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EX-32.2 - EX-32.2 - Select Energy Services, Inc.wttr-20170331ex3224dcbe7.htm
EX-32.1 - EX-32.1 - Select Energy Services, Inc.wttr-20170331ex321635ed9.htm
EX-31.2 - EX-31.2 - Select Energy Services, Inc.wttr-20170331ex31270807a.htm
EX-31.1 - EX-31.1 - Select Energy Services, Inc.wttr-20170331ex3114db336.htm
EX-10.12 - EX-10.12 - Select Energy Services, Inc.wttr-20170331ex1012b7cbc.htm

 

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, 2017

or

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

For the transition period from _______________ to ________________

Commission File Number 001‑38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

81‑4561945

(State of incorporation)

(IRS Employer

Identification Number)

 

 

1820 North I‑35, P.O. Box 1715

76241

(Address of principal executive offices)

(Zip Code)

 

(940) 668‑0259

(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  ☐    No  ☑*

* The registrant has not been subject to the filing requirements for the past 90 days as it commenced trading following its initial public offering on April 21, 2017, but has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 since such time.

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  ☑    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 ☐

 

 

(Do not check if a 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 15, 2017, the registrant had 14,082,970 shares of Class A common stock, 16,100,000 shares of Class A-1 common stock and 38,462,541 shares of Class B common stock outstanding.

 

 

 


 

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 final prospectus dated April 20, 2017 and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act, on April 24, 2017 (the “Final Prospectus”).  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 level of capital spending by domestic 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 Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and various lenders, entered into on May 3, 2011 and amended most recently on December 20, 2016 (as amended, our “Credit Facility”), 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 and various environmental matters;

·

our ability to retain key management and employees;

·

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;

3


 

·

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

·

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

·

the other risks described under “Risk Factors” in the Final Prospectus.

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 the Final Prospectus. 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 statement.

4


 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

(unaudited)

 

 

  

Assets

 

 

 

 

 

 

Current assets

 

 

  

 

 

  

Cash and cash equivalents

 

$

8,048

 

$

40,041

Accounts receivable trade, net of allowance for doubtful accounts of $2,203 and $2,144, respectively

 

 

103,180

 

 

75,892

Accounts receivable, related parties

 

 

279

 

 

135

Inventories

 

 

940

 

 

1,001

Prepaid expenses and other current assets

 

 

5,683

 

 

7,586

Total current assets

 

 

118,130

 

 

124,655

Property and equipment

 

 

756,124

 

 

739,386

Accumulated depreciation

 

 

(500,541)

 

 

(490,519)

Property and equipment, net

 

 

255,583

 

 

248,867

Goodwill

 

 

22,975

 

 

12,242

Other intangible assets, net

 

 

36,017

 

 

11,586

Other assets

 

 

8,410

 

 

7,716

Total assets

 

$

441,115

 

$

405,066

Liabilities and Equity

 

 

  

 

 

  

Current liabilities

 

 

  

 

 

  

Accounts payable

 

$

13,012

 

$

10,796

Accounts payable and accrued expenses, related parties

 

 

666

 

 

648

Accrued salaries and benefits

 

 

6,431

 

 

2,511

Accrued insurance

 

 

9,351

 

 

10,338

Accrued expenses and other current liabilities

 

 

24,031

 

 

22,091

Total current liabilities

 

 

53,491

 

 

46,384

Accrued lease obligations

 

 

17,282

 

 

15,946

Other long term liabilities

 

 

7,771

 

 

8,028

Long-term debt, net of current maturities

 

 

34,000

 

 

 —

Total liabilities

 

 

112,544

 

 

70,358

Commitments and contingencies (Note 8)

 

 

  

 

 

  

Class A-1 common stock, $0.01 par value; 40,000,000 shares authorized and 16,100,000 shares issued and outstanding as of March 31, 2017 and December 31, 2016

 

 

161

 

 

