diluted	$	(0.27)	$	(2.86)
Class B—Diluted	$	—	$	—

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)


	Three months ended March 31,
	2021		2020
Net loss	$	(27,421)	$	(291,220)
Comprehensive loss		(27,421)		(291,220)
Less: comprehensive loss attributable to noncontrolling interests		4,314		45,358
Comprehensive loss attributable to Select Energy Services, Inc.	$	(23,107)	$	(245,862)

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended March 31, 2021 and 2020

(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, 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


	Class A			Class B
	Stockholders			Stockholders					Retained
		Class A			Class B		Additional		Earnings		Total
		Common			Common		Paid-In		(Accumulated		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Deficit)		Equity		Interests		Total
Balance as of December 31, 2019	87,893,525	$	879	16,221,101	$	162	$	914,699	$	21,437	$	937,177	$	175,635	$	1,112,812
ESPP shares issued	4,443		—	—		—		30		—		30		(3)		27
Equity-based compensation	—		—	—		—		483		—		483		91		574
Issuance of restricted shares	1,271,706		13	—		—		2,158		—		2,171		(2,171)		—
Exercise of restricted stock units	625		—	—		—		1		—		1		(1)		—
Repurchase of common stock	(979,391)		(10)	—		—		(7,229)		—		(7,239)		603		(6,636)
Restricted shares forfeited	(199,069)		(2)	—		—		(338)		—		(340)		340		—
NCI income tax adjustment	—		—	—		—		8		—		8		(8)		—
Net loss	—		—	—		—		—		(245,862)		(245,862)		(45,358)		(291,220)
Balance as of March 31, 2020	87,991,839	$	880	16,221,101	$	162	$	909,812	$	(224,425)	$	686,429	$	129,128	$	815,557

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three months ended March 31,
	2021		2020
Cash flows from operating activities
Net loss	$	(27,421)	$	(291,220)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		22,299		26,867
Net loss on disposal of property and equipment and divestitures		579		435
Bad debt expense		300		2,385
Amortization of debt issuance costs		172		172
Inventory write-downs		54		48
Equity-based compensation		1,422		574
Impairment of goodwill and trademark		—		276,016
Impairment and abandonment of property and equipment		—		3,184
Unrealized loss on short-term investment		1,831		—
Other operating items, net		(129)		(47)
Changes in operating assets and liabilities
Accounts receivable		(11,187)		34,992
Prepaid expenses and other assets		(2,696)		6,633
Accounts payable and accrued liabilities		10,903		(13,328)
Net cash (used in) provided by operating activities		(3,873)		46,711
Cash flows from investing activities
Proceeds received from divestitures		—		85
Purchase of property and equipment		(4,534)		(11,338)
Purchase of equity method investment		(2,000)		—
Proceeds received from sales of property and equipment		2,316		5,768
Net cash used in investing activities		(4,218)		(5,485)
Cash flows from financing activities
Payments of finance lease obligations		(75)		(65)
Proceeds from share issuance		14		27
Contributions from noncontrolling interests		—		383
Repurchase of common stock		(874)		(6,636)
Net cash used in financing activities		(935)		(6,291)
Effect of exchange rate changes on cash		8		(61)
Net (decrease) increase in cash and cash equivalents		(9,018)		34,874
Cash and cash equivalents, beginning of period		169,039		79,268
Cash and cash equivalents, end of period	$	160,021	$	114,142
Supplemental cash flow disclosure:
Cash paid for interest	$	367	$	386
Cash refunds received for income taxes, net	$	(650)	$	(156)
Supplemental disclosure of noncash investing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	6,490	$	6,184

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.

Rockwater Merger: On November 1, 2017, the Company completed a merger with Rockwater Energy Solutions, Inc. (the “Rockwater Merger”).

Class A and Class B Common Stock: At March 31, 2021, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of our Class A common stock and 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 Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.

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

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

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method or other appropriate basis as applicable. As of March 31, 2021, the Company had one equity method investee and one cost-method investee. The Company also had one investment in notes receivable accounted for using the amortized cost basis 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:


					(in thousands)
Type of Investment	Year attained	Accounting method	Balance Sheet Location	March 31, 2021		December 31, 2020
20% minority interest	2011	Cost-method	Other long-term assets, net	$	300	$	300
Notes receivable	2020	Amortized cost basis	Other long-term assets, net		3,096		3,037
33% minority interest	2021	Equity-method	Other long-term assets, net		2,000		—
Publicly traded securities	2020	Fair value option	Prepaid expenses and other current assets		1,546		3,377

Segment reporting: 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.

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

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

The Oilfield Chemicals segment provides technical solutions and expertise related to chemical applications in the oil and gas industry. We also have significant capabilities in supplying logistics for chemical applications. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, production, pipelines and well completions. With our broad chemicals product line, combined with our expertise in oilfield chemicals application, we serve pressure pumpers and major integrated and independent U.S. and international oil and gas producers. We further utilize our chemicals experience and lab testing capabilities to customize water treatment solutions tailored to the customer’s water quality and other fluid system design objectives.

