For the quarterly period ended March 31, 2019

For the transition period from                      to                     

(Registrant’s telephone number, including area code) 

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

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  ý  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

The number of the registrant’s common shares, par value $0.001 per share, outstanding at April 30, 2019, was 100,419,802.

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          The accompanying condensed consolidated financial statements of ProPetro Holding Corp. and its subsidiary (the "Company," "we," "us" or "our") have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission ("SEC") for interim financial information and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for annual financial statements. Those adjustments (which consisted of normal recurring accruals) that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods have been made. Results of operations for such interim periods are not necessarily indicative of the results of operations for a full year due to changes in market conditions and other factors. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018 included in our Form 10-K filed with the SEC ("Form 10-K").

          Pressure Pumping — Pressure pumping consists of downhole pumping services, which includes hydraulic fracturing (inclusive of acidizing services) and cementing.

           All Other— All other consists of our coil tubing, drilling and flowback, which are all downhole well stimulation and completion/remedial services. The performance obligation for each of the services has a fixed transaction price which is satisfied at a point-in-time upon completion of the service when control is transferred to the customer. Accordingly, we recognize revenue at a point-in-time, upon completion of the service and transfer of control to the customer.

          Accounts receivables are stated at the amount billed and billable to customers. At March 31, 2019 and December 31, 2018, accrued revenue (unbilled receivable) included as part of our accounts receivable was $33.8 million and $18.0 million, respectively. At March 31, 2019, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing operations was $79.8 million, which is expected to be completed and recognized in one month following the current period balance sheet date, in our pressure pumping reportable segment.

Recently Issued Accounting Standards Adopted in 2019

            In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases. This new leases standard introduces a lessee model that brings most leases on the balance sheet. This new standard increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as Right of Use ("ROU") Assets and Lease Liabilities. Leases will be classified as either finance or operating, which will impact the pattern of expense recognition on the income statement. This ASU also requires additional qualitative and quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Effective January 1, 2019, we adopted the new leases standard using the modified retrospective transition method and electing to account for comparative periods under legacy GAAP. We also elected other practical expedients provided by the new leases standard, the short-term lease recognition practical expedient in which leases with an initial term of 12 months or less will not be recognized on the balance sheet and the practical expedient to not separate lease and non-lease components for our real estate class of leased assets. See Note 9 for additional disclosures relating to our adoption of ASU 2016-02.

Recently Issued Accounting Standards Not Yet Adopted in 2019

            In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under this ASU, an entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Although, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for impairment tests in fiscal years beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We believe that the adoption of this guidance will not materially affect our consolidated financial statements.

          Our financial instruments include cash and cash equivalents, accounts receivable and accounts payable, accrued expenses and long-term debt. The estimated fair value of our financial instruments at March 31, 2019 and December 31, 2018 approximated or equaled their carrying values as reflected in our condensed consolidated balance sheets.

          No assets were measured at fair value on a nonrecurring basis at March 31, 2019 and December 31, 2018, respectively.

          No impairment of property and equipment was recorded during the three months ended March 31, 2019 and 2018.

          We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit's carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is calculated and recorded in the period. There were no additions to, or disposal of, goodwill during the three months ended March 31, 2019 and 2018. At December 31, 2018, we determined our goodwill carrying value not to be impaired as per our annual impairment test.

          On March 22, 2017, we entered into a revolving credit facility with a $150.0 million borrowing capacity ("ABL Credit Facility"). Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with no LIBOR floor. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. The ABL Credit Facility has a borrowing base of 85% of eligible accounts receivable less customary reserves. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. In addition, the ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio of 1.0x when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $12.0 million. The ABL has a commitment fee of 0.38%, which reduces to 0.25% if utilization is greater than 50.0% of the borrowing base.

          On February 22, 2018, we entered into an amendment with our lenders to increase the capacity of the ABL Credit Facility. The amendment increased total capacity under the facility from $150.0 million to $200.0 million, and modified the Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10.0% of the lesser of the facility size and the Borrowing Base and (ii) $15.0 million.

On December 19, 2018, we entered into a second amendment with our lenders to further increase the capacity of the ABL Credit Facility. The second amendment increased total capacity under the facility from $200.0 million to $300.0 million and extended the maturity date of the ABL Credit Facility from March 22, 2022 until December 19, 2023. The second amendment to the ABL Credit Facility further modified the Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $22.5 million.

          Total debt consisted of the following at March 31, 2019 and December 31, 2018, respectively:

Annual Maturities — Scheduled remaining annual maturities of total debt are as follows at March 31, 2019:

          The Company has five operating segments for which discreet financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback, and drilling. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.

          In accordance with Accounting Standards Codification ("ASC") 280—Segment Reporting, the Company has one reportable segment (pressure pumping) comprised of the hydraulic fracturing and cementing operating segments. All other operating segments and corporate administrative expenses are included in the ‘‘all other’’ category in the table below. Inter-segment revenues are not material and are not shown separately in the table below.

          The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest, taxes, depreciation & amortization, stock-based compensation expense, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or income). A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below.

Reconciliation of net income (loss) to adjusted EBITDA:

          The table below shows the calculations for the three months ended March 31, 2019 and 2018.

          There were no anti-dilutive stock options, performance stock units and non-vested restricted stocks during the three months ended March 31, 2019 and 2018.

          A summary of the stock option activity for the three months ended March 31, 2019 is presented below.

          There were no new grants during the three months ended March 31, 2019 and 2018. As of March 31, 2019, the aggregate intrinsic value for our outstanding stock options was $77.5 million, and the aggregate intrinsic value for our exercisable stock options was $74.3 million. The aggregate intrinsic value for the exercised stock options during the three months ended March 31, 2019 was $1.4 million. The remaining contractual term for the outstanding and exercisable stock options as of March 31, 2019, was 5.6 years and 5.5 years, respectively. For the three months ended March 31, 2019 and 2018, we recognized $0.2 million and $0.2 million in stock compensation expense related to these stock option awards.

         During the three months ended March 31, 2019, we granted a total of 318,332 restricted stock units ("RSUs") to employees, directors and executives pursuant to our Incentive Award Plan ("IAP"). Each RSU represents the right to receive one share of common stock. The fair value of the RSUs is based on the closing share price of our common stock on the date of grant. During the three months ended March 31, 2019 and 2018, the recorded stock compensation expense for all RSUs was $0.9 million and $0.4 million, respectively. As of March 31, 2019 the total unrecognized compensation expense for all RSUs was approximately $11.3 million, and is expected to be recognized over a weighted average period of approximately 2.5 years.

          The following table summarizes RSUs activity during the three months ended March 31, 2019:

           Effective March 18, 2019, our Board of Directors authorized and granted 199,413 performance stock units ("PSUs") to certain key employees under the IAP. The actual number of shares that may be issued under the PSUs ranges from zero up to a maximum of twice the target number of performance stock unit awards granted to the participant, based on our total shareholder return relative to a designated peer group from January 1, 2019 through December 31, 2021. Compensation expense is recorded

ratably over the corresponding requisite service period. The fair value of PSUs is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued. During the three months ended March 31, 2019 and 2018, the recorded stock compensation expense for the PSUs was $0.7 million and $0.2 million, respectively.

          The following table summarizes information about PSUs activity during the three months ended March 31, 2019:

          The total stock compensation expense for the three months ended March 31, 2019 and 2018 for all stock awards was $1.8 million and $0.8 million, respectively. The total unrecognized compensation expense as of March 31, 2019 is approximately $23.1 million, and is expected to be recognized over a weighted average period of approximately 2.4 years.

          The Company leases its corporate offices from a related party with a base rent of $0.1 million per year. The Company also leases five properties adjacent to the corporate office from related parties with annual base rents of $0.03 million, $0.03 million, $0.1 million, $0.1 million, and $0.2 million.

          For the three months ended March 31, 2019 and 2018, the Company paid approximately $0.1 million and $0.03 million, respectively, for the use of transportation services from a related party. The Company also rents equipment in Elk City, Oklahoma from a related party, and for the three months ended March 31, 2019 and 2018, the Company paid $0.05 million and $0.05 million, respectively.

          At March 31, 2019 and December 31, 2018, the Company had $0.03 million and $0.01 million in payables, respectively, and approximately $0 and $0 in receivables, respectively, for transportation and equipment rental services provided by related parties.

          On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pressure Pumping Services, LLC. The acquisition cost of the assets was comprised of approximately $110.0 million of cash and 16.6 million shares of our common stock. In addition, we entered into a real estate lease for a crew camp facility with Pioneer, as disclosed in Note 9. In connection with the consummation of the transaction, we became a service provider to Pioneer, providing pressure pumping and related services for a term of up to ten years. Revenue from services provided to Pioneer accounted for approximately 29.3% and 4.8% of our total revenue during the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the balance due from Pioneer for services we provided during the period amounted to $93.7 million and the amount due to Pioneer was $0.2 million. As of December 31, 2018, the balance due from Pioneer for services we provided during the period amounted to $15.7 million and the amount due to Pioneer was $109.8 million.

