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•

approximately $370,000 of expenses reimbursed to members of senior management, including the former chief executive officer (approximately $346,000) and former chief financial officer (approximately $18,000), were incorrectly recorded as expenses of the Company and should have been the responsibility of the officers individually; each of these officers has reimbursed the Company in full for the identified amounts. These improper reimbursements were attributable to inadequate documentation stemming from the lack of a more robust employee expense review and approval procedure;

•	the Company’s former chief accounting officer entered into a related party transaction that was not properly disclosed in the Company’s filings with the Securities and Exchange Commission (the “SEC”);

•	a number of internal and disclosure control deficiencies and material weaknesses were identified, as described in more detail in Part I - Item 4. “Controls and Procedures,” including, but not limited to, the following:

◦	the Company’s former executive management team did not establish and promote a control environment with an appropriate tone of compliance and control consciousness throughout the entire Company;

◦	the Company did not appropriately identify and monitor conflicts of interest;

◦	certain whistleblower allegations were not properly investigated and elevated to the Committee;

◦	instances were identified of non-compliance with the Company’s internal policies, including its Insider Trading Compliance Policy and Code of Conduct and Ethics; and

◦	management did not appropriately communicate information internally and externally, including communication between management and the Board.

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•	the severity and duration of world health events, including the recent outbreak of the novel coronavirus (“COVID-19”) pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business;

•

the current significant surplus in the supply of oil and actions by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;

•	uncertainty regarding the timing, pace and extent of an economic recovery in the United States and elsewhere, which in turn will likely affect demand for crude oil and natural gas and therefore the demand for our services;

•	the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons;

•	changes in general economic and geopolitical conditions;

•	competitive conditions in our industry;

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

•	our ability to successfully implement technological developments and enhancements, including the new DuraStim® fleets and associated power solutions;

•	the effects of current and future litigation, including the Logan Lawsuit, the Boca Raton Lawsuit and the Chang Lawsuit (each defined herein);

•	the timing and outcome of, including potential expense associated with, the SEC pending investigation;

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•	the potential impact on our business and stock price of any announcements regarding the SEC's pending investigation, the Logan Lawsuit, the Boca Raton Lawsuit or the Chang Lawsuit;

•	the material weaknesses in our internal controls over financial reporting and disclosure controls and procedures described under Part I, Item 4, “Controls and Procedure” in this Form 10-Q;

•	matters related to the Expanded Audit Committee Review and related findings, as well as the implementation and effectiveness of the Company's remediation plan; and

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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 (our "Form 10-K").

Risks and Uncertainties

          As an oilfield services company, we are exposed to a number of risks and uncertainties that are inherent to our industry. In addition to such industry-specific risks, the global public health crisis associated with the novel coronavirus (“COVID-19”) pandemic has, and is anticipated to continue to have, an adverse effect on global economic activity for the immediate future and has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. The slowdown in global economic activity attributable to the COVID-19 pandemic has resulted in a dramatic decline in the demand for energy, which directly impacts our industry and the Company. In addition, global crude oil prices experienced a collapse starting in early March 2020 as a direct result of failed negotiations between the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia. In response to the global economic slowdown, OPEC had recommended a decrease in production levels in order to accommodate reduced demand. Russia rejected the recommendation of OPEC as a concession to U.S. producers. After the failure to reach an agreement, Saudi Arabia, a dominant member of OPEC, and other Persian Gulf OPEC members announced intentions to increase production and offer price discounts to buyers in certain geographic regions.

          As the breadth of the COVID-19 health crisis expanded throughout the month of March 2020 and governmental authorities implemented more restrictive measures to limit person-to-person contact, global economic activity continued to decline commensurately. The associated impact on the energy industry has been adverse and continued to be exacerbated by the unresolved conflict regarding production. In the second week of April 2020, OPEC, Russia and certain other petroleum producing nations (“OPEC+”), reconvened to discuss the matter of production cuts in light of unprecedented disruption and supply and demand imbalances that expanded since the failed negotiations in early March 2020. Tentative agreements were reached to cut production by up to 10 million barrels of oil per day with allocations to be made among the OPEC+ participants. Some of these production cuts went into effect in the first half of May 2020, however, commodity prices remain depressed as a result of an increasingly utilized global storage network and near-term demand loss attributable to the COVID-19 health crisis and related economic slowdown.

         The combined effect of COVID-19 and the energy industry disruptions led to a decline in WTI crude oil prices of approximately 67 percent from the beginning of January 2020, when prices were approximately $62 per barrel, through the end of March 2020, when they were just above $20 per barrel. Overall crude oil price volatility has continued despite apparent agreement among OPEC+ regarding production cuts and as of June 17, 2020, the WTI price for a barrel of crude oil was approximately $38.

          Despite a significant decline in drilling and completion activities by U.S. producers starting in mid-March 2020, domestic supply is exceeding demand which has led to significant operational stress with respect to capacity limitations associated with storage, pipeline and refining infrastructure, particularly within the Gulf Coast region. The combined effect of the aforementioned factors is anticipated to have an adverse impact on the industry in general and our operations specifically.