161

Class A common stock, $0.01 par value; 250,000,000 shares authorized and 4,077,970 shares issued and outstanding as of March 31, 2017; 3,802,792 shares issued and outstanding as of December 31, 2016

 

 

41

 

 

38

Class B common stock, $0.01 par value; 150,000,000 shares authorized and 38,462,541 shares issued and outstanding as of March 31, 2017 and December 31, 2016

 

 

385

 

 

385

Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2017 and December 31, 2016

 

 

 —

 

 

 —

Additional paid-in capital

 

 

115,891

 

 

113,175

Accumulated deficit

 

 

(5,215)

 

 

(1,043)

Total stockholders’ equity

 

 

111,263

 

 

112,716

Noncontrolling interests

 

 

217,308

 

 

221,992

Total equity

 

 

328,571

 

 

334,708

Total liabilities and equity

 

$

441,115

 

$

405,066

 

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

5


 

SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

 

Revenue

 

 

  

 

 

  

 

Water solutions

 

$

78,377

 

$

62,289

 

Accommodations and rentals

 

 

9,515

 

 

8,514

 

Wellsite completion and construction services

 

 

12,033

 

 

8,036

 

Total revenue

 

 

99,925

 

 

78,839

 

Costs of revenue

 

 

  

 

 

  

 

Water solutions

 

 

60,621

 

 

51,534

 

Accommodations and rentals

 

 

7,923

 

 

6,238

 

Wellsite completion and construction services

 

 

10,419

 

 

6,862

 

Depreciation and amortization

 

 

21,204

 

 

26,142

 

Total costs of revenue

 

 

100,167

 

 

90,776

 

Gross profit (loss)

 

 

(242)

 

 

(11,937)

 

Operating expenses

 

 

  

 

 

  

 

Selling, general and administrative

 

 

9,957

 

 

8,980

 

Depreciation and amortization

 

 

446

 

 

634

 

Lease abandonment costs

 

 

1,863

 

 

 —

 

Total operating expenses

 

 

12,266

 

 

9,614

 

Loss from operations

 

 

(12,508)

 

 

(21,551)

 

Other income (expense)

 

 

  

 

 

  

 

Interest expense, net

 

 

(730)

 

 

(3,367)

 

Other income (expense), net

 

 

1,064

 

 

(566)

 

Loss before tax expense

 

 

(12,174)

 

 

(25,484)

 

Tax expense

 

 

(106)

 

 

(309)

 

Net loss

 

 

(12,280)

 

 

(25,793)

 

Less: Net loss attributable to Predecessor

 

 

 —

 

 

25,337

 

Less: Net loss attributable to noncontrolling interests

 

 

8,108

 

 

456

 

Net loss attributable to Select Energy Services, Inc.

 

$

(4,172)

 

$

 —

 

Allocation of net loss attributable to:

 

 

  

 

 

  

 

Class A-1 stockholders

 

$

(3,363)

 

 

  

 

Class A stockholders

 

 

(809)

 

 

  

 

Class B stockholders

 

 

 —

 

 

  

 

 

 

$

(4,172)

 

 

  

 

Weighted average shares outstanding:

 

 

  

 

 

  

 

Class A-1—Basic & Diluted

 

 

16,100,000

 

 

  

 

Class A—Basic & Diluted

 

 

3,870,194

 

 

  

 

Class B—Basic & Diluted

 

 

38,462,541

 

 

  

 

Net loss per share attributable to common stockholders:

 

 

  

 

 

  

 

Class A-1—Basic & Diluted

 

$

(0.21)

 

 

  

 

Class A—Basic & Diluted

 

$

(0.21)

 

 

  

 

Class B—Basic & Diluted

 

$

 —

 

 

  

 

 

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

6


 

SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

 

Net loss

 

$

(12,280)

 

$

(25,793)

 

Other comprehensive income (loss)

 

 

  

 

 

  

 

Interest rate derivatives designated as cash flow hedges

 

 

  

 

 

  

 

Unrealized holding loss arising during period

 

 

 —

 

 

(80)

 

Net amount reclassified to earnings

 

 

 —

 

 

85

 

Net change in unrealized gain (loss)

 

 

 —

 

 

 5

 

Comprehensive loss

 

 

(12,280)

 

 

(25,788)

 

Less: Comprehensive loss attributable to Predecessor

 

 

 —

 

 

25,332

 

Less: Comprehensive loss attributable to noncontrolling interests

 

 

8,108

 

 

456

 

Comprehensive loss attributable to Select Energy Services, Inc.

 

$

(4,172)

 

$

 —

 

 

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

 

 

7


 

SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A-1

 

Class A

 

Class B

 

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders

 

Stockholders

 

Stockholders

 

Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A-1

 

 

 

Class A

 

 

 

Class B

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

Common

 

 

 

Common

 

 

 

Preferred

 

Paid-In

 

Accumulated

 

Stockholders’

 

Noncontrolling

 

 

 

 

    

Shares

    

Stock

    

Shares

    

Stock

    

Shares

    

Stock

    

Shares

    

Stock

    

Capital

    

Deficit

    

Equity

    

Interests

    

Total

Balance as of December 31, 2016

 

16,100,000

 

 

161

 

3,802,972

 

 

38

 

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

 

16,100,000

 

$

161

 

4,077,970

 

$

41

 

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. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2017

    

2016

Cash flows from operating activities

 

 

  

 

 

  

Net loss

 

$

(12,280)

 

$

(25,793)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

  

 

 

  

Depreciation and amortization

 

 

21,650

 

 

26,776

(Gain) loss on disposal of property and equipment

 

 

(1,105)

 

 

622

Bad debt expense

 

 

334

 

 

158

Amortization of debt issuance costs

 

 

309

 

 

651

Equity-based compensation

 

 

643

 

 

308

Changes in operating assets and liabilities

 

 

  

 

 

  

Accounts receivable

 

 

(21,157)

 

 

18,994

Prepaid expenses and other assets

 

 

1,337

 

 

2,006

Accounts payable and accrued liabilities

 

 

2,333

 

 

(7,302)

Net cash (used in) provided by operating activities

 

 

(7,936)

 

 

16,420

Cash flows from investing activities

 

 

  

 

 

  

Acquisitions, net of cash received

 

 

(49,004)

 

 

 —

Purchase of property, equipment, and intangible assets

 

 

(10,806)

 

 

(22,275)

Proceeds received from sale of property and equipment

 

 

1,753

 

 

2,736

Net cash used in investing activities

 

 

(58,057)

 

 

(19,539)

Cash flows from financing activities

 

 

  

 

 

  

Proceeds from revolving line of credit

 

 

34,000

 

 

8,500

Payments on long-term debt

 

 

 —

 

 

(7,625)

Payment of debt issuance costs

 

 

 —

 

 

(376)

Member distributions

 

 

 —

 

 

212

Net cash provided by financing activities

 

 

34,000

 

 

711

Net decrease in cash and cash equivalents

 

 

(31,993)

 

 

(2,408)

Cash and cash equivalents, beginning of period

 

 

40,041

 

 

16,305

Cash and cash equivalents, end of period

 

$

8,048

 

$

13,897

Supplemental cash flow disclosure:

 

 

  

 

 

  

Cash paid for interest

 

$

427

 

$

2,711

Cash paid for taxes

 

$

12

 

$

208

Supplemental disclosure of noncash investing activities:

 

 

  

 

 

  

Capital expenditures included in accounts payable and accrued liabilities

 

$

4,766

 

$

28

 

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

9


 

SELECT ENERGY SERVICES, INCAND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business:  Select Energy Services, Inc. (“Select Energy Services” 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” or the “Predecessor”). SES Holdings was formed in July 2008 and in October 2008, members of Select Energy Services, LLC (“Select”), formerly known as Peak Oilfield Services, LLC (“Peak”), a Delaware limited liability company formed in December 2006, transferred all interests in Select to SES Holdings in exchange for membership interests in SES Holdings and Select became a wholly‑owned subsidiary of SES Holdings.