 Description of Lease

          In March 2013, we entered into a ten year real estate lease contract (the "Real Estate Lease") with a commencement date of April 1, 2013, as part of the expansion of our equipment yard. The assets and liabilities under this contract are equally allocated between our cementing and coiled tubing segments. In addition to the contractual lease period, the contract includes an optional renewal of up to ten years, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate Lease does not contain variability in payments resulting from either an index change or rate change. Effective January 1, 2019, the remaining lease term in our present value estimate of the minimum future lease payments was four years.

          In January 2019, we entered into a four year real estate lease contract with Pioneer Natural Resources USA, Inc. (the "Crew Camp Lease") with a commencement date of January 1, 2019 for purposes of providing housing to company personnel. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Crew Camp Lease does not contain variability in payments resulting from either an index change or rate change. The lease term used in our estimate of the present value of the minimum future lease payments for the purpose of determining our right-of-use asset and lease obligation was four years. The right-of-use asset and lease liability outstanding under the Crew Camp Lease as of March 31, 2019 is $0.5 million and $0.5 million, respectively. The total operating lease cost recorded during three months ended March 31, 2019, in connection with the Crew Camp lease was $0.04 million.

          Consistent with the requirements of the new lease standard, ASC 842, we have determined the Real Estate Lease and Crew Camp Lease to be operating leases. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the real estate lease because we concluded that the accounting effect will be insignificant. As of March 31, 2019, the weighted average discount rate and remaining lease term was 6.1% and 3.9 years, respectively.

          As of March 31, 2019, our total operating lease right-of-use asset cost was $1.8 million, and accumulated amortization was $0.1 million. For the three months ended March 31, 2019, we recorded operating lease cost of $0.1 million in our statement of operations. During the three months ended March 31, 2018, our operating lease expense, under legacy GAAP, ASC 840, was $0.4 million.

          As part of our expansion of maintenance facilities for our pressure pumping equipment, we entered into a ten year land lease contract (the "Ground Lease") with an exclusive option to purchase the land exercisable beginning one year from the commencement date of October 1, 2018 through the end of the contractual lease term. The Ground Lease does not include any residual value guarantee, covenants or financial restrictions. Further, the Ground Lease does not contain variability in payments resulting from either an index change or rate change. The remaining lease term used in our estimate of the present value of the minimum future lease payments for the purpose of determining our right-of-use asset and lease obligation was 0.6 years, assuming we will exercise our option to purchase the land immediately after the option becomes exercisable.

          Consistent with the requirements of the new lease standard, ASC 842, we have determined the Ground Lease to be a finance lease. Our assumptions resulted from the existence of the right to control the use of the land for a period of time and the option to purchase the land, which we are reasonable certain of exercising after one year from the commencement date. As of March 31, 2019, the weighted average discount rate and remaining lease term was 4.3% and 0.6 years, respectively .

          As of March 31, 2019, our net finance lease right-of-use asset included as part of property and equipment in our consolidated balance sheet consists of a cost of $3.1 million and accumulated amortization of $0. For the three months ended March 31, 2019, no amortization was recorded on the land under the finance lease and the interest on our finance lease for the three months ended March 31, 2019 was $0.03 million. No amortization was recorded in the period for our finance lease right-of-use asset because it is comprised of land only.

          The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for finance and operating leases as of March 31, 2019 are as follows:

The total cash paid for amounts included in the measurement of our operating and finance lease liabilities during the three months ended March 31, 2019 was $0.1 million and $0.1 million, respectively. The non-cash lease obligation we recorded effective January 1, 2019, upon adopting the new lease standard, was $2.0 million and $3.1 million for operating and finance leases, respectively. There were no non-cash changes to our lease liabilities during the three months ended March 31, 2019.

          We elected the practical expedient, consistent with ASC 842, to exclude leases with an initial term of twelve months or less ("short-term leases") from our balance sheet and continue to record short-term leases as a period expense. For the three months ended March 31, 2019, our short-term lease expense was $0.3 million. At March 31, 2019, the total remaining lease commitments for all of our short-term lease was $0.03 million.

As of December 31, 2018, our required remaining lease payments under legacy GAAP, ASC 840, for each fiscal year are as follows:

Contingent Liabilities