          Since March 2020, we initiated several actions to mitigate the anticipated adverse economic conditions for the immediate future and to support our financial position and liquidity. The more significant actions that we have taken included: (i) canceling substantially all of our growth capital projects, (ii) significantly reducing our maintenance expenditures and field level consumable costs, (iii) reducing our workforce to follow our activity levels, (iv) efforts to manage our compensation costs, such as compensation reductions and management of work schedules to reduce overtime costs and (v) negotiating more favorable payment terms with certain of our larger vendors and proactively managing our portfolio of accounts receivable.

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Revenue Recognition

          The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of the principal activities, separated by reportable segment and all other, from which the Company generates its revenue.

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

Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale wellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts have one performance obligation, contracted total stages, satisfied over time. We recognize revenue over time using a progress output method, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our hydraulic fracturing services are transferred to our customers over time.

Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid is injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation.

Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation.

The transaction price for each performance obligation for all our pressure pumping services is fixed per our contracts with our customers.

           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 Receivable

          Accounts receivables are stated at the amount billed and billable to customers. At September 30, 2019 and December 31, 2018, accrued revenue (unbilled receivable) included as part of our accounts receivable was $34.9 million and $18.0 million, respectively. At September 30, 2019, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing operations was $32.1 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 lease 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.

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Recently Issued Accounting Standards Not Yet Adopted in 2019

            In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842. ASU 2016-13 and ASU 2018-19 are effective for annual periods beginning after December 15, 2019. Effective January 1, 2020, the Company adopted ASU 2016-13 using the modified-retrospective approach. The adoption of this guidance did not materially affect our consolidated financial statements. While there was no material impact to the financial statements as a result of adoption of ASU 2016-13, as a result of deteriorating economic conditions for the oil and gas industry brought on by the COVID-19 pandemic, during the first quarter of 2020 the Company recorded a provision for credit losses of $4.3 million.

            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. The adoption of this guidance did not materially affect the Company's condensed consolidated financial statements.

            In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The Company adopted ASU 2018-13 on January 1, 2020 and determined the adoption of this standard did not impact the Company’s condensed consolidated financial statements.

          In December 2019, the FASB issued ASU No 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s condensed consolidated financial statements.

            In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s condensed consolidated financial statements.

           Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

          In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

          Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based

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on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.

          Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

          Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

          A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

          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 September 30, 2019 and December 31, 2018 approximated or equaled their carrying values as reflected in our condensed consolidated balance sheets.

Assets Measured at Fair Value on a Nonrecurring Basis

          No assets were measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018, respectively.

          No impairment of property and equipment was recorded during the nine months ended September 30, 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 nine months ended September 30, 2019 and 2018. At December 31, 2018, we determined our goodwill carrying value not to be impaired as per our annual impairment test.

ABL Credit Facility

          Our revolving credit facility (“ABL Credit Facility”), as amended, has a total borrowing capacity of $300 million (subject to the Borrowing Base limit), with a maturity date of December 19, 2023. The ABL Credit Facility has a borrowing base, as determined monthly, of 85% of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"). The Borrowing Base as of September 30, 2019 was approximately $191.1 million. The ABL Credit Facility includes a 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 or the Borrowing Base or (ii) $22.5 million. 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. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company.

          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 a LIBOR floor of zero. The weighted average interest rate for our ABL Credit Facility for the nine months ended September 30, 2019 was 4.4%.

          In March 2020, we obtained a waiver from our lenders under the ABL Credit Facility to extend the time period for us to provide our lenders the Company’s audited financial statements for the year ended December 31, 2019 to July 31, 2020.

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          Total debt consisted of the following at September 30, 2019 and December 31, 2018, respectively:

($ in thousands)		2019				2018
ABL Credit Facility		$	130,000			$	70,000
Total debt		130,000				70,000
Less current portion of long-term debt		—				—
Total long-term debt		$	130,000			$	70,000

          The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet.

Annual Maturities — Scheduled remaining annual maturities of total debt are as follows at September 30, 2019:

($ in thousands)
2019		$	—
2020		—
2021		—
2022		—
2023 and thereafter		130,000
Total		$	130,000

          The Company has five operating segments for which discrete 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 expense (inclusive of our total income tax expense and interest expense) are included in the ‘‘all other’’ category in the table below. Total corporate administrative expense for the three and nine months ended September 30, 2019 was $30.1 million and $87.3 million, respectively. The corporate administrative expense for the three and nine months ended September 30, 2018 was $21.6 million and $59.6 million, respectively.

          Our hydraulic fracturing operating segment revenue approximated 95.7% and 95.7% of our pressure pumping revenue during the three and nine months ended September 30, 2019, respectively. During the three and nine months ended September 30, 2018, our hydraulic fracturing operating segment revenue approximated 94.9% and 95.5% of our pressure pumping revenue, respectively.

          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 and amortization, stock-based compensation expense, severance, 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 ($ in thousands):

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		Three Months Ended September 30, 2019
		Pressure Pumping				All Other				Total
Service revenue		$	528,851			$	12,996			$	541,847
Adjusted EBITDA		$	134,789			$	(2,894	)		$	131,895
Depreciation and amortization		$	36,110			$	1,543			$	37,653
Goodwill at September 30, 2019		$	9,425			$	—			$	9,425
Capital expenditures		$	83,770			$	3,189			$	86,959
Total assets at September 30, 2019		$	1,399,865			$	56,178			$	1,456,043
		Three Months Ended September 30, 2018
		Pressure Pumping				All Other				Total
Service revenue		$	421,436			$	12,605			$	434,041
Adjusted EBITDA		$	105,069			$	(1,701	)		$	103,368
Depreciation and amortization		$	22,026			$	1,191			$	23,217
Goodwill at December 31, 2018		$	9,425			$	—			$	9,425
Capital expenditures		$	73,143			$	1,060			$	74,203
Total assets at December 31, 2018		$	1,230,830			$	43,692			$	1,274,522

		Nine Months Ended September 30, 2019
		Pressure Pumping				All Other				Total
Service revenue		$	1,576,781			$	40,740			$	1,617,521
Adjusted EBITDA		$	417,017			$	(8,283	)		$	408,734
Depreciation and amortization		$	101,916			$	4,336			$	106,252
Goodwill at September 30, 2019		$	9,425			$	—			$	9,425
Capital expenditures		$	322,347			$	11,978			$	334,325
Total assets at September 30, 2019		$	1,399,865			$	56,178			$	1,456,043
		Nine Months Ended September 30, 2018
		Pressure Pumping				All Other				Total
Service revenue		$	1,242,286			$	36,862			$	1,279,148
Adjusted EBITDA		$	281,951			$	(5,871	)		$	276,080
Depreciation and amortization		$	59,830			$	3,598			$	63,428
Goodwill at December 31, 2018		$	9,425			$	—			$	9,425
Capital expenditures		$	218,113			$	6,586			$	224,699
Total assets at December 31, 2018		$	1,230,830			$	43,692			$	1,274,522

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Reconciliation of net income (loss) to adjusted EBITDA ($ in thousands):

		Three Months Ended September 30, 2019
		Pressure Pumping				All Other				Total
Net income (loss)		$	65,961			$	(31,564	)		$	34,397
Depreciation and amortization		36,110				1,543				37,653
Interest expense		21				1,728				1,749
Income tax expense		—				12,340				12,340
Loss on disposal of assets		30,987				166				31,153
Stock-based compensation		—				577				577
Other expense		—				75				75
Other general and administrative expense(1)		—				10,786				10,786
Retention bonus and severance expense		1,710				1,455				3,165
Adjusted EBITDA		$	134,789			$	(2,894	)		$	131,895
		Three Months Ended September 30, 2018
		Pressure Pumping				All Other				Total
Net income (loss)		$	66,493			$	(20,208	)		$	46,285
Depreciation and amortization		22,026				1,191				23,217
Interest expense		—				1,480				1,480
Income tax expense		—				13,592				13,592
Loss on disposal of assets		16,117				290				16,407
Stock-based compensation		—				1,631				1,631
Other expense		—				93				93
Deferred IPO bonus expense		433				230				663
Adjusted EBITDA		$	105,069			$	(1,701	)		$	103,368

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		Nine Months Ended September 30, 2019
		Pressure Pumping				All Other				Total
Net income (loss)		$	228,285			$	(87,950	)		$	140,335
Depreciation and amortization		101,916				4,336				106,252
Interest expense		43				5,635				5,678
Income tax expense		—				44,504				44,504
Loss on disposal of assets		81,110				468				81,578
Stock-based compensation		—				5,246				5,246
Other expense		—				539				539
Other general and administrative expense (1)		—				17,326				17,326
Deferred IPO, retention bonus and severance expense		5,663				1,613				7,276
Adjusted EBITDA		$	417,017			$	(8,283	)		$	408,734
		Nine Months Ended September 30, 2018
		Pressure Pumping				All Other				Total
Net income (loss)		$	176,952			$	(54,868	)		$	122,084
Depreciation and amortization		59,830				3,598				63,428
Interest expense		—				4,973				4,973
Income tax expense		—				35,998				35,998
Loss (gain) on disposal of assets		43,768				(707		)		43,061
Stock-based compensation		—				3,832				3,832
Other expense		—				505				505
Other general and administrative expense (1)		2				18				20
Deferred IPO bonus expense		1,399				780				2,179
Adjusted EBITDA		$	281,951			$	(5,871	)		$	276,080

 

(1)	Other general and administrative expense primarily relates to professional fees paid to external consultants in connection with the Company's expanded audit committee review and advisory services in 2019, and legal settlement in 2018.

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          Basic net income per common share is computed by dividing the net income relevant to the common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share uses the same net income divided by the sum of the weighted average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance and restricted stock units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method.

          The table below shows the calculations for the three and nine months ended September 30, 2019 and 2018 (in thousands, except for per share data).

		Three Months Ended September 30,
		2019				2018
Numerator (both basic and diluted)
Net income relevant to common stockholders		$	34,397			$	46,285
Denominator
Denominator for basic income per share		100,606				83,544
Dilutive effect of stock options		2,750				3,039
Dilutive effect of performance share units		184				225
Dilutive effect of restricted stock units		112				70
Denominator for diluted income per share		103,652				86,878
Basic income per common share		$	0.34			$	0.55
Diluted income per common share		$	0.33			$	0.53

		Nine Months Ended September 30,
		2019				2018
Numerator (both basic and diluted)
Net income relevant to common stockholders		$	140,335			$	122,084
Denominator
Denominator for basic income per share		100,423				83,359
Dilutive effect of stock options		3,114				3,355
Dilutive effect of performance share units		183				218
Dilutive effect of restricted stock units		268				221
Denominator for diluted income per share		103,988				87,153
Basic income per common share		$	1.40			$	1.46
Diluted income per common share		$	1.35			$	1.40

           There were no anti-dilutive stock options, performance share units and restricted stock units during the nine months ended September 30, 2019 and 2018. A total of 702,170 stock options outstanding as of September 30, 2019 was not included in our calculation of diluted income per common share for the three months ended September 30, 2019 because the options' exercise price was greater than the average market price of our common shares.

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Stock Options

          A summary of the stock option activity for the nine months ended September 30, 2019 is presented below.

		Number of Shares			Weighted Average Exercise Price
Outstanding at January 1, 2019		4,557,186			$	5.14
Granted		—			$	—
Exercised		(212,242	)		$	5.49
Forfeited		(20,011	)		$	14.00
Expired		—			$	—
Outstanding at September 30, 2019		4,324,933			$	5.08
Exercisable at September 30, 2019		3,967,091			$	4.28

          There were no new stock option grants during the nine months ended September 30, 2019 and 2018. As of September 30, 2019, the aggregate intrinsic value for our outstanding stock options was $20.8 million, and the aggregate intrinsic value for our exercisable stock options was $20.8 million. The aggregate intrinsic value for the exercised stock options during the nine months ended September 30, 2019 was $2.9 million. The remaining exercise period for the outstanding and exercisable stock options as of September 30, 2019, was 5.1 years and 5.0 years, respectively. For the nine months ended September 30, 2019 and 2018, we recognized $0.4 million and $0.5 million, respectively, in stock compensation expense related to these stock option awards.

Restricted Stock Units

    

         During the nine months ended September 30, 2019, we granted a total of 385,661 restricted stock units ("RSUs") to employees, officers and directors pursuant to the ProPetro Holding Corp. 2017 Incentive Award Plan (the "Incentive Plan"), which generally vest ratably over a three-year vesting period, in the case of awards to employees and officers, and generally vest in full after one year, in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. During the nine months ended September 30, 2019 and 2018, the recorded stock compensation expense for all RSUs was $2.3 million and $2.0 million, respectively. As of September 30, 2019, the total unrecognized compensation expense for all RSUs was approximately $7.4 million, and is expected to be recognized over a weighted average period of approximately 2.0 years.

          The following table summarizes RSUs activity during the nine months ended September 30, 2019:

		Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019		473,505			$	16.52
Granted		385,661			$	20.95
Vested		(214,872	)		$	15.89
Forfeited		(58,619	)		$	18.72
Canceled		—			$	—
Outstanding at September 30, 2019		585,675			$	19.45

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Performance Share Units

          During the nine months ended September 30, 2019, we granted 199,413 performance share units ("PSUs") to certain key employees and officers under the Incentive Plan. The actual number of shares of common stock that may be issued under the PSUs ranges from 0% up to a maximum of 200% of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group, generally at the end of a three year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date 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 nine months ended September 30, 2019 and 2018, the recorded stock compensation expense for the PSUs was $2.6 million and $1.3 million, respectively.

          The following table summarizes information about PSUs activity during the nine months ended September 30, 2019:

Period Granted		Target Shares Outstanding at January 1, 2019			Target Shares Granted			Target Shares Vested			Target Shares Forfeited			Target Shares Outstanding at September 30, 2019			Weighted Average Grant Date Fair Value per Share
2017		169,635			—			—			(18,143	)		151,492			$	10.73
2018		178,975			—			—			(17,341	)		161,634			$	27.51
2019		—			199,413			—			(18,676	)		180,737			$	34.82
Total		348,610			199,413			—			(54,160	)		493,863			$	25.04

Corporate Office Building

          The Company rents its corporate office building and the associated real property from an entity, in which a former executive officer of the Company has an equity interest. The rent expense incurred on our corporate office building is approximately $0.1 million per year. During the nine months ended September 30, 2019, the total improvements on our corporate office building that we rent from the related party was $1.3 million. In April 2020, the Company acquired the corporate office building and associated real property for approximately $1.5 million.

Operations and Maintenance Yards

          The Company also leases five yards from an entity, which certain former executive officers, an executive officer and a director of the Company have equity interests and total annual rent expense for each of the five yards was approximately $0.03 million, $0.03 million, $0.1 million, $0.1 million, and $0.2 million, respectively. The Company also leased a yard from another entity, which a certain executive officer of the Company has an equity interest, and with annual lease expense of $0.1 million.

          Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2018 we identified the following related party transaction. In 2018, the Company entered into a construction and purchase agreement for a maintenance facility for our pressure pumping operations with a developer. The developer for the maintenance facility was an equal partner with a former executive officer of the Company in a separate legal entity. The entity the former executive officer was associated with provided funding to the developer related to the construction of the maintenance facility. The construction and purchase cost of $2.3 million was paid to the developer during the year ended December 31, 2018.

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Transportation and Equipment Rental

          For the nine months ended September 30, 2019 and 2018, the Company incurred costs for transportation services with an entity, in which a former executive officer of the Company had an equity interest, of approximately $0.2 million and $0.3 million, respectively.

         The Company also rented equipment in Elk City, Oklahoma for our flowback operations from an entity, which a former executive officer of the Company has an equity interest. During the nine months ended September 30, 2019 and 2018, the Company incurred and paid $0.1 million and $0.1 million, respectively. This rental arrangement was terminated in January 2020.

         At September 30, 2019 and December 31, 2018, the Company had $0 and $0.01 million in payables to the above related parties.

PT Petroleum, LLC

          Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2018 we identified the following related party transaction. During the nine months ended September 30, 2018, the Company provided services to PT Petroleum, LLC, an entity in which a director was an officer, of approximately $16.7 million.

Pioneer

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          On January 1, 2019, we implemented ASC 842, using the modified transition approach and elected not to restate prior years. Accordingly, the effects of adopting ASC 842 were adjusted in the beginning of 2019 while prior periods are accounted for under the legacy GAAP, ASC 840. There was no cumulative effect adjustment on beginning retained earnings. We also elected other practical expedients provided by the new leases standard, the short-term lease recognition practical expedient in which leases with a term of twelve months or less will not be recognized on the balance sheet and the practical expedient to not separate lease and non-lease components for real estate class of assets. Our discount rate was based on our estimated incremental borrowing rate on a collateralized basis with similar terms and economic considerations as our lease payments at the lease commencement. Below is a description of our operating and finance leases.

Operating Leases

 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 lease is with an entity in which a director of the Company has a noncontrolling equity ownership interest. During the nine months ended September 30, 2019 and 2018, the Company made lease payments of approximately $0.3 million and $0.3 million, respectively. 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. We determined the Crew Camp Lease to be an operating lease. However, effective July 1, 2019, the Crew Camp Lease was terminated in connection with our disposal of our camp assets located at the leased real estate for $5.0 million. In connection with the Crew Camp Lease termination, we derecognized the right-of-use asset and lease liability of $0.5 million and $0.5 million, respectively. The total operating lease cost recorded during the nine months ended September 30, 2019, in connection with the Crew Camp Lease was $0.1 million. Effective July 1, 2019, we disposed of our camp assets to Target Logistics Management and entered into a twelve month lease (the "Lodging Lease"), which we determined to be a short-term lease, to rent a certain number of rooms daily, including related services, for a fixed rate and accordingly, we recorded a gain on sale in our statement of operations during the three and nine months ended September 30, 2019 of approximately $4.2 million.

          Consistent with the requirements of the new lease standard, ASC 842, we have determined the Real Estate Lease to be an operating lease. 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 was insignificant. As of September 30, 2019, the weighted average discount rate and remaining lease term was 6.7% and 3.5 years, respectively.

          As of September 30, 2019, our total operating lease right-of-use asset cost was $1.2 million, and accumulated amortization was $0.2 million. For the nine months ended September 30, 2019, we recorded operating lease cost of $0.3 million in our statement of operations. During the nine months ended September 30, 2018, our operating lease expense, under legacy GAAP, ASC 840, was $1.2 million.

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Finance Leases

Description of Ground Lease

          In 2018, 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 0.9 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 reasonably certain of exercising shortly after one year from the commencement date. As of September 30, 2019, the weighted average discount rate and remaining lease term was 4.3% and 0.1 years, respectively.

          As of September 30, 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 nine months ended September 30, 2019, no amortization was recorded on the land under the finance lease and the interest on our finance lease for the nine months ended September 30, 2019 was $0.1 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 operating and finance leases as of September 30, 2019 are as follows:

		Leases
($ in thousands)		Operating				Finance
2019		$	90			$	2,927
2020		366				—
2021		377				—
2022		389				—
2023		97				—
Total undiscounted future lease payments		1,319				2,927
Less: amount representing interest		(148		)		(10		)
Present value of future lease payments (lease obligation)		$	1,171			$	2,917

          The total cash paid for amounts included in the measurement of our operating and finance lease liabilities during the nine months ended September 30, 2019 was $0.3 million and $0.3 million, respectively. The non-cash lease obligation we recorded effective January 1, 2019, upon adopting the new lease standard, ASC 842, was $2.0 million and $3.1 million for operating and finance leases, respectively. The non-cash changes to our lease liabilities during the nine months ended September 30, 2019, relate to the derecognition of the lease liability of $0.5 million, in connection with the Crew Camp Lease termination on July 1, 2019.

          In March 2020, the Company exercised its option and purchased the land associated with the Ground Lease.

Short-Term Leases

          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 nine months ended September 30, 2019, our short-term asset lease and Lodging Lease expense was $1.0 million and $1.2 million, respectively. At September 30, 2019, the total remaining lease commitments for all of our short-term lease was $5.4 million.

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Commitments

          As of December 31, 2018, our required remaining lease payments under legacy GAAP, ASC 840, for each fiscal year are as follows. See Note 9 for additional lease disclosures under the new lease standard, ASC 842.

($ in thousands)
2019		$	892
2020		721
2021		721
2022		721
2023 and thereafter		2,258
Total		$	5,313

             In 2019, the Company entered into a fixed asset purchase agreement, as amended, with its equipment manufacturer. As of September 30, 2019, the Company has outstanding agreements with its equipment manufacturer to purchase new hydraulic fracturing DuraStim® fleets, and an option to purchase additional DuraStim® fleets through April 30, 2021. The option fee of $6.1 million which we have classified as a deposit for property and equipment will be applied equally towards the purchase price of each additional DuraStim® fleet ordered. As of September 30, 2019, the total outstanding remaining contractual obligation under the purchase agreement for the DuraStim® fleets, two turbines and related ancillary equipment was approximately $21.5 million. As of September 30, 2019, other contracted capital commitments entered into as part of normal course of business for supply of certain equipment, including improvements of our corporate office building, was approximately $1.6 million.

           The Company enters into purchase agreements with its sand suppliers (the "Sand suppliers") to secure supply of sand as part of its normal course of business. The agreements with the Sand suppliers require that the Company purchase a minimum volume of sand, constituting substantially all of its sand requirements, from the Sand suppliers, otherwise certain penalties may be charged. Under certain of the purchase agreements, a shortfall fee applies if the Company purchases less than the minimum volume of sand. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the minimum volumes or a fixed price per ton of unpurchased volumes. Under one of the purchase agreements, the Company is obligated to purchase a specified percentage of its overall sand requirements, or it must pay the supplier the difference between the purchase price of the minimum volumes under the purchase agreement and the purchase price of the volumes actually purchased. Our minimum volume commitments under the purchase agreements are either based on a percentage of our total usage or fixed minimum quantity. Our agreements with the Sand suppliers expire at different times prior to April 30, 2022. During the nine months ended September 30, 2019 and 2018, no shortfall fee has been recorded. One of the Sand suppliers (“SandCo”) we entered into an agreement with to purchase sand (“Texas sand”) has an indirect relationship with a former executive officer of the Company, because beginning in 2018, the Texas sand was sourced from a mine located on land owned by an entity (“LandCo”) in which the former executive officer has a 44% noncontrolling equity interest in the LandCo. The total sand purchased from SandCo during the the nine months ended September 30, 2019 and 2018 was approximately $36.8 million and $1.6 million, respectively, and the estimated indirect benefit to the former executive officer of the Company was approximately $1.2 million and $0.1 million, respectively.

          As of September 30, 2019, and December 31, 2018, the Company had issued letters of credit of $1.5 million and $1.8 million, respectively, under the Company's ABL Credit Facility relating to the Company's casualty insurance policy.

          As of September 30, 2019, our accrued severance relating to the resignation of a former officer of the Company was approximately $1.5 million, which was included as part of accrued and other current liabilities in our consolidated balance sheet and within our general and administrative expense in our statement of operations. On October 3, 2019, an officer of the Company resigned his position and the additional estimated future severance in connection with this resignation is approximately $0.5 million.

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Contingent Liabilities

    

           In September 2019, a complaint, captioned Richard Logan, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. ProPetro Holding Corp., et al., (the “Logan Lawsuit”), was filed against the Company and certain of its current and former officers and directors in the U.S. District Court for the Western District of Texas.

          In April 2020, Lead Plaintiffs Nykredit Portefølje Administration A/S, Oklahoma Firefighters Pension and Retirement System, Oklahoma Law Enforcement Retirement System, Oklahoma Police Pension and Retirement System, and Oklahoma City Employee Retirement System, and additional named plaintiff Police and Fire Retirement System of the City of Detroit, individually and on behalf of a putative class of shareholders who purchased the Company’s common stock between March 17, 2017 and March 13, 2020, filed a second amended class action complaint in the U.S. District Court for the Western District of Texas in the Logan Lawsuit, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, as amended, and Rule l0b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act, as amended, based on allegedly inaccurate or misleading statements, or omissions of material facts, about the Company’s business, operations and prospects.

          In January 2020, Boca Raton Firefighters’ and Police Pension Fund (“Boca Raton”) filed a shareholder derivative suit in the U.S. District Court for the Western District of Texas (the “Boca Raton Lawsuit”) against certain of the Company’s current and former officers and directors (the “Boca Raton Defendants”). The Company was named as a nominal defendant only. The claims include (i) breaches of fiduciary duties, (ii) unjust enrichment and (iii) contribution. Boca Raton did not quantify any alleged damages in its complaint but, in addition to attorneys’ fees and costs, Boca Raton seeks various forms of relief, including (i) damages sustained by the Company as a result of the Boca Raton Defendants’ alleged misconduct, (ii) punitive damages and (iii) equitable relief in the form of improvements to the Company’s governance and controls.

          In April 2020, Jye-Chun Chang filed a shareholder derivative suit in the U.S. District Court for the Western District of Texas (the “Chang Lawsuit”) against certain of the Company’s current and former officers and directors (the “Chang Defendants”). The Company was named as a nominal defendant only. The claims include (i) violations of section 14(a) of the Exchange Act, (ii) breach of fiduciary duties, (iii) unjust enrichment, (iv) abuse of control, (v) gross mismanagement and (vi) waste of corporate assets. Chang did not quantify any alleged damages in its complaint but, in addition to attorneys’ fees and costs, Chang seeks various forms of relief, including (i) declaring that Chang may sustain the action on behalf of the Company, (ii) declaring that the Chang Defendants breached their fiduciary duties to the Company, (iii) damages sustained by the Company as a result of the Chang Defendants’ alleged misconduct, (iv) equitable relief in the form of improvements to the Company’s governance and controls and (v) restitution.

          In October 2019, the Company received a letter from the SEC indicating that the SEC had opened an investigation into the Company and requesting that the Company provide certain information and documents, including documents related to the Company's expanded audit committee review and related events. The Company has cooperated and expects to continue to cooperate with the SEC’s investigation.

          We are presently unable to predict the duration, scope or result of the Logan Lawsuit, the Boca Raton Lawsuit, the Chang Lawsuit, the SEC investigation, or any other related lawsuit or investigation. As of September 30, 2019, no provision was made by the Company in connection with these pending lawsuits and the SEC investigation as they are still at early stages and the final outcomes cannot be reasonably estimated.

Environmental

          The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.

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Regulatory Audits

          In 2019, the Texas Comptroller of Public Accounts commenced a routine audit of the Company's gross receipts and sales, excise and use taxes for the periods of July 2015 through December 2018. As of September 30, 2019, although the audit is still ongoing, we do not believe that any material tax liability will arise from the audit.

Stockholder Rights Plan

          On April 10, 2020, the board of directors of the Company adopted a short-term stockholder rights plan (the “Rights Plan”). The Rights Plan provides for the issuance of one right for each outstanding share of the Company’s common stock held by stockholders of record on April 24, 2020. In general, the rights will become exercisable only if a person or group acquires beneficial ownership of 10% (or 20% in the case of certain passive investors) or more of the Company’s outstanding common stock or announces a tender or exchange offer that would result in such ownership. If the rights become exercisable, all holders of rights (other than any triggering person) will be entitled to acquire shares of common stock at a 50% discount, or the Company may exchange each right held by such holders for one share of common stock.

          The Rights Plan will expire on March 31, 2021. The Rights Plan may also be terminated, or the rights may be redeemed, prior to the scheduled expiration of the Rights Plan under certain other circumstances.

Impairments

          In the fourth quarter of 2019, management determined that the demand for vertical rigs and flowback services in the Permian Basin continued to be depressed. The Company's (i) vertical drilling rigs were not more likely than not to be utilized in the foreseeable future and (ii) flowback assets were having a deterioration in utilization. As such we expect to record impairment charges of approximately $3.4 million in the fourth quarter of 2019.

          During the first quarter of 2020, management determined the reductions in commodity prices driven by the potential impact of the novel COVID-19 virus and global supply and demand dynamics coupled with the sustained decrease in the Company’s share price were triggering events for goodwill and asset impairment. As a result of the triggering events, we performed an interim goodwill impairment test on the hydraulic fracturing reporting unit and a recoverability tests on each of the assets groups. As a result, we expect to recognize impairments and charges in the first quarter of 2020 as follows:

•	goodwill impairment of approximately $9.4 million;

•	drilling asset group impairment of approximately $1.1 million as a result of our recoverability tests; and

•	write-off of $6.1 million of deposits related to options to purchase additional DuraStim® equipment for which options expire at various times through the end of April 2021 as it is not probable we would exercise our options due to the events describe above.

          If the depressed oil prices and the current economic conditions remain for a longer period of time, actual results may differ from estimates and future assumptions may change resulting in additional impairment charges in the future.

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◦	Growth Capital. We cancelled substantially all our planned growth capital expenditures for the remainder of 2020.

◦	Other Expenditures. We significantly reduced our maintenance expenditures and field level consumable costs due to our reduced activity levels. We have been seeking lower pricing for our expendable items, materials used in day-to-day operations and large component replacement parts. Also, we have been internalizing certain support services that were outsourced.

◦	Labor Force Reductions. We have reduced our workforce by over 60% due to the changing activity levels for our services. We will continue to make appropriate adjustments to our workforce to reflect outlook related to activity levels.

◦	Compensation Related Costs. The directors and officers have voluntarily reduced compensation at different levels up to 20%. We have taken efforts to manage work schedules, primarily related to hourly employees, to minimize overtime costs.

◦	Working Capital. We have negotiated more favorable payment terms with certain of our larger vendors and are continuing to increase our diligence in collecting and managing our portfolio of accounts receivables.

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(1)	Other general and administrative expense primarily relates to nonrecurring professional fees paid to external consultants in connection with the Expanded Audit Committee Review and advisory services in 2019, and legal settlement in 2018.

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(1)	Exclusive of depreciation and amortization.

(2)	Inclusive of stock-based compensation.

(3)	For definitions of the non-GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated in accordance with GAAP, please read "How We Evaluate Our Operations".

(4)	The non-GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenue for the pressure pumping segment.

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(1)	Exclusive of depreciation and amortization.

(2)	Inclusive of stock-based compensation.

(3)	For definitions of the non-GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated in accordance with GAAP, please read "How We Evaluate Our Operations".

(4)	The non-GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenue for the pressure pumping segment.

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(1)	Exclusive of future commitment fees, amortization of deferred financing costs, interest expense or other fees on our revolving credit facility because obligations thereunder are floating rate instruments and we cannot determine with accuracy the timing of future loan advances, repayments or future interest rates to be charged.

(2)	Finance and Operating leases include agreements for various office locations, excluding short-term leases (see Notes (9) Leases and (10) Commitments and Contingencies in the financial statements for additional disclosures) .

(3)	Capital expenditures relate to the contractual expenditures (see Note 10 Commitments and Contingencies). Amounts reflected in the table above do not include any potential capital expenditures associated with the 108,000 HHP of DuraStim® hydraulic pumps (or associated auxiliary and mixing equipment and power equipment) that we have an option to purchase through April 2021.

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•	goodwill impairment of approximately $9.4 million;

•	drilling asset group impairment of approximately $1.1 million as a result of our recoverability tests; and

•	write-off of $6.1 million of deposits related to options to purchase additional DuraStim® equipment for which options expire at various times through the end of April 2021 as it is not probable we would exercise our options due to the events describe above.

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•	Appointed new executive officers with extensive public company experience to improve the tone at the top, communication with the Board and compliance with policies within the Company.

•	Enhanced certain of the Company’s policies, including the Code of Ethics and Conduct, Expense Reimbursement, Travel and Entertainment, and Delegation of Responsibilities and Authority. Additionally, the Company enhanced or implemented control activities to monitor compliance with such policies.

•	Designed and implemented control activities related to the identification of, approval of, and disclosure of related party transactions.

•	Designed and implemented control activities related to the identification and approval of potential conflicts of interest.

•	Designed and implemented control activities related to the evaluation of whistleblower allegations.

•	Formed a disclosure committee and appointed a Chief Disclosure Officer to provide improved corporate governance related to disclosures the Company provides to the public and other external parties.

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•	the severity and duration of world health events, including the recent COVID-19 pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business;

•	the current significant surplus in the supply of oil and actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;

•	uncertainty regarding the timing, pace and extent of an economic recovery in the United States and elsewhere, which in turn will likely affect demand for crude oil and natural gas and therefore the demand for our services;

•	the domestic and foreign supply of, and demand for, oil and natural gas;

•	the level of prices, and expectations about future prices, of oil and natural gas;

•	the level of global oil and natural gas exploration and production;

•	the cost of exploring for, developing, producing and delivering oil and natural gas;

•	the supply of and demand for drilling and hydraulic fracturing equipment;

•	the expected decline rates of current production;

•	the price and quantity of foreign imports;

•	political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia;

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

•	speculative trading in crude oil and natural gas derivative contracts;

•	the level of consumer product demand;

•	the discovery rates of new oil and natural gas reserves;

•	contractions in the credit market;

•	the strength or weakness of the U.S. dollar;

•	available pipeline and other transportation capacity;

•	the levels of oil and natural gas storage;

•	weather conditions and other natural disasters;

•	domestic and foreign tax policy;

•	domestic and foreign governmental approvals and regulatory requirements and conditions;

•	the continued threat of terrorism and the impact of military and other action, including military action in the Middle East;

•	political or civil unrest in the United States or elsewhere;

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•	technical advances affecting energy consumption;

•	the proximity and capacity of oil and natural gas pipelines and other transportation facilities;

•	the price and availability of alternative fuels;

•	the ability of oil and natural gas producers to raise equity capital and debt financing;

•	merger and divestiture activity among oil and natural gas producers; and

•	overall domestic and global economic conditions.

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•	increasing our vulnerability to general adverse economic and industry conditions;

•	the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments;

•	our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;

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•	any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable;

•	our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms, in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and

•	our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness.

•	grant liens;

•	incur additional indebtedness;

•	engage in a merger, consolidation or dissolution;

•	enter into transactions with affiliates;

•	sell or otherwise dispose of assets, businesses and operations;

•	materially alter the character of our business as currently conducted; and

•	make acquisitions, investments and capital expenditures.

•	requiring us to dedicate a substantial portion of our cash flow from operating activities to payments on our indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts, potential strategic acquisitions and other general corporate purposes;

•	limiting our ability to obtain additional financing to fund growth, working capital or capital expenditures, or to fulfill debt service requirements or other cash requirements;

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•	goodwill impairment of approximately $9.4 million;

•	drilling asset group impairment of approximately $1.1 million as a result of our recoverability tests; and

•	write-off of $6.1 million of deposits related to options to purchase additional DuraStim® equipment for which options expire at various times through the end of April 2021 as it is not probable we would exercise our options due to the events described above.

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•	limitations on the removal of directors;

•	limitations on the ability of our shareholders to call special meetings;

•	advance notice provisions for shareholder proposals and nominations for elections to the Board to be acted upon at meetings of shareholders;

•	providing that the Board is expressly authorized to adopt, or to alter or repeal our bylaws; and

•	establishing advance notice and certain information requirements for nominations for election to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings.

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