Select Energy Services is an oilfield services company that provides water solutions to the U.S conventional oil and natural gas industry. The Company offers water‑related services that support oil and gas well completion and production activities including sourcing, transfer, containment, monitoring, treatment, flowback, hauling and disposal in the U.S. shale basins. These services establish and maintain the flow of oil and natural gas throughout the productive life of a horizontal well.

The Company also operates a wellsite services group as a part of its total water solutions offering. These services include equipment rental, accommodations, crane and logistics services, wellsite and pipeline construction, and field services. The Company conducts its wellsite services activities on a third‑party contractual basis unrelated to its water‑related services.

Reorganization:  On December 20, 2016, Select Energy Services completed a private placement of 16,100,000 shares of Class A‑1 common stock (the “144A Offering”) at an offering price of $20.00 per share. In conjunction with the 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 144A Offering to SES Holdings, SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Energy Services, and Select Energy Services became the sole managing member of SES Holdings. Select Energy Services issued 38,462,541 shares of 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. The Company 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 Class A common stock. Shareholders of Class A‑1, Class A, and Class B common stock vote together as a single class on all matters, subject to certain exceptions in our amended and restated certificate of incorporation. Shareholders of Class B common stock have voting rights only and are not entitled to an economic interest in Select Energy Services 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. Unless otherwise stated or the context otherwise indicates, all references to the “Company” or similar expressions for time periods prior to the reorganization and 144A Offering transactions refer to SES Holdings and its subsidiaries. For time periods subsequent to the reorganization and 144A Offering transactions, these terms refer to Select Energy Services, Inc. and its subsidiaries.

Credit Facility:  Concurrent with the closing of the 144A Offering, the Company repaid all of its outstanding indebtedness and amended its Credit Facility to reduce the total commitment of its revolving line of credit to $100.0 million. See Note 7—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 has 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 the Company’s Class A common stock at an exchange ratio of one share of Class A common stock for each SES Holdings

10


 

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, the Company will have 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 the Company’s Class B common stock will be cancelled.

Registration rights:  In December 2016, in connection with the closing of the 144A Offering, Select Energy Services entered into a registration rights agreement with FBR Capital Markets & Co. for the benefit of the investors in the 144A Offering. Under this registration rights agreement, the Company agreed, at its expense, to file with the SEC, in no event later than April 30, 2017, a shelf registration statement registering for resale the 16,100,000 shares of the Company’s Class A common stock issuable upon conversion of the Class A‑1 common stock sold in the 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 Company’s IPO (as defined below). The Company filed this registration statement with the SEC on April 28, 2017. Each share of Class A‑1 common stock will be automatically converted into a share of Class A common stock on a one‑for‑one basis upon the effectiveness of such registration statement. Investors in the 144A Offering will be restricted from selling shares for a period of 60 days following the effective date of the registration statement related to the Company’s initial public offering of 8,700,000 shares of Class A common stock at a price of $14.00 per share (the “IPO”),  or April 20, 2017. 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.

Tax receivable agreement:  Concurrent with the closing of the 144A Offering, the Company entered into two tax receivable agreements with Legacy Owner Holdco and certain legacy owners of SES Holdings. 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 consolidated financial statements for the years ended December 31, 2016 and 2015 included in the Final Prospectus. The consolidated financial statements include the accounts of Select Energy Services and all of its majority‑owned or controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary for a fair presentation of our interim financial statements have been included in these unaudited interim consolidated financial statements. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

The Company’s historical financial statements prior to the 144A Offering and reorganization transactions are prepared using SES Holdings’ historical basis in the assets and liabilities, and include all revenues, costs, assets and liabilities attributed to SES Holdings.

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 (loss) are reflected as noncontrolling interests. Investments in entities in which Select Energy Services 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.

11


 

 

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: Our significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the years ended December 31, 2016 and 2015 included in the Final Prospectus. There have been no changes in such policies or the application of such policies during the quarter ended March 31, 2017.

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.

Emerging Growth Company status:  Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. We intend 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 we are no longer an emerging growth company. Our election to use the phase‑in periods permitted by this election may make it difficult to compare our 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 we were to subsequently elect instead to comply immediately with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

Recent accounting pronouncements:  In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), outlining a comprehensive new revenue recognition standard that will supersede ASC 605, Revenue Recognition. The new accounting guidance 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, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019 for nonpublic entities. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures and has not yet determined the method by which it will adopt the standard.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes,  which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet. The pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018 for nonpublic

12


 

entities, and may be applied either prospectively or retrospectively. The Company prospectively adopted this guidance during the three months ended March 31, 2017. Prior periods were not retrospectively adjusted. As the Company’s deferred tax assets and liabilities are all noncurrent, the adoption did not result in a change to the consolidated financial statements and related disclosures.

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. The pronouncement is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, for nonpublic entities using a modified retrospective approach. Early adoption is permitted. The Company is still 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, that provides a new requirement to record all of the tax effects related to share‑based payments at settlement (or expiration) through the income statement. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018, for nonpublic entities. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

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. This pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, for nonpublic entities. The amendments in this ASU should be applied using a retrospective approach. The Company is still 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 pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, for nonpublic entities. The Company is still 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 pronouncement is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied using a prospective approach. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

13


 

NOTE 3— ACQUISITION

On March 10, 2017, the Company completed its acquisition (the “Permian 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 900 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 paid for this acquisition was $56.5 million, with $51.0 million paid in cash and $5.5 million paid in shares of Class A common stock valued at $20.00 per share, subject to customary post‑closing adjustments. The Company funded the cash portion of the consideration for the Permian Acquisition with $17.0 million of cash on hand and $34.0 million of borrowings under the Company’s Credit Facility. For the three months ended March 31, 2017, the Company expensed $0.7 million of transaction-related costs. The Permian Acquisition is being accounted for as a business combination under the acquisition method of accounting. The preliminary allocation of the consideration transferred is based on management’s estimates, judgments and assumptions. When determining the fair values of assets acquire 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. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $10.7 million was recorded. The goodwill recognized is primarily attributable to synergies related to the Company’s comprehensive water solutions strategy that are expected to arise from the Permian Acquisition and is 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:

 

 

 

 

Preliminary purchase price allocation

    

Amount

Consideration  transferred

 

(in thousand)

Cash paid

 

$

51,000

Class A common stock issued

 

 

5,500

Total consideration transferred

 

 

56,500

Less: identified assets

 

 

  

Working capital

 

 

6,000

Fixed assets

 

 

13,225

Customer relationship intangible assets

 

 

21,392

Other intangible assets

 

 

5,150

Total identified assets

 

 

45,767

Goodwill

 

$

10,733

 

14


 

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

 

 

 

 

 

 

 

 

 

Pro Forma

 

 

Three Months Ended March 31, 

 

    

2017

    

2016

 

 

(unaudited)

 

 

(in thousands)

Revenue

 

$

105,531

 

$

83,942

 

 

 

 

 

 

 

Net loss

 

$

(12,055)

 

(26,242)

Less: net loss attributable to noncontrolling interests1

 

 

7,932

 

 

17,369

Net loss attributable to Select Energy Services, Inc.1

 

$

(4,123)

 

(8,873)

 1 The allocation of net loss attributable to noncontrolling interests and Select Energy Services gives effect to the corporate reorganization as though the 144A Offering occurred as of January 1, 2016. However, the calculation of pro forma net loss does not give effect to any pro forma adjustments for the 144A Offering.

 

The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Permian 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 Permian Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Permian Acquisition had occurred as of January 1, 2016 or of future operating performance.

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. 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 during the three months ended March 31, 2017. The Company had a remaining balance of $20.4 million, inclusive of a short‑term balance of $3.1 million in accrued expenses and other current liabilities, as of March 31, 2017 related to accrued lease obligations and terminations at exited facilities within its Water Solutions segment. As of March 31, 2017, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision during  the

 

Usage  during the

 

 

 

 

 

Balance as of

 

three months ended

 

three months 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

 

 

15


 

NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

(in thousands)

Land

 

$

8,540

 

$

8,593

Buildings and leasehold improvements

 

 

83,061

 

 

83,352

Vehicles and equipment

 

 

27,711

 

 

24,114

Machinery and equipment

 

 

538,693

 

 

534,303

Computer equipment and software

 

 

11,221

 

 

11,102

Office furniture and equipment

 

 

4,277

 

 

4,275

Disposal wells

 

 

67,566

 

 

67,566

Helicopters

 

 

497

 

 

497

Construction in progress

 

 

14,558

 

 

5,584

 

 

 

756,124

 

 

739,386

Less accumulated depreciation and impairment

 

 

(500,541)

 

 

(490,519)

Total property and equipment, net

 

$

255,583

 

$

248,867

 

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.

The Company had no capital lease obligations as of March 31, 2017 and December 31, 2016.

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. The changes in the carrying amounts of goodwill by reportable segment for the three months ended March 31, 2017 and the year ended December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Wellsite Completion

    

 

 

    

 

 

 

 

Water

 

and Construction

 

Accommodations

 

 

 

 

 

Solutions

 

Services

 

and Rentals

 

Total

 

 

(in thousands)

Balance as of December 31, 2015

 

$

137,534

 

$

12,242

 

$

995

 

$

150,771

Impairment

 

 

(137,534)

 

 

 —

 

 

(995)

 

 

(138,529)

Balance as of December 31, 2016

 

 

 —

 

 

12,242

 

 

 —

 

 

12,242

Additions

 

 

10,733

 

 

 —

 

 

 —

 

 

10,733

Balance as of March 31, 2017

 

$

10,733

 

$

12,242

 

$

 —

 

$

22,975

 

The components of other intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

    

Gross

    

Accumulated

    

Net

 

 

Value

 

Amortization

 

Value

 

 

(in thousands)

Customer relationships

    

$

78,218

    

$

50,207

    

$

28,011

Other

 

 

10,641

 

 

2,635

 

 

8,006

Total other intangible assets

 

$

88,859

 

$

52,842

 

$

36,017

 

16


 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

    

Gross

    

Accumulated

    

Net

 

 

Value

 

Amortization

 

Value

 

 

(in thousands)

Customer relationships

    

$

56,826

    

$

48,236

    

$

8,590

Other

 

 

5,491

 

 

2,495

 

 

2,996

Total other intangible assets

 

$

62,317

 

$

50,731

 

$

11,586

 

Intangibles obtained through acquisitions are initially recorded at estimated fair value based on preliminary information which is subject to change until final valuations are obtained. Customer relationships and non‑compete agreements are being amortized over estimated useful lives ranging from five to seven years and three to five years, respectively. Other intangible assets primarily relate to certain water rights that are amortized over estimated useful lives ranging from three to eight years. Intangible assets obtained in the Permian Acquisition consisted of customer relationships and non-compete agreements that will be amortized over estimated useful lives of thirteen and five years, respectively. As a result of the Permian Acquisition, the Company also obtained water rights that have an indefinite life and will be tested periodically for impairment.

Amortization expense was $2.1 million and $2.2 million for the three months ended March 31, 2017 and 2016, respectively.

NOTE 7—DEBT

Credit Facility term loans and revolving line of credit

Select Energy Services’ Credit Facility, originally executed in May 2011, has been amended over time. Effective December 20, 2016, the Company amended its Credit Facility to extend the maturity date from February 28, 2018 to February 28, 2020 and reduce the revolving line of credit to $100 million. The agreement also amended certain financial covenants and restrictions and outlined a new pricing grid that is effective after receipt of the third quarter 2017 compliance certificate. Accrued interest is payable at the end of each quarter. The Credit Facility has a variable interest rate that ranges from either (i) the London interbank rate (“LIBOR”) plus a margin for Eurodollar advances or (ii) the applicable base rate plus a margin for base rate advances based on the Company’s Leverage Ratio (as defined in the Credit Facility) as outlined below. In addition, a commitment fee related to the revolving line of credit is payable at the end of each calendar quarter based on a rate of 0.500% per annum on any unused portion of the commitment under the Credit Facility.

 

 

 

 

 

 

Leverage Ratio Before Receipt of Third Quarter 2017

    

Eurodollar

    

Base Rate

 

Compliance Certificate

 

Advances

 

Advances

 

< 4.00

 

4.00

%  

3.00

%

≥ 4.00

 

4.50

%  

3.50

%

 

 

 

 

 

 

 

Leverage Ratio After Receipt of Third Quarter 2017

    

Eurodollar

    

Base Rate

 

Compliance Certificate

 

Advances

 

Advances

 

< 2.00

 

3.00

%  

2.00

%

≥ 2.00 < 2.50

 

3.25

%  

2.25

%

≥ 2.50 < 3.00

 

3.50

%  

2.50

%

≥ 3.00 < 3.50

 

3.75

%  

2.75

%

≥ 3.50 < 4.00

 

4.00

%  

3.00

%

≥ 4.00

 

4.50

%  

3.50

%

 

Select Energy Services had $34.0 million outstanding under the revolving line of credit as of March 31, 2017 and no debt outstanding under the revolving line of credit as of December 31, 2016. The weighted‑average interest rate of outstanding borrowings under the revolving line of credit was 5.50% as of March 31, 2017. The borrowing capacity under the revolving line of credit was reduced by outstanding letters of credit of $16.1 million as of March 31, 2017. The Company’s letters of credit have a variable interest rate between 3.00% and 4.50% based on the Company’s Leverage

17


 

Ratio as outlined above. The unused portion of the available borrowings under the revolving line of credit was $49.9 million at March 31, 2017.

Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of March 31, 2017 were $3.6 million. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheet.

The Company’s obligations under its Credit Facility are secured by substantially all of its assets. The Credit Facility contains customary events of default and covenants and limits its ability to incur additional indebtedness, pay dividends or make other distributions, create liens and sell assets. The Company was in compliance with all debt covenants as of March 31, 2017.

NOTE 8—COMMITMENTS AND CONTINGENCIES

Litigation

The Company is named from time to time in various legal proceedings in the ordinary course of business. The legal proceedings are at different stages; however, the Company does not believe the resolution of any of these proceedings would be material to its financial position or results of operations.

General Business Risk

As discussed in Note 1, the substantial majority of Company’s customers are in the oil and gas industry. The oil and gas industry is currently facing unique challenges due to the continued volatility and depressed state of oil and gas prices.

NOTE 9—EQUITY‑BASED COMPENSATION

The SES Holdings 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the Predecessor’s board of managers in April 2011. In conjunction with the 144A Offering, the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the 144A Offering were cancelled in exchange for new options granted under the 2016 Plan. The maximum number of shares that may be issued pursuant to the 2016 Plan shall not exceed 4,600,000 shares of Class A common stock plus 8% of any shares of Class A common stock sold in any underwritten public offering, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. Stock options are granted with terms not to exceed ten years. Phantom unit awards granted under the 2011 Plan, upon vesting, entitled each participant with the right to receive an amount of cash based in part on the fair market value of a  share of Class A common stock on the date of the Company’s initial public offering. Based on the fair market value of a share of the Company’s Class A common stock of $14.00 on the date of the Company’s initial public offering, each participant received a cash payment equal to $5.53 for each phantom unit on May 5, 2017. Refer to Note 17 – Subsequent Events for details related to the payments made in respect of outstanding phantom units in connection with the Company’s initial public offering.

Stock option awards

Stock options were granted with an exercise price equal to or greater than the fair market value of a share of the Company’s Class A common stock as of the date of grant. The Company historically valued its Class A common stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. The fair value measurement relies on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certain awards that were granted during 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were granted in exchange for the cancellation of outstanding options granted under the 2011 Plan that were fully vested and

18


 

exercisable prior to such cancellation. The Company utilizes the Black‑Scholes model to determine fair value, which incorporates assumptions to value equity‑based awards. The risk‑free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. At the time of grant, there was no public market for the Company’s equity. Therefore, the Company considered the historic volatility of publicly traded peer companies when determining the volatility factor. The expected life of the options was based on a formula considering the vesting period and term of the options awarded, which is generally seven to ten years.

A summary of the Company’s stock option activity and related information for the three months ended March 31, 2017 is as follows:

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017

 

    

 

    

Weighted-average

 

 

Equity Options

 

Exercise Price

Beginning balance

 

620,721

 

$

16.50

Granted

 

418,184

 

 

20.00

Ending balance

 

1,038,905

 

$

17.91

 

The weighted‑average grant date fair value of stock options granted during the three months ended March 31, 2017 was $7.98. The relevant assumptions for stock options granted during the period are as follows:

 

 

 

 

 

 

    

$20.00 Strike

    

Underlying Equity

 

$

20.00

 

Strike Price

 

$

20.00

 

Dividend Yield (%)

 

 

0.0

%  

Risk free rate (%)

 

 

1.64% - 1.99

%  

Volatility (%)

 

 

46.6% - 46.7

%  

Expected Term (Years)

 

 

4-6

 

 

There was no vested stock option activity, or exercise of vested stock options, during the three months ended March 31, 2017.

A summary of the Company’s restricted stock unit activity and related information for the three months ended March 31, 2017 is as follows:

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017

 

    

 

    

Grant Date Fair

 

 

Restricted Stock

 

Value

Beginning balance

 

 —

 

$

 —

Granted

 

39,242

 

 

20.00

Ending balance

 

39,242

 

$

20.00

 

The Company recognized approximately $0.6 million and $0.3 million of compensation expense related to stock options and restricted stock unit awards during the three months ended March 31, 2017 and 2016, respectively.

Phantom unit awards

The Company’s phantom unit awards are cash settled awards that were contingent upon meeting certain equity returns and a liquidation event. The settlement amount was based on the fair market value of a share of the Company’s Class A common stock on the date of completion of the Company’s initial public offering, which constituted a liquidation event with respect to such phantom unit awards. As a result of the cash‑settlement feature of these awards, the Company considers these awards to be liability awards, which are measured at fair value at each reporting date and the pro rata vested portion of the award is recognized as a liability to the extent that the performance condition is deemed probable. No compensation expense was recognized through March 31, 2017 due to the non‑occurrence of the performance condition, which was not considered probable as of March 31, 2017. There was no activity related to the

19


 

Company’s phantom unit awards for the three months ended March 31, 2017. Refer to Note 17 – Subsequent Events for details related to the payments made in respect of outstanding phantom units in connection with the Company’s initial public offering.

NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS

The Company had variable rate debt outstanding which was subject to interest rate risk based on volatility in underlying interest rates. In April 2013, the Company entered into a pay fixed, receive variable interest rate swap, with an aggregate notional amount of $125.0 million, which the Company designated as a cash flow hedge. The derivative contract matured in April 2016. The change in value and amounts reclassified to interest expense during the three months ended March 31, 2016 were nominal. There was no activity during the three months ended March 31, 2017.

Changes in the fair values of the Company’s derivative instruments are presented on a net basis in the accompanying consolidated statements of operations. Changes in the fair value of the Company’s interest rate swap derivative instruments are as follows:

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

Derivatives designated as cash flow hedges

    

2016

 

 

(in thousands)

Beginning fair value of interest rate swap derivative instruments

 

$

(7)

Amount of unrealized losses recognized in OCI

 

 

(80)

Amount of gains reclassified from AOCI to earnings (effective portion)

 

 

85

Net change in fair value of interest rate swap derivative instruments

 

 

 5