NOTE 3—ACQUISITIONS

Business combinations

Rockwater Merger

On November 1, 2017, the Company completed the Rockwater Merger in which the Company combined with Rockwater. Rockwater is a provider of comprehensive water management solutions and oilfield chemicals to the oil and gas industry in the United States and Canada. The complementary nature of Rockwater’s business operations will create a leading pre-frac and water solutions company across all major U.S. unconventional basins.

Total consideration was $620.2 million based on the closing price of the Company’s shares of Class A Common Stock on November 1, 2017. Consideration transferred consisted of shares of Class A Common Stock, shares of Class A-2 Common Stock, shares of Class B Common Stock, and SES Holdings LLC Units. Consideration transferred also included the Company’s previously held interest in Rockwater, which was acquired as consideration in a sale of assets by Select’s predecessor to Rockwater’s predecessor in 2008 prior to the contribution of those assets to Rockwater and the related conversion of the ownership interests received by Select’s predecessor to ownership interests in Rockwater in 2011, and the fair value of Rockwater’s replaced share-based payments attributed to pre-acquisition service. In addition, the Company’s pre-merger interest in Rockwater was cancelled pursuant to the merger agreement. The pre-merger interest in Rockwater was previously included in other assets in the consolidated balance sheet. It was remeasured to a fair value of $2.3 million, which resulted in a gain of $1.2 million recognized in the fourth quarter of 2017 in other income in the consolidated statement of operations. For the year ended December 31, 2017, the Company expensed $8.9 million of transaction-related costs which are included in selling, general and administrative within the consolidated statement of operations.

The Rockwater Merger was accounted for as a business combination under the acquisition method of accounting. The preliminary allocation of the consideration transferred is based on management’s estimates, judgments and assumptions and are subject to change with the final valuation. This preliminary allocation is subject to being adjusted in the twelve-month period following the transaction date, reflecting significant new information that may be obtained in the future about facts and circumstances that existed as of the transaction date that, if known, would have affected the measurement of the amounts initially recognized. The final allocation of purchase consideration could include changes in the estimated fair value of working capital, property and equipment, intangible assets, other long-term assets, deferred tax liabilities and other long-term liabilities. Adjustments in the purchase price allocation may require a change in the amount allocated to goodwill during the period in which the adjustments are determined.

When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. The Company also engaged third-party valuation experts to assist in the purchase price allocation and the recorded valuation of property and equipment. The Company has received preliminary reports from these experts including estimates, judgments and assumptions for the valuation of the tangible and intangible assets acquired and liabilities assumed. These preliminary reports along with the analysis and expertise of management have formed the basis for the preliminary allocation. Detailed analysis and review of the assets acquired, including confirmation of the condition, existence and utility of the assets is currently ongoing. Management believes that the current information provides a reasonable basis for estimating fair values of assets acquired and liabilities assumed. These estimates, judgments and assumptions are subject to change and should be treated as preliminary values as there could be significant changes upon final valuation. Management currently believes that its valuation work and the work of its third party experts will be completed and a final purchase price allocation will be recorded by June 30, 2018. Included in the working capital figure in the table below is accounts receivable acquired with a fair value of $196.9 million, and a gross contractual amount of $199.1 million. The Company expects $2.2 million of the gross contractual amount to be uncollectible. Management estimated that total consideration paid exceeded the fair value of the net assets acquired and liabilities assumed by $247.2 million, which excess was recognized as goodwill. The goodwill recognized was primarily attributable to synergies driven by expanding into new geographies and service offerings, strengthening existing service lines, acquiring an established, trained workforce and expected cost reductions. Goodwill of $231.6 million and $15.6 million was allocated to the Company’s Water Solutions and Oilfield Chemicals segments, respectively.

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


Preliminary purchase price allocation	Amount
Consideration transferred	(in thousands)
Class A Common Stock (25,914,260 shares)	$	423,957
Class A-2 Common Stock (6,731,845 shares)		110,133
Class B Common Stock (4,356,477 shares) and SES Holdings common units issued (4,356,477 units)		71,272
Fair value of previously held interest in Rockwater		2,310
Fair value of Rockwater share-based awards attributed to pre-acquisition service		12,529
Total consideration transferred		620,201
Less: identifiable assets acquired and liabilities assumed
Working capital		146,883
Property and equipment		185,601
Intangible assets
Customer relationships		89,007
Trademarks and patents		31,215
Non-compete agreements		3,810
Other long-term assets		62
Deferred tax liabilities		(408)
Long-term debt		(80,555)
Other long-term liabilities		(2,650)
Total identifiable net assets acquired		372,965
Goodwill		247,236
Fair value allocated to net assets acquired	$	620,201

Resource Water Acquisition

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

The total consideration for the Resource Water Acquisition was $9.0 million, with $6.6 million paid in cash and $2.4 million paid in shares of Class A Common Stock valued at $15.17 per share, subject to customary post‑closing adjustments. The Company funded the cash portion of the consideration for the Resource Water Acquisition with $6.6 million of cash on hand. For the year ended December 31, 2017, the Company expensed $0.1 million of related transaction-related costs, which are included in selling, general and administrative within the consolidated statement of operations. The Resource Water Acquisition was accounted for as a business combination under the acquisition method of accounting. The preliminary allocation of the consideration transferred was based on management’s estimates, judgments and assumptions. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. Working capital estimates are based on provisional amounts. Management estimated that total consideration paid exceeded the fair value of the net assets acquired by $1.9 million, which excess was recognized as goodwill. The goodwill recognized was attributable to Resource Water’s assembled workforce as well as synergies related to the Company’s comprehensive water solutions strategy. The goodwill was included in the assets of the Company’s Water Solutions segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:


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

(1)

The Company obtained additional information related to the working capital, customer relationship intangible assets and other intangible assets balances which led to a decrease of $0.2 million, an increase of less than $0.1 million and a decrease of less than $0.1 million, respectively. The cash paid was also reduced by $0.1 million when finalizing the purchase price. The combined impact of these changes resulted in a corresponding increase of less than $0.1 million in goodwill.

GRR Acquisition

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

The total consideration for the GRR Acquisition was $59.6 million, subject to customary post-closing adjustments, with $53.0 million paid in cash, $1.1 million in assumed tax liabilities to the sellers and $5.5 million paid in shares of Class A Common Stock valued at $20.00 per share. The Company funded the cash portion of the consideration for the GRR Acquisition with $19.0 million of cash on hand and $34.0 million of borrowings under the Company’s Previous Credit Facility (as defined and discussed in Note 8). For the year ended December 31, 2017, the Company expensed $1.0 million of transaction-related costs which are included in selling, general and administrative expenses within the consolidated statement of operations. The GRR Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $12.0 million was recorded. The goodwill recognized was primarily attributable to synergies related to the Company’s comprehensive water solutions strategy that are expected to arise from the GRR Acquisition and was attributable to the Company’s Water Solutions segment. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions segment.

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


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

(1)

The Company obtained additional information related to its cash paid, working capital, customer relationship intangible asset, other intangible asset and assumed tax liabilities to the sellers’ balances which led to an increase of $1.7 million, $1.7 million, less than $0.1 million, less than $0.1 million and $1.1 million, respectively. The combined impact of these changes resulted in a corresponding increase of $1.0 million in goodwill.

The Rockwater Merger contributed revenue and net income of $128.9 million and $4.1 million, respectively, to the results of the Company from the date of acquisition through December 31, 2017. Resource Water Acquisition contributed revenue and net income of $4.6 million and $1.4 million, respectively, to the results of the Company from the date of acquisition through December 31, 2017. The GRR Acquisition contributed revenue and net income of $35.2 million and $3.2 million, respectively, to the consolidated results of the Company from the date of acquisition through December 31, 2017. The following unaudited consolidated pro forma information is presented as if the Rockwater Merger, the GRR Acquisition and the Resource Water Acquisition had occurred on January 1, 2016:


	Pro Forma
	Year ended December 31,
	2017		2016
	(unaudited)
	(in thousands)
Revenue	$	1,263,787	$	698,778

Net loss		(17,069)		(375,133)
Less: net loss attributable to noncontrolling interests(1)		6,815		153,970
Net loss attributable to Select Energy Services, Inc.(1)	$	(10,254)	$	(221,163)

(1)

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

The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the Rockwater Merger, GRR Acquisition and Resource Water Acquisition results to reflect the increase to depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2016 and other related pro forma adjustments. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the Rockwater Merger, the GRR Acquisition or the Resource Water Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the Rockwater Merger, the GRR Acquisition and the Resource Water Acquisition had occurred as of January 1, 2016 or of future operating performance.

Asset acquisitions

On November 8, 2017 the Company completed the acquisition of fixed assets from Heritage Environmental Services, LLC (the “Solid Oak Flowback Acquisition”) for $4.9 million in cash, funded entirely with cash on hand. On June 21, 2017 the Company completed the acquisition of fixed assets from Tex-Star Water Services, LLC for $4.2 million in cash, funded entirely with cash on hand.

On May 30, 2017 the Company completed the acquisition of automated manifold intellectual property and related assets from Data Automated Water Systems, LLC (the “DAWS Acquisition”) for $4.0 million. This acquisition was paid with $2.0 million of cash and 128,370 shares of Class A Common Stock valued at $2.0 million. The DAWS Acquisition resulted in fixed assets of $1.8 million, patents of $1.9 million and software of $0.3 million.