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, 2020, included in the 2020 Form 10-K.

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

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

Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred where a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. The duration and severity of the COVID-19 pandemic and continued market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.

The change in the allowance for credit losses is as follows:


	Three months ended March 31, 2021
	(in thousands)
Balance at December 31, 2020	$	9,157
Increase to allowance based on a percent of revenue		290
Charge-offs		(830)
Balance at March 31, 2021	$	8,617

The Company also has a $3.1 million note receivable resulting from an investment in the fourth quarter of 2020, with no allowance for credit losses as of March 31, 2021. See Note 11 – Related Party Transactions for additional information.

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



	Three months ended March 31, 2021
	(in thousands)
Balance at December 31, 2020	$	999
Accretion expense, included in depreciation and amortization expense		13
Payments		(121)
Balance at March 31, 2021	$	891

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

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Lessor Income: During the Current Quarter, the Company had two owned facility leases and multiple facility subleases that are accounted for as follows:


		Three months ended March 31,
		2021		2020

		(in thousands)
Category	Classification
Lessor income	Costs of revenue	$	66	$	116
Sublease income	Lease abandonment costs and Costs of revenue		243		401

The Company also generates short-term equipment rental revenue. See Note 3—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 has continued into the Current Quarter. The Company incurred no match expense in either the Current Quarter or the Prior Quarter.

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 has deferred the payment of $6.0 million of payroll taxes as of December 31, 2020. The amounts deferred in 2020 must be repaid half by December 31, 2021, and half by December 31, 2022. The deferral is split evenly between accrued salaries and benefits and other long-term liabilities on the accompanying consolidated balance sheets as of March 31, 2021.

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NOTE 3—REVENUE

The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606), for most revenue recognition, which provides a five-step model for determining revenue recognition for arrangements that are within the scope of the standard: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model only to contracts when it is probable that we will collect the consideration the Company is entitled to in exchange for the goods or services the Company transfers to the customer. The accommodations and rentals revenue continues to be guided by ASC 842 – Leases, which is discussed further below.

The following factors are applicable to all three of the Company’s segments for the first three months of 2021 and 2020, respectively:

●

The vast majority of customer agreements are short-term, lasting less than one year.

●

Contracts are seldom combined together as virtually all of our customer agreements constitute separate performance obligations. Each job is typically distinct, thereby not interdependent or interrelated with other customer agreements.

●

Most contracts allow either party to terminate at any time without substantive penalties. If the customer terminates the contract, the Company is unconditionally entitled to the payments for the services rendered and products delivered to date.

●

Contract terminations before the end of the agreement are rare.

●

Sales returns are rare and no sales return assets have been recognized on the balance sheet.

●

There are minimal volume discounts.

●

There are no service-type warranties.

●

There is no long-term customer financing.

In the Water Services and Water Infrastructure segments, performance obligations arise in connection with services provided to customers in accordance with contractual terms, in an amount the Company expects to collect. Services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenues are generated by services rendered and measured based on output generated, which is usually simultaneously received and consumed by customers at their job sites. As a multi-job site organization, contract terms, including pricing for the Company’s services, are negotiated on a job site level on a per-job basis. Most jobs are completed in a short period of time, usually between one day and one month. Revenue is recognized as performance obligations are completed on a daily, hourly or per unit basis with unconditional rights to consideration for services rendered reflected as accounts receivable trade, net of allowance for credit losses. In cases where a prepayment is received before the Company satisfies its performance obligations, a contract liability is recorded in accrued expenses and other current liabilities. Final billings generally occur once all of the proper approvals are obtained. No revenue is associated with mobilization or demobilization of personnel and equipment. Rather, mobilization and demobilization are factored into pricing for services. Billings and costs related to mobilization and demobilization is not material for customer agreements that start in one period and end in another. As of March 31, 2021, the Company had six contracts in place for these segments lasting over one year. The Company has recorded an $8.2 million contract liability associated with one of the six long-term contracts as of March 31, 2021, recognized in other long-term liabilities in the accompanying balance sheets. The Company expects this contract liability to be converted to revenue under the terms of the contract as it is earned.

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In the Oilfield Chemicals segment, the typical performance obligation is to provide a specific quantity of chemicals to customers in accordance with the customer agreement in an amount the Company expects to collect. Products and services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenue is recognized as the customer takes title to chemical products in accordance with the agreement. Products may be provided to customers in packaging or delivered to the customers’ containers through a hose. In some cases, the customer takes title to the chemicals upon consumption from storage containers on their property, where the chemicals are considered inventory until customer usage. In cases where the Company delivers products and recognizes revenue before collecting payment, the Company usually has an unconditional right to payment reflected in accounts receivable trade, net of allowance for credit losses. Customer returns are rare and immaterial and there were no material in-process customer agreements for this segment as of March 31, 2021, lasting greater than one year.

The Company accounts for accommodations and rentals agreements as an operating lease. The Company recognizes revenue from renting equipment on a straight-line basis. Accommodations and rental contract periods are generally daily, weekly or monthly. The average lease term is less than three months and as of March 31, 2021, there were no material rental agreements in effect lasting more than one year. During the Current Quarter and Prior Quarter, approximately $6.2 million and $15.2 million of accommodations and rentals revenue was accounted for under ASC 842 lease guidance, with the remainder accounted for under ASC 606 revenue guidance.

The following table sets forth certain financial information with respect to the Company’s disaggregation of revenues by geographic location:


	Three months ended March 31,
	2021		2020

	(in thousands)
Geographic Region
Permian Basin	$	71,204	$	137,998
Eagle Ford		20,785		35,664
Haynesville/E. Texas		17,265		19,015
Marcellus/Utica		11,667		19,839
Rockies		10,022		18,869
MidCon		8,476		24,873
Bakken		6,903		22,560
Eliminations and other regions		(2,580)		(533)
Total	$	143,742	$	278,285

In the Water Services segment, the top three revenue-producing regions are the Permian Basin, Eagle Ford and Marcellus/Utica, which collectively comprised 77% and 74% of segment revenue for the Current Quarter and Prior Quarter, respectively. In the Water Infrastructure segment, the top two revenue-producing regions are the Permian Basin and Bakken, which collectively comprised 86% and 87% of segment revenue for the Current Quarter and Prior Quarter, respectively. In the Oilfield Chemicals segment, the top three revenue-producing regions are the Permian Basin, Haynesville/E. Texas and MidCon, which collectively comprised 88% and 81% of segment revenue for the Current Quarter and Prior Quarter, respectively.

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NOTE 4—INVENTORIES

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



	March 31, 2021		December 31, 2020

	(in thousands)
Raw materials	$	18,869	$	16,701
Finished goods		15,541		16,683
Total	$	34,410	$	33,384

During the Current Quarter and Prior Quarter, the Company recorded charges to the reserve for excess and obsolete inventory for immaterial amounts of $0.1 million or less, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The Company’s inventory reserve was $4.1 million as of March 31, 2021 and December 31, 2020. The reserve for excess and obsolete inventories is determined based on the Company’s historical usage of inventory on hand, as well as future expectations and the amount necessary to reduce the cost of the inventory to its estimated net realizable value.

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NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation. Depreciation (and amortization of finance lease assets) is calculated on a straight-line basis over the estimated useful life of each asset. Property and equipment consists of the following as of March 31, 2021 and December 31, 2020:



	March 31, 2021		December 31, 2020

	(in thousands)
Machinery and equipment	$	591,362	$	596,441
Buildings and leasehold improvements		92,669		93,236
Pipelines		72,624		72,458
Disposal wells		47,571		48,097
Vehicles and equipment		29,839		30,975
Land		12,803		13,497
Computer equipment and software		6,790		7,127
Office furniture and equipment		888		892
Machinery and equipment - finance lease		537		537
Vehicles and equipment - finance lease		463		475
Computer equipment and software - finance lease		356		356
Construction in progress		14,189		14,811
		870,091		878,902
Less accumulated depreciation⁽¹⁾		(537,199)		(528,537)
Total property and equipment, net	$	332,892	$	350,365

(1)

Includes $1.1 million of accumulated depreciation related to finance leases as of March 31, 2021 and December 31, 2020.

Total depreciation and amortization expense related to property and equipment and finance leases presented in the table above, as well as amortization of intangible assets presented in Note 6 is as follows:


	Three months ended March 31,
	2021		2020

	(in thousands)
Category
Depreciation expense from property and equipment	$	19,587	$	23,985
Amortization expense from finance leases		82		77
Amortization expense from intangible assets		2,617		2,993
Accretion expense from asset retirement obligations		13		(188)
Total depreciation and amortization	$	22,299	$	26,867

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the Prior Quarter, the Company determined that certain equipment was obsolete, and recorded a $3.2 million impairment of property and equipment.

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NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs (see Note 10 – Fair Value Measurement). During the first quarter of 2020, the Company had triggering events related to the significant adverse change to the demand for the Company’s services in connection with a significant decline in the price of oil and the related global economic impacts resulting from the OPEC+ disputes as well as the COVID-19 pandemic. This included uncertainty regarding oil prices and the length of the recovery following the significant market disruption in the oil and gas industry. Given the volatile market environment at March 31, 2020, the Company utilized third-party valuation advisors to assist with these evaluations. These evaluations included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on our weighted-average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset. The Company performed quantitative tests for reporting units in both the Water Services and Water Infrastructure segments using the income and market approaches, resulting in a full impairment to goodwill in both segments totaling $266.9 million.

The components of other intangible assets, net as of March 31, 2021 and December 31, 2020 are as follows:

Form: 10-Q

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