What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-05 compared with 2020-06-22 · 512 added, 392 removed, 575 unchanged (61% of the section changed)

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 19, 2020 , expressed an adverse opinion on the Company's internal control over financial reporting.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Related-party transactions — Refer to Note 13 to the financial statements

Critical Audit Matter Description

The Company engages in related party transactions, such as leasing of its corporate office, drilling yards, renting of equipment, purchasing assets, and providing pressure pumping and related services.

We identified related-party transactions as a critical audit matter because of the Company’s lack of effective controls related to the identification and approval of transactions involving related parties or potential conflicts of interest, including the material weaknesses discussed in Management’s Report on Internal Control over Financial Reporting .

The heightened risk that related-party transactions were not timely identified and properly disclosed by the Company in the

financial statements required us to exercise significant auditor judgment when performing audit procedures on related-party transactions.

The Company engages in various related party transactions, including leasing real estate, renting of equipment, purchasing assets, obtaining equipment maintenance and repair services, and providing pressure pumping and related services.

We identified related-party transactions as a critical audit matter because of the Company’s material weaknesses reported in the Company’s internal controls processes as of the year ended December 31, 2019, related to the identification and approval of transactions involving related parties or potential conflicts of interest.

result, of these previously identified internal control matters, we believe the risk that related-party transactions were not timely identified and properly disclosed by the Company in the financial statements was elevated and required us to exercise significant auditor judgment when designing and performing audit procedures on related-party transactions.

How the Critical Audit Matter Was Addressed in the Audit

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Houston, Texas

June 19, 2020

March 5, 2021

We have served as the Company's auditor since 2013.

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and Subsidiary (the “Company”) as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated June 19, 2020 , expressed an unqualified opinion on those financial statements.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 5, 2021 , expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial

statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified and included in management’s assessment:

Control Environment -The Company identified deficiencies in the principles associated with the control environment component of the COSO framework.

Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to the following COSO principles:

(i) the organization demonstrates a commitment to integrity and ethical values, (ii) the board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control, (iii) management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in pursuit of objectives, (iv) the organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives, and (v) the organization holds individuals accountable for their internal control related responsibilities in the pursuit of objectives.

The Company did not establish and promote a control environment with an appropriate tone of compliance and control consciousness throughout the entire Company, nor sufficiently promote, monitor, or enforce adherence to its Code of Conduct and Ethics.

Additionally, there was a general lack of focus on promoting a culture of compliance within the Company.

Results of poor tone at the top included:

(i) certain whistleblower allegations were not properly investigated and elevated to the audit committee, (ii) the lack of an employee expense review and approval policy, (iii) two instances of non-compliance with the Company’s Insider Trading Policy, and (iv) instances of non-compliance with the Code of Conduct and Ethics policies.

This material weakness in the control environment contributed to material weaknesses in the following components of the COSO framework.

Information and Communication -The Company identified deficiencies in the principles associated with the information and communication component of the COSO framework.

Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to the following COSO principles:

(i) the organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control and (ii) the organization communicates with external parties regarding matters affecting the functioning of internal control.

Factors contributing to the material weakness included miscommunication between management and the Board of Directors regarding the conditionality of certain contracts that resulted in the non-disclosure of such contract commitments and the impact of such commitments on the Company’s future liquidity.

Control Activities -The Company identified deficiencies in the principles associated with the control activities component of the COSO framework.

Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to the following COSO principles:

(i) the organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels and (ii) the organization deploys control activities through policies that establish what is expected and procedures that put policies into action.

The Company’s failure to maintain an appropriate tone at the top had a pervasive impact, resulting in a risk that could have impacted virtually all financial statement account balances and disclosures.

The COSO component material weaknesses described above contributed to the following material weakness within the Company’s system of internal control over financial reporting at the control activity level.

Related Parties - The Company did not maintain controls designed to sufficiently identify, evaluate, and disclose related party transactions.

As a result, two related party transactions were entered into that were not identified by the Company’s controls and given consideration of appropriate disclosure.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2019, of the Company, and this report does not affect our report on such financial statements.

/s/ DELOITTE & TOUCHE LLP

Houston, Texas

June 19, 2020

March 5, 2021

PROPETRO HOLDING CORP.

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Cash and cash equivalents

Accounts receivable - net of allowance for doubtful accounts of $1,049 and $100, respectively

$ 68,772 $ 149,036

Accounts receivable - net of allowance for credit losses of $ 1,497 and $ 1,049 , respectively

84,244 212,183

Prepaid expenses

11,199 10,815

Other current assets

Total current assets

167,726 375,591

PROPERTY AND EQUIPMENT - Net of accumulated depreciation

880,477 1,047,535

OPERATING LEASE RIGHT-OF-USE ASSETS

OTHER NONCURRENT ASSETS:

Intangible assets - net of amortization

Other noncurrent assets

Total other noncurrent assets

$ 1,050,739 $ 1,436,111

LIABILITIES AND SHAREHOLDERS’ EQUITY

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Accounts payable

$ 79,153 $ 193,096

Accrued and other current liabilities

24,676 36,343

Operating lease liabilities

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Total current liabilities

104,163 232,966

DEFERRED INCOME TAXES

75,340 103,041

LONG-TERM DEBT

NONCURRENT OPERATING LEASE LIABILITIES

OTHER LONG-TERM LIABILITIES

Total liabilities

179,968 466,806

COMMITMENTS AND CONTINGENCIES (Note 15)

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Additional paid-in capital

Retained earnings (Accumulated deficit)

835,115 826,629

Retained earnings

35,555 142,575

Total shareholders’ equity

870,771 969,305

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$ 1,050,739 $ 1,436,111

See notes to consolidated financial statements.

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(In thousands, except per share data)

2020 2019 2018

REVENUE - Service revenue

$ 789,232 $ 2,052,314 $ 1,704,562

COSTS AND EXPENSES:

Cost of services (exclusive of depreciation and amortization)

584,279 1,470,356 1,270,577

General and administrative (inclusive of stock‑based compensation)

86,768 105,076 53,958

Depreciation and amortization

153,290 145,304 88,138

Impairment expense

38,002 3,405 —

Loss on disposal of assets

58,136 106,811 59,220

Total costs and expenses

OPERATING INCOME

920,475 1,830,952 1,471,893

OPERATING (LOSS) INCOME

( 131,243 ) 221,362 232,669

OTHER EXPENSE:

Interest expense

( 2,383 ) ( 7,141 ) ( 6,889 )

Other expense

( 874 ) ( 717 ) ( 663 )

Total other expense

INCOME BEFORE INCOME TAXES

INCOME TAX EXPENSE

NET INCOME PER COMMON SHARE:

( 3,257 ) ( 7,858 ) ( 7,552 )

(LOSS) INCOME BEFORE INCOME TAXES ( 134,500 ) 213,504 225,117

INCOME TAX BENEFIT/ (EXPENSE)

27,480 ( 50,494 ) ( 51,255 )

NET (LOSS) INCOME

$ ( 107,020 ) $ 163,010 $ 173,862

NET (LOSS) INCOME PER COMMON SHARE:

$ ( 1.06 ) $ 1.62 $ 2.08

$ ( 1.06 ) $ 1.57 $ 2.00

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

100,829 100,472 83,460

100,829 103,750 87,046

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 , 2018 AND 2017 (In thousands)

Preferred Stock

Retained Earnings (Accumulated

FOR THE YEARS ENDED DECEMBER 31, 2020 , 2019 AND 2018

(In thousands)

Preferred Stock Common Stock

Shares Amount Preferred

Capital Shares Amount Additional

Capital Retained Earnings (Accumulated

Deficit) Total

BALANCE - January 1, 2018 — $ — $ — 83,040 $ 83 $ 607,466 $ ( 194,297 ) $ 413,252

Stock‑based compensation cost — — — — — 5,482 — 5,482

Initial Public Offering, net of costs

Conversion of preferred stock to common stock at Initial Public Offering

Issuance of equity awards—net

Issuance of equity award—net — — — 550 1 246 — 247

Issuance of common stock — — — 16,600 16 204,496 — 204,512

— — — — — — 173,862 173,862

BALANCE - December 31, 2018 — $ — $ — 100,190 $ 100 $ 817,690 $ ( 20,435 ) $ 797,355

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Issuance of common stock — — — — — — — —

Net income — — — — — — 163,010 163,010

BALANCE - December 31, 2019 — $ — $ — 100,624 $ 101 $ 826,629 $ 142,575 $ 969,305

Stock‑based compensation cost

— — — — — 9,100 — 9,100

Issuance of equity awards—net

— — — 289 — — — —

Tax withholdings paid for net settlement of equity — — — — — ( 614 ) — ( 614 )

— — — — — — ( 107,020 ) ( 107,020 )

BALANCE - December 31, 2020 — $ — $ — 100,913 $ 101 $ 835,115 $ 35,555 $ 870,771

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CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 , 2018 AND 2017 (In thousands)

FOR THE YEARS ENDED DECEMBER 31, 2020 , 2019 AND 2018

(In thousands)

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 107,020 ) $ 163,010 $ 173,862

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization

153,290 145,304 88,138

Impairment expense 38,002 3,405 —

Deferred income tax expense

Deferred income tax (benefit) expense ( 27,701 ) 48,758 49,704

Amortization of deferred revenue rebate

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Stock‑based compensation

Provision for bad debt expense

9,100 7,776 5,482

Provision for credit losses 448 949 —

Loss on disposal of assets

Gain loss on interest rate swap

58,136 106,812 59,220

Changes in operating assets and liabilities:

Accounts receivable

127,491 ( 10,177 ) ( 3,300 )

Other current assets

1,978 1,351 207

( 293 ) 3,917 ( 168 )

Prepaid expenses

( 232 ) ( 4,386 ) ( 1,418 )

Accounts payable

( 95,697 ) ( 25,242 ) 9,720

Accrued liabilities

( 18,527 ) 13,088 9,853

Accrued interest

( 394 ) 183 761

Net cash provided by operating activities

139,124 455,290 393,079

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

( 100,603 ) ( 502,894 ) ( 284,197 )

Proceeds from sale of assets

6,386 7,595 3,593

Net cash used in investing activities

( 94,217 ) ( 495,299 ) ( 280,604 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from borrowings

— 110,000 77,378

Repayments of borrowings

( 130,000 ) ( 50,000 ) ( 80,946 )

Payment of finance lease obligation

( 30 ) ( 272 ) —

Proceeds from insurance financing

6,821 — 5,824

Repayments of insurance financing

( 1,348 ) ( 4,547 ) ( 4,495 )

Payment of debt issuance costs

— — ( 1,732 )

Proceeds from exercise of equity awards

Proceeds from initial public offering

Payment of initial public offering costs

Net cash provided by (used in) financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Tax withholdings paid for net settlement of equity awards ( 614 ) — —

Net cash (used in) provided by financing activities

( 125,171 ) 56,345 ( 3,724 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 80,264 ) 16,336 108,751

CASH AND CASH EQUIVALENTS — Beginning of year

149,036 132,700 23,949

CASH AND CASH EQUIVALENTS — End of year

$ 68,772 $ 149,036 $ 132,700

See notes to consolidated financial statements.

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(“Services”), a Texas corporation.

Services offers hydraulic fracturing, cementing, coiled tubing, drilling and flowback services to oil and gas producers, located primarily in Texas, Oklahoma, New Mexico and Utah.

Services offers hydraulic fracturing, cementing and coiled tubing services to oil and gas producers, located primarily in Texas, New Mexico and Utah.

Holding was converted and incorporated to a Delaware Corporation on March 8, 2017.

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and Services.

On March 22, 2017, we consummated our initial public offering (“IPO”) in which 25,000,000 shares of our common stock, par value $ 0.001 per share, were sold at a public offering price of $ 14.00 per share, with 13,250,000 shares issued and sold by the Company and 11,750,000 shares sold by existing stockholders.

We received net proceeds of approximately $ 170.1 million after deducting $ 10.9 million of underwriting discounts and commissions, and $ 4.5 million of other offering expenses.

At closing, we used the proceeds (i) to repay $ 71.8 million in outstanding borrowings under the term loan, (ii) $ 86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes.

In connection with the IPO, the Company executed a stock split, such that each holder of common stock of the Company received 1.45 shares of common stock for every one share of previous common stock, and all 16,999,990 shares of our outstanding Series A preferred stock converted to common stock on a 1 :1 basis.

Accordingly, any information related to or dependent upon the share or option counts in the 2019 , 2018 and 2017 consolidated financial statements and Note 13 Net Income Per Share , Note 14 Stock‑Based Compensation , Note 19 Quarterly Financial Data (Unaudited) have been updated to reflect the effect of the stock split in March 2017, as applicable.

On December 31, 2018, we consummated the purchase of pressure pumping and related assets of Pioneer Natural Resources USA, Inc.(“Pioneer”) and Pioneer Pumping Services, LLC (the “Pioneer Pressure Pumping Acquisition”).

On December 31, 2018, we consummated the purchase of pressure pumping and related assets of Pioneer Natural Resources USA, Inc.

(“Pioneer”) and Pioneer Pumping Services, LLC (the “Pioneer Pressure Pumping Acquisition”).

The pressure pumping assets acquired were used to provide integrated well completion services in the Permian Basin to Pioneer’s completion and production operations.

The acquisition cost of the assets was comprised of $ 110.0 million of cash and 16.6 million shares of our common stock.

The incremental direct cost of $ 3.4 million incurred to consummate the transaction was capitalized as part of the acquisition cost.

The pressure pumping assets acquired included hydraulic fracturing pumps of 510,000 HHP, four coiled tubing units and the associated equipment maintenance facility.

In connection with the acquisition, we became a long-term service provider to Pioneer under a pressure pumping services agreement (the “Pioneer Services Agreement”), providing pressure pumping and related services for a term of up to 10 years;

provided, that Pioneer has the right to terminate the Pioneer Services Agreement, in whole or in part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026.

The pressure pumping assets acquired included hydraulic fracturing pumps of 510,000 hydraulic horsepower (“HHP”), four coiled tubing units and the associated equipment maintenance facility.

provid ed, that Pioneer has the right to terminate the Pioneer Services Agreement, in whole or in part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026.

Pioneer can increase the number of committed fleets prior to December 31, 2022.

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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

The global public health crisis associated with the 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 COVID-19 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 (together with OPEC and other allied producing countries, “OPEC+”).

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 depressed demand in the energy sector and uncertainty in global production levels.

In response to the global economic slowdown and depressed demand in the oil and gas industry, OPEC+ has made adjustments to production levels with the objective of rebalancing the energy market.

After the March 2020 failed negotiations, OPEC+ subsequently agreed to cut production by 7.7 million barrels of oil per day (“BOPD”).

In January 2021, OPEC+ reconvened to discuss the matter of production cuts in light of unprecedented disruption and supply and demand imbalances.

Agreements were reached to gradually increase production by 0.5 million BOPD, starting in January 2021, and adjusting the production reduction from 7.7 million BOPD to 7.2 million BOPD.

OPEC+ members have shown compliance with previously agreed upon production levels, and we have seen recovery in crude oil prices from its low point in 2020.

The combined effect of COVID-19 and the energy industry disruptions led to a decline in the West Texas Intermediate (“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, with OPEC+ managing production levels and with the development and distribution of COVID-19 vaccines, there has been a gradual recovery in crude oil prices from the low point in March 2020.

However, with the uncertainty in the global market resulting from the COVID-19 pandemic, the risk that currently developed vaccines may not be successful in preventing the COVID-19 virus or the outbreak of a new virus, the global demand for crude oil could continue to be depressed and crude oil prices could decline.

As of March 3, 2021, the WTI price for

PROPETRO HOLDING CORP.

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ORGANIZATION AND HISTORY (Continued)

energy, which directly impacts our industry and the Company.

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.

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.

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.

a barrel of crude oil was approximately $62.

If the market continues to be depressed, the aforementioned factors are 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.

(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, and (iv) negotiating more favorable payment terms with certain of our larger vendors and proactively managing our portfolio of accounts receivable.

SIGNIFICANT ACCOUNTING POLICIES

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All intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the United States Securities Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

financial statements and revenues and expenses during the reporting period.

Such estimates include, but are not limited to, allowance for doubtful accounts, useful lives for depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation and finance and operating leases.

Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Such estimates include, but are not limited to, allowance for credit losses, useful lives for depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation and leases.

Actual results could differ from those estimates.

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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.

The following is a description of the principal activities, separated into our one 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.

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Hydraulic fracturing contracts with our customer have one performance obligation, which is the 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 recognize revenue over time using a progress output, 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.

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Cementing involves well bonding solutions, and contracts with customers have one performance obligation, which is 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.

Jobs for these services are

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 are fixed per our contract with customer.

All Other — All other services consist of our drilling, coiled tubing and flowback, which are downhole well stimulation and completion/remedial services.

All Other — All other services consist of coiled tubing operations, which are downhole well 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.

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At December 31, 2020, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing operations was $ 14.7 million, which is expected to be completed and recognized in approximately one month following the current period balance sheet date, in our pressure pumping reportable segment.

At December 31, 2018 the transaction price allocated to the remaining

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

performance obligation for our then partially completed hydraulic fracturing operations was $ 43.9 million , which was recorded as part of our pressure pumping segment revenue for the year ended December 31, 2019 .

At December 31, 2019 , 2018 and 2017 the allowance for doubtful accounts was $ 1.0 million , $ 0.1 million and $ 0.4 million , respectively.

During the year ended December 31, 2019 , additional allowance for doubtful accounts was $ 0.9 million and there was no write-off of previously recognized allowance.

During the year ended December 31, 2018 , additional allowance for doubtful accounts was $ 0.1 million and the write-off of previously recognized allowance was $ 0.4 million .

During the year ended December 31, 2017 , additional allowance for doubtful accounts was $ 0.1 million and the write-off of previously recognized allowance was $ 0.2 million .

At December 31, 2019 the transaction price allocated to the remaining performance obligation for our then partially completed hydraulic fracturing operations was $ 47.5 million, which was recorded as part of our pressure pumping segment revenue for the year ended December 31, 2020.

As of December 31, 2020, the Company had $ 1.5 million allowance for credit losses.

Our allowance for credit losses is based on the evaluation of both our historic collection experience and the expected impact of currently deteriorating economic conditions in the oil and gas industry.

We evaluated the historic loss experience on our accounts receivable and also considered separately customers with receivable balances that may be negatively impacted by current economic developments and market conditions.

While the Company has not experienced significant credit losses in the past and has not yet seen material changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of the COVID-19 pandemic, including the potential impact of periodically adjusted borrowing base limits, level of hedged production or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due.

Accordingly, in future periods, the Company may revise its estimates of expected credit losses.

($ in thousands)

2020 2019 2018

Balance - January 1, 2020 $ 1,049 $ 100 $ 443

Provision for credit losses during the period 4,291 949 114

Provision for credit losses no longer required ( 3,843 ) — ( 457 )

Balance - December 31, 2020 $ 1,497 $ 1,049 $ 100

Inventories — Inventories, which consists only of raw materials, are stated at lower of average cost and net realizable value.

Property and Equipmen t — The Company’s property and equipment are recorded at cost, less accumulated depreciation.

Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation.

Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives:

1 unchanged sentence

Leasehold improvements

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Upon sale or retirement of property and equipment, including certain major components of our pressure pumping equipment that are replaced, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations.

3 unchanged sentences

In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

Property and equipment impairment loss of $ 1.2 million and $ 2.2 million was recorded during the year ended December 31, 2019 relating to our drilling and flow back asset groups, respectively.

No impairment was recorded in the years ended December 31, 2018 and 2017 .

Property and equipment impairment loss of $ 27.5 million and $ 1.1 million was recorded during the year ended December 31, 2020 relating to our pressure pumping and drilling assets, respectively.

Property and equipment impairment loss of $ 1.2 million and $ 2.2 million was recorded during the year ended December 31, 2019 relating to our drilling and flowback asset groups, respectively.

No impairment expense was recorded during the year ended December 31, 2018.

Our drilling and flowback asset groups are included in the “all other” category in our reportable segment disclosure.

4 unchanged sentences

The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches.

If the fair value of the

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

reporting unit exceeds the carrying value, no further testing is performed.

If the fair value of the reporting unit exceeds the carrying value, no further testing is performed.

If the fair value of the reporting unit is less than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is estimated and recorded in the statement of operations.

2 unchanged sentences

The acquisition complemented our existing pressure pumping business.

The transaction has been accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date.

In the first quarter of 2020, we performed an interim impairment test and concluded that goodwill was fully impaired.

As a result of our interim impairment test, we recorded goodwill impairment expense of $ 9.4 million during the year ended December 31, 2020.

Based on our goodwill impairment tests as of December 31, 2019 and 2018, we concluded that the goodwill related to TSS acquisition was no t impaired.

The goodwill related to the TSS acquisition of $ 9.4 million is recorded in our pressure pumping reportable segment.

Intangible Assets — Intangible assets with finite useful lives are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized, which is generally on a straight‑line basis over the asset’s estimated useful life.

3 unchanged sentences

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations.

In making such a determination, we consider all positive and negative evidence, including future reversals

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

of existing taxable temporary differences, projected future taxable income, and the results of recent operations.

If we determine that we would not be able to fully realize our deferred tax assets in the future, we would record a valuation allowance.

11 unchanged sentences

Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable.

Cash balances are maintained in financial

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

institutions, which at times exceed federally insured limits.

Cash balances are maintained in financial institutions, which at times exceed federally insured limits.

The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts.

2 unchanged sentences

Recently Issued Accounting Standards Adopted in 2020

In February 2016, the 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.

2016-02 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 17 for additional disclosures relating to our adoption of ASU 2016-02.

Recently Issued Accounting Standards Not Yet Adopted in 2019

In June 2016, the FASB issued ASU No.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments-Credit Losses (Topic 326) :

2 unchanged sentences

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.

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 Accounting Standards Codification (“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 consolidated 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 our consolidated financial statement.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Effective January 1, 2020, the Company adopted ASU 2016-13 using the modified-retrospective approach, which allows for a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective.

Periods prior to the adoption date that are presented for comparative purposes were not adjusted.

The Company continuously evaluates customers based on risk characteristics, such as historical losses and current economic conditions.

Due to the cyclical nature of the oil and gas industry, the Company often evaluates its customers’ estimated losses on a combination of historical losses and on case-by-case basis.

There was no material impact to our consolidated financial statements as a result of adoption of ASU 2016-13.

In August 2018, the FASB issued ASU No.

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.

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SIGNIFICANT ACCOUNTING POLICIES (Continued)

In December 2019, the FASB issued ASU No 2019-12, Income Taxes (Topic 740):

In January 2017, the FASB issued ASU No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

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.

Effective January 1, 2020, we adopted this guidance and the adoption did not materially affect the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted in 2020

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

10 unchanged sentences

Year Ended December 31,

2020 2019 2018

Supplemental cash flows disclosures

Interest paid

$ 2,207 $ 6,433 $ 5,068

Income taxes paid

$ 1,786 $ 1,018 $ —

Supplemental disclosure of non‑cash investing and financing activities

Capital expenditures included in accounts payable and accrued liabilities

Conversion of preferred stock to common stock at Initial Public Offering

$ 14,803 $ 31,226 $ 137,647

Non-cash purchases of property and equipment $ — $ — $ 204,512

FAIR VALUE MEASUREMENTS

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.

Fair value (“FV”) 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.

2 unchanged sentences

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 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.

PROPETRO HOLDING CORP.

1 unchanged sentence

FAIR VALUE MEASUREMENTS (Continued)

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 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.

5 unchanged sentences

The estimated fair value of our financial instruments — cash and cash equivalent, accounts receivable and accounts payable and accrued liabilities at December 31, 2020 and 2019 approximated or equaled their carrying value as reflected in our consolidated balance sheets because of their short‑term nature.

During the year ended December 31, 2019 and 2018 , we did not have a derivative financial instrument.

Prior to 2018, we used a derivative financial instrument, an interest rate swap, to manage interest rate risk.

Our policies do not permit the use of derivative financial instruments for speculative purposes.

We did not designate the interest rate swap as a hedge for accounting purposes.

We record all derivatives as of the end of our reporting period in our consolidated balance sheet at fair value, which is based on quoted market prices, which represents a level 1 in the fair value measurement hierarchy.

Assets Measured at Fair Value on a Nonrecurring Basis

8 unchanged sentences

Property and equipment, net

$ — $ — $ — $ —

Property and equipment, net

In 2019, the depressed cash flows and continued decline in utilization of our drilling and flow back asset groups were indicative of potential impairment, resulting in the Company comparing the carrying value of the asset group with its estimated fair value.

We determined that the carrying value of the asset groups was greater than its estimated fair value and accordingly, an impairment was recorded.

Impairment loss related to our property and equipment of $ 1.2 million and $ 2.2 million was recorded at December 31, 2019 relating to our drilling and flow back asset groups, respectively.

No impairment was recorded during the years ended December 31, 2018 and 2017 .

Prior to the impairment write-down during the year ended December 31, 2019 , the drilling assets net carrying value was $ 3.2 million and our flow back assets net carrying value was $ 2.2 million .

See Note 7, “Impairment of Long‑Lived Assets”.

We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment 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

$ 2,000 $ — $ 2,000 $ —

Whenever events or circumstances indicate that the carrying value of long‑lived assets may not be recoverable, the Company reviews the carrying value of long‑lived assets, such as property and equipment and other assets to determine if they are recoverable.

If any long‑lived assets are determined to be unrecoverable, an impairment is recorded in the period.

Asset recoverability is estimated using undiscounted future net cash flows at the lowest identifiable level, excluding interest expense and nonrecurring other income and expense adjustments.

During the year, the Company determined the lowest level of identifiable cash flows to be at the asset group level.

In the first quarter of 2020, we determined that the carrying value of our Permian drilling assets were greater than its estimated fair value because of the negative future near-term outlook resulting from the continued idling of our Permian drilling assets and the depressed market conditions .

Our fair value estimate for our drilling assets was determined using a market transaction, which represents a level 2 in the fair value measurement hierarchy.

Accordingly, an impairment expense of $ 1.1 million was recorded for our Permian drilling assets during the year ended December 31, 2020.

Prior to the impairment expense, our Permian drilling net carrying value was $ 1.8 million.

During the fourth quarter of 2020, we shut down our drilling operations and disposed all of the drilling assets.

PROPETRO HOLDING CORP.

1 unchanged sentence

FAIR VALUE MEASUREMENTS (Continued)

the fair value.

In 2019, the Company entered an agreement with its equipment manufacturer granting the Company the option to purchase an additional 108,000 hydraulic horsepower (“HHP”) of DuraStim® equipment, with the purchase option expiring at different times throu gh July 31, 2022, as amended.

The option fee of $ 6.1 million, classified as a deposit for property and equipment as part of our pressure pumping reportable segment, was fully impaired and written off in the first quarter of 2020 because it was not probable that the Company will exercise the option to purchase the equipment given the depressed crude oil prices and other market conditions that have resulted in a decline in the demand for our hydraulic fracturing services.

The estimated fair value of our DuraStim® equipment option was based on unobservable inputs, which represents a level 3 in the fair value measurement hierarchy.

Prior to the impairment expense, our carrying value for the option fee equipment deposit was $ 6.1 million.

As of December 31, 2020, we have fully impaired the carrying value of the equipment deposit related to the option fees.

In light of the energy industry transition to lower emissions equipment, the Company made a strategic decision to retire approximately 150,000 HHP of conventional Tier II pressure pumping equipment.

As of December 31, 2020, we recorded an impairment expense of approximately $ 21.3 million, which is a full write-off of the net carrying value of the conventional Tier II pressure pumping equipment that we are reasonably certain will be permanently retired, in our pressure pumping reportable segment.

The total non-cash property and equipment impairment charges recorded during the years ended December 31, 2020, 2019 and 2018 in our hydraulic fracturing, flowback and drilling segments was $ 28.6 million, $ 3.4 million and $ 0 , respectively.

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 is recorded in that period.

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 years ended December 31, 2020, 2019 and 2018.

Based on our annual goodwill impairment test, no impairment of goodwill was recorded for the years ended December 31, 2019 , 2018 and 2017 .

INTANGIBLE ASSETS

Intangible assets are composed of internally developed software.

Intangible assets are amortized on a straight‑line basis with a useful life of five years .

Amortization expense included in net income for the years ended December 31, 2019 , 2018 and 2017 was $ 0 , $ 0.3 million and $ 0.3 million , respectively.

T he Company’s intangible assets subject to amortization are as follows:

($ in thousands)

Internally developed software

Less accumulated amortization

Intangible assets — net

In the first quarter of 2020, the depressed crude oil prices and crude oil storage challenges faced in the U.S.

oil and gas industry triggered the Company to perform an interim goodwill impairment test, and as a result, we compared the carrying value of the goodwill in our hydraulic fracturing reporting unit with the estimated fair value.

Our interim impairment test also considered other relevant factors, including market capitalization and market participants’ view of the oil and gas industry in reaching our conclusion that the carrying value of our goodwill in our pressure pumping reportable segment of $ 9.4 million was fully impaired during the first quarter of 2020.

Accordingly, we recorded a goodwill impairment expense of $ 9.4 million in March 2020, resulting in a full write off of our goodwill.

Based on our annual goodwill impairment test on December 31, 2019 and 2018, we determined that there was no impairment of goodwill.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT

1 unchanged sentence

($ in thousands)

$ 10,551 $ 10,772

29,312 24,375

Equipment and vehicles

1,242,698 1,333,705

Leasehold improvements

1,290,596 1,376,882

Less accumulated depreciation

( 410,119 ) ( 329,347 )

Property and equipment — net

$ 880,477 $ 1,047,535

During the years ended December 31, 2020 and 2019 and 2018, our depreciation expense was $ 153.3 million, $ 145.3 million and $ 87.9 million respectively.

IMPAIRMENT OF LONG‑LIVED ASSETS

If any long‑lived assets are determined to be unrecoverable, an impairment is recorded in the period.

Asset recoverability is estimated using undiscounted future net cash flows at the lowest identifiable level, excluding interest expense and nonrecurring other income and expense adjustments.

During the year, the Company determined the lowest level of identifiable cash flows to be at the asset group level, which consists of hydraulic fracturing, cementing, coiled tubing, flowback and drilling.

The shift to horizontal drilling rigs in the Permian Basin led to the deterioration in utilization of our vertical drilling rigs, and we expected undiscounted future cash flows to be lower than the carrying value of the drilling assets.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IMPAIRMENT OF LONG-LIVED ASSETS (Continued)

the pricing pressure on our flowback services led to a deterioration in the utilization of our flowback assets, resulting in our expected undiscounted future cash flows to be lower than the carrying value.

Given that the carrying value of the drilling and flowback assets may not be recoverable, the Company estimated the fair value of each asset group and compared it to its carrying value.

Potential impairment exists if the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset group.

The impairment is determined by comparing the estimated fair value with the carrying value of the related asset, and any excess amount by which the carrying value exceeds the fair value is recorded as an impairment in that period.

At December 31, 2019 , the estimated fair value of the drilling and flowback asset groups was $ 2.0 million and $ 0 , respectively.

Our fair value estimate for our drilling assets was determined using a market transaction, which represents a level 2 in the fair value measurement hierarchy, while our fair value estimate for our flowback approach was determined using unobservable inputs, which represents a level 3 in the fair value measurement hierarchy.

Our fair value estimates required us to use significant other observable inputs including assumptions related to replacement cost, auction value, among others.

Accordingly, an impairment expense of $ 1.2 million and $ 2.2 million was recorded during the year ended December 31, 2019 for our drilling and flowback asset groups, respectively, because the carrying value of the drilling asset group of $ 3.2 million and the flowback asset group of $ 2.2 million was greater than their estimated fair value.

DEFERRED REVENUE REBATE

In November 2011, the Company acquired certain oilfield fracturing equipment from a customer and agreed to provide future fracturing services to the customer for a period of 78 months in exchange for a 12 % $ 25.0 million note payable to the customer.

The Company recorded the fracturing equipment at its estimated fair value of approximately $ 13.0 million and assigned the remaining value of approximately $ 12.0 million to a deferred revenue rebate account to be amortized over the customer’s 78 ‑month service period.

In March 2013, the Company repaid the note payable to the customer.

The deferred revenue rebate was fully amortized as of December 31, 2018.

Accordingly, for the years ended December 31, 2018 and 2017 the Company recorded $ 0.6 million and $ 1.8 million , respectively, of amortization rebate as a reduction of revenue.

LONG‑TERM DEBT

7 unchanged sentences

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 year ended December 31, 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.

The weighted average interest rate for our borrowings under the ABL Credit Facility for the year ended December 31, 2020 was 3.6 %.

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

The fair value of the ABL Credit Facility approximates its carrying value.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LONG‑TERM DEBT (Continued)

Total debt consisted of the following:

1 unchanged sentence

ABL Credit Facility

$ — $ 130,000

Total debt — 130,000

Less current portion of long-term debt

Total long-term debt

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

The fair value of the ABL Credit Facility approximates its carrying value.

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

($ in thousands)

2024 and thereafter

$ — $ 130,000

ACCRUED AND OTHER CURRENT LIABILITIES

1 unchanged sentence

($ in thousands)

Accrued capital expenditure

Accrued insurance

Accrued payroll and related expenses

Accrued taxes and others

Capital expenditure, taxes and others accruals

13,483 18,303

$ 24,676 $ 36,343

EMPLOYEE BENEFIT PLAN

4 unchanged sentences

During the years ended December 31, 2020, 2019 and 2018, the recorded expense under the plan was $ 2.1 million, $ 3.0 million and $ 0.3 million, respectively.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REPORTABLE SEGMENT INFORMATION

The Company has five operating segments for which discrete financial information is readily available:

hydraulic fracturing, cementing, coiled tubing, flowback, and drilling.

The Company has three operating segments for which discrete financial information is readily available:

hydraulic fracturing, cementing and coiled tubing.

These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.

On August 31, 2018, we divested our surface air drilling operations, included in our "all other" category, in order to continue to focus and position ourselves as a Permian Basin-focused pressure pumping business because we believe the pressure pumping market in the Permian Basin offers more supportive long-term growth fundamentals.

The divestiture of our surface air drilling operations did not qualify for presentation and disclosure as discontinued operations, and accordingly, during the year ended December 31, 2018, we have recorded the resulting loss on disposal of our surface air drilling of $ 0.3 million as part of our loss on disposal of asset in our consolidated statement of operations.

The divestiture of our surface air drilling operations resulted in a reduction in the number of our current operating segments to five .

In September 2020, the Company shut down its drilling operations and disposed of all of its drilling rigs and ancillary assets for approximately $ 0.5 million.

In March 2020, the Company shut down its flowback operating segment and subsequently disposed of the assets for approximately $ 1.6 million.

Our drilling and flowback operations were included in our “all other” category.

In August 2018, we divested our surface air drilling operations, included in our “all other” category.

The divestiture or disposal of our surface drilling assets did not qualify for presentation and disclosure as discontinued operations, and accordingly, during the year ended December 31, 2018, we recorded the resulting loss associated with the asset disposal of $ 0.3 million as part of our loss on disposal of asset in our consolidated statement of operations.

The shutdown of these operations resulted in a reduction in the number of our current operating segments to three .

The change in the number of our operating segments did not impact our reportable segment information reported for the years presented.

2 unchanged sentences

Total corporate administrative expense for the years ended December 31, 2020, 2019 and 2018 was $ 31.6 million, $ 113.0 million and $ 83.9 million, respectively.

Our hydraulic fracturing operating segment revenue approximated 95.6 % , 95.4 % and 95.3 % of our pressure pumping revenue for the years ended December 31, 2019 , 2018 and 2017 , 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.

We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization (EBITDA), plus (i) loss/(gain) on disposal of assets, (ii) loss/(gain) on extinguishment of debt, (iii) stock-based compensation, and (iv) other unusual or non‑recurring (income)/expenses, such as impairment charges, severance, costs related to our IPO and costs related to asset acquisitions or one-time professional fees.

PROPETRO HOLDING CORP.

1 unchanged sentence

REPORTABLE SEGMENT INFORMATION (Continued)

Our hydraulic fracturing operating segment revenue approximated 94.2 %, 95.6 % and 95.4 % of our pressure pumping revenue for the years ended December 31, 2020, 2019 and 2018, 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.

We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization (EBITDA), plus (i) loss/(gain) on disposal of assets, (ii) loss/(gain) on extinguishment of debt, (iii) stock-based compensation, and (iv) other unusual or nonrecurring (income)/expenses, such as impairment charges, severance, costs related to our initial public offering (“IPO”), costs related to asset acquisitions, costs related to SEC investigation and class action lawsuits and one-time professional fees.

A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below ($ in thousands):

1 unchanged sentence

Service revenue

$ 773,474 $ 15,758 $ 789,232

Adjusted EBITDA

$ 174,030 $ ( 32,567 ) $ 141,463

Depreciation and amortization

$ 148,659 $ 4,631 $ 153,290

Impairment expense

$ 36,907 $ 1,095 $ 38,002

Capital expenditures

$ 78,154 $ 3,091 $ 81,245

$ 1,009,631 $ 41,108 $ 1,050,739

Year ended and as of December 31, 2019

Service revenue

$ 2,001,627 $ 50,687 $ 2,052,314

Adjusted EBITDA

$ 533,760 $ ( 14,691 ) $ 519,069

Depreciation and amortization

$ 139,348 $ 5,956 $ 145,304

Impairment expense

$ — $ 3,405 $ 3,405

Capital expenditures

$ 387,119 $ 13,552 $ 400,671

$ 9,425 $ — $ 9,425

Total assets $ 1,381,811 $ 54,300 $ 1,436,111

Year ended and as of December 31, 2018

Service revenue

$ 1,658,403 $ 46,159 $ 1,704,562

Adjusted EBITDA

$ 398,396 $ ( 9,873 ) $ 388,523

Depreciation and amortization

$ 83,404 $ 4,734 $ 88,138

Capital expenditures

$ 577,171 $ 15,431 $ 592,602

$ 9,425 $ — $ 9,425

$ 1,230,830 $ 43,692 $ 1,274,522

PROPETRO HOLDING CORP.

4 unchanged sentences

Net income (loss)

$ ( 68,271 ) $ ( 38,749 ) $ ( 107,020 )

Depreciation and amortization

148,659 4,631 153,290

Interest expense

Income tax expense

1 2,382 2,383

Income tax benefit — ( 27,480 ) ( 27,480 )

Loss on disposal of assets

56,659 1,477 58,136

Impairment expense 36,907 1,095 38,002

Stock‑based compensation

— 9,100 9,100

Other expense

Other general and administrative expense (1)

Deferred IPO bonus, retention bonus and severance expense

— 13,038 13,038

Retention bonus and severance expense 75 1,065 1,140

Adjusted EBITDA

$ 174,030 $ ( 32,567 ) $ 141,463

Pumping All Other Total

Year ended December 31, 2019

Net income (loss)

$ 281,090 $ ( 118,080 ) $ 163,010

Depreciation and amortization

139,348 5,956 145,304

Interest expense

51 7,090 7,141

Income tax expense

Loss (gain) on disposal of assets

— 50,494 50,494

Loss on disposal of assets

106,178 633 106,811

Impairment expense — 3,405 3,405

Stock‑based compensation

— 7,776 7,776

Other expense

Other general and administrative expense (1)

Deferred IPO bonus

— 25,208 25,208

Deferred IPO bonus, retention bonus and severance expense 7,093 2,110 9,203

Adjusted EBITDA

533,760 ( 14,691 ) 519,069

Pumping All Other Total

Year ended December 31, 2018

Net income (loss)

$ 253,196 $ ( 79,334 ) $ 173,862

Depreciation and amortization

83,404 4,734 88,138

Interest expense

— 6,889 6,889

Income tax expense

— 51,255 51,255

Loss on disposal of assets

59,962 ( 742 ) 59,220

Stock‑based compensation

— 5,482 5,482

Other expense

1 unchanged sentence

Deferred IPO bonus

1,832 977 2,809

Adjusted EBITDA

Other general and administrative expense primarily relates to nonrecurring professional fees paid to external consultants in connection with the Company’s expanded audit committee review and advisory services in 2019, and legal settlements in 2018 and 2017.

$ 398,396 $ ( 9,873 ) $ 388,523

(1) During the years ended December 31, 2020 and 2019, other general and administrative expense primarily relates to nonrecurring professional fees paid to external consultants in connection with the Company’s expanded audit committee review, SEC investigation and shareholder litigation.

All nonrecurring professional fees incurred after the end of June 2020 are in connection with the pending SEC investigation and shareholder litigation.

The other general and administrative expense during the year ended December 31, 2018 primarily relates to legal settlements.

PROPETRO HOLDING CORP.

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Major Customers

T he Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue:

The Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue:

Year Ended December 31,

2020 2019 2018

42.5 % 25.5 % 24.1 %

20.3 % 20.9 % 16.5 %

9.3 % 13.2 % 12.2 %

8.6 % 9.2 % 8.9 %

5.8 % 8.2 % 7.1 %

The above significant customers’ revenue that relates to pressure pumping is below:

Year Ended December 31,

NET INCOME PER SHARE

Basic net income per common share is computed by dividing the net income relevant to the common stockholders by the weighted-average number of shares outstanding during the year.

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 stock units 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.

2020 2019 2018

Customer A 99.8 % 99.7 % 97.4 %

Customer B 97.6 % 95.4 % 98.3 %

Customer C 99.9 % 99.9 % 100.0 %

Customer D 99.7 % 100.0 % 100.0 %

Customer E 85.7 % 100.0 % 100.0 %

NET (LOSS) INCOME PER SHARE

Basic net (loss) income per common share is computed by dividing the net (loss) income relevant to the common stockholders by the weighted-average number of shares outstanding during the year.

Diluted net (loss) income per common share uses the same net (loss) 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 stock units 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.

(In thousands, except for per share data)

Year Ended December 31,

2020 2019 2018

Numerator (both basic and diluted)

Net income relevant to common stockholders

Denominator for basic net income per share

Net (loss) income relevant to common stockholders $ ( 107,020 ) $ 163,010 $ 173,862

Denominator for basic net (loss) income per share 100,829 100,472 83,460

Dilutive effect of stock options — 2,929 3,129

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Dilutive effect of restricted stock units — 179 180

Denominator for diluted net income per share

Basic net income per common share

Diluted net income per common share

There were no anti-dilutive stock options, performance stock units and restricted stock units during the years ended December 31, 2019 , 2018 and 2017 .

Denominator for diluted net (loss) income per share 100,829 103,750 87,046

Basic net (loss) income per common share $ ( 1.06 ) $ 1.62 $ 2.08

Diluted net (loss) income per common share $ ( 1.06 ) $ 1.57 $ 2.00

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NET (LOSS) INCOME PER SHARE (Continued)

As shown in the table below, the following stock options, restricted stock units and performance stock units outstanding as of December 31, 2020, 2019 and 2018 have not been included in the calculation of diluted (loss) income per common share for the years ended December 31, 2020, 2019 and 2018 because they would be anti-dilutive to the calculation of diluted net (loss) income per common share:

(In thousands)

2020 2019 2018

Stock options 4,200 — —

Restricted stock units 1,165 — —

Performance stock units 1,019 — —

Total 6,384 — —

STOCK‑BASED COMPENSATION

Stock Option Plan

In March 2013, we approved the Stock Option Plan of ProPetro Holding Corp.

(the “Stock Option Plan”) pursuant to which our Board of Directors may grant stock options to our consultants, directors, executives and employees.

No awards have been granted under the Stock Option Plan following our IPO, and no further awards will be granted under the Stock Option Plan.

2017 Incentive Award Plan

In March 2017, our shareholders approved the ProPetro Holding Corp.

2017 Incentive Award Plan (the "Incentive Plan") pursuant to which our Board of Directors may grant stock options, restricted stock units ("RSUs"), performance stock units ("PSUs"), or other stock-based awards to consultants, directors, executives and employees.

2017 Incentive Award Plan (the "2017 Incentive Plan") pursuant to which our Board of Directors was authorized to grant stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”), or other stock-based and cash awards to consultants, directors, executives and employees.

The 2017 Incentive Plan originally authorized up to 5,800,000 shares of common stock to be issued under awards granted pursuant to the plan.

2020 Long Term Incentive Plan

In October 2020, our shareholders approved the ProPetro Holding Corp.

2020 Long Term Incentive Plan (the “2020 Incentive Plan”) pursuant to which our Board of Directors may grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees.

The 2020 Incentive Plan authorizes up to 4,650,000 shares of common stock to be issued under awards granted pursuant to the plan.

The 2020 Incentive Plan became effective October 22, 2020, and as of such date no further awards will be granted under the 2017 Incentive Plan on or after October 22, 2020.

The 2017 Incentive Plan and the 2020 Incentive Plan are herein collectively referred to as the “Incentive Plans”.

Stock Options

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The fair value of each option award granted was estimated on the date of grant using the Black-Scholes option-pricing model.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK‑BASED COMPENSATION (Continued)

On March 16, 2017, we granted 793,738 stock option awards to certain key employees, officers and directors pursuant to the 2017 Incentive Plan which are scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement.

2 unchanged sentences

There were no new stock option grants during the years ended December 31, 2020, 2019 and 2018.

The weighted average grant-date fair value of stock options granted during the year ended December 31, 2017 was $ 3.35 .

As of December 31, 2020, the aggregate intrinsic value for our outstanding stock options was $ 14.6 million, and the aggregate intrinsic value for our exercisable stock options was $ 14.6 million.

The aggregate intrinsic value for the exercised stock options during the year ended December 31, 2019 was $ 2.9 million .

There were no exercises of stock options during the year ended December 31, 2020.

The remaining contractual term for the outstanding and exercisable stock options as of December 31, 2020, was 2.5 years and 2.4 years, respectively.

On March 13, 2020, the Company modified the stock options previously granted to two former officers in connection with one such former officer’s separation agreement and the other former officer’s amended employment arrangement.

Such modifications extended the exercise period such that all vested but unexercised stock options held by such former officers shall not be forfeited or cancelled on the ninety-first day following the former officers’ respective separation dates but rather shall remain outstanding and exercisable until the one-year anniversary of such former officers’ separation date.

In connection with a former officer’s separation agreement, on December 31, 2020, the Company modified the stock options previously granted to such former officer to (i) accelerate the vesting of the stock options granted to such former officer in 2017 pursuant to the 2017 Incentive Plan and (ii) extend the exercise period applicable to all vested but unexercised stock options held by such former officer such that all such stock options shall not be forfeited or cancelled on the ninety-first day following the former officer’s separation date but rather shall remain outstanding and exercisable until June 14, 2023.

As a result of these modifications, we recorded an incremental stock expense of $ 2.0 million during the year ended December 31, 2020.

For the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $ 2.3 million, $ 0.5 million and $ 0.6 million, respectively, in compensation expense related to stock options.

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Outstanding at January 1, 2020 4,300,088 $ 5.03

( 76,398 ) $ 14.00

( 23,349 ) $ 14.00

Outstanding at December 31, 2020 4,200,341 $ 4.82

Exercisable at December 31, 2020 4,098,924 $ 4.59

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK‑BASED COMPENSATION (Continued)

Restricted Stock Units

4 unchanged sentences

For the years ended December 31, 2020, 2019 and 2018, the Company recognized stock compensation expense for RSUs of approximately $ 5.1 million, $ 3.5 million and $ 2.9 million, respectively.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK‑BASED COMPENSATION (Continued)

On October 30, 2020, the Company modified the RSUs previously granted to a former officer in 2019 and 2020 to accelerate the vesting of such RSUs in connection with his separation agreement.

On December 31, 2020, the Company modified the RSUs previously granted to a former officer in 2018, 2019 and 2020 to accelerate the vesting of such RSUs in connection with his separation agreement.

As a result of these modifications, we recorded an incremental stock expense of $ 0.1 million during the year ended December 31, 2020.

As of December 31, 2020, the total unrecognized compensation expense for all RSUs was approximately $ 5.9 million, and is expected to be recognized over a weighted-average period of approximately 1.8 years.

The following table summarizes the RSUs activity during the year December 31, 2020:

Shares Weighted

Fair Value ("FV")

Outstanding at January 1, 2020 613,217 $ 18.75

Granted 1,185,832 $ 7.00

Vested ( 262,931 ) $ 17.37

Forfeited ( 370,749 ) $ 14.37

Canceled — $ —

Outstanding at December 31, 2020 1,165,369 $ 8.50

Performance Stock Units

In 2019, we granted PSUs to certain key employees and officers under the Incentive Plan.

In 2020, we granted 1,007,058 PSUs (excluding PSUs that were administratively cancelled and regranted) to certain key employees and officers as new awards under the 2017 Incentive Plan.

The actual number of shares of common stock that may be issued under the PSUs ranges from zero 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 from January 1, 2020 through December 31, 2022.

3 unchanged sentences

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.

In connection with a former officer’s separation agreement, on October 30, 2020, the Company modified the PSUs previously granted to such former officer in 2019 and 2020 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of October 30, 2020 such that such PSUs shall remain outstanding and eligible to vest based on our TSR relative to a designated peer group over the applicable performance period.

In connection with a former officer’s separation agreement, on December 31, 2020, the Company modified the PSUs previously granted to such former officer in 2018, 2019 and 2020 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of December 31, 2020 such that such PSUs shall remain outstanding and eligible to vest based on our TSR relative to a designated peer group over the applicable performance period.

As a result of these modifications, we recorded an incremental stock expense of $ 0.1 million during the year ended December 31, 2020.

For the years ended December 31, 2020, 2019 and 2018 the Company recognized stock compensation expense for the PSUs of approximately $ 1.7 million, $ 3.8 million and $ 2.0 million, respectively.

The following table summarizes the PSUs activity during the year ended December 31, 2019 :

Target Shares Outstanding at January 1, 2019

Target Shares Vested

Target Shares Outstanding at December 31, 2019

Fair Value per

PROPETRO HOLDING CORP.

1 unchanged sentence

STOCK‑BASED COMPENSATION (Continued)

The following table summarizes the PSU activity during the year ended December 31, 2020:

Granted Target Shares Outstanding at January 1, 2020 Target

Granted Target Shares Vested Target

Forfeited Target Shares Outstanding at December 31, 2020 Weighted

Fair Value per

Share for Outstanding Shares

2017 151,492 — ( 151,492 ) — — $ 10.73

2018 156,576 — — ( 72,254 ) 84,322 $ 27.51

2019 214,553 — — ( 88,235 ) 126,318 $ 27.49

2020 — 1,007,058 — ( 198,420 ) 808,638 $ 8.30

Total 522,621 1,007,058 ( 151,492 ) ( 358,909 ) 1,019,278 $ 12.27

Weighted Average FV Per Share $ 23.88 $ 9.31 $ 10.73 $ 21.51 $ 12.27

The total stock compensation expense for the years ended December 31, 2020, 2019 and 2018 for all stock awards was approximately $ 9.1 million, $ 7.8 million and $ 5.5 million, respectively.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

( 27,104 ) 47,090 48,738

221 1,736 1,551

( 597 ) 1,668 966

( 376 ) 3,404 2,517

Total income tax expense

Reconciliation between the amounts determined by applying the federal statutory rate of 21 % for years ended December 31, 2019 and 2018 and 35 % for the year ended December 31, 2017 to income tax expense is as follows:

$ ( 27,480 ) $ 50,494 $ 51,255

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (Continued)

Reconciliation between the amounts determined by applying the federal statutory rate of 21% for years ended December 31, 2020, 2019 and 2018 to income tax (benefit) expense is as follows:

($ in thousands)

Year Ended December 31,

2020 2019 2018

Taxes at federal statutory rate

$ ( 28,245 ) $ 44,836 $ 47,275

State taxes, net of federal benefit

154 2,504 1,874

Non-deductible expenses

314 3,683 2,423

Stock-based compensation

751 ( 717 ) ( 426 )

Valuation allowance

Effect of change in enacted tax rate

Total income tax expense

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (Continued)

868 — ( 1,151 )

( 1,322 ) 188 1,260

Total income tax (benefit) expense

$ ( 27,480 ) $ 50,494 $ 51,255

Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements.

3 unchanged sentences

Accrued liabilities

Allowance for doubtful accounts

Allowance for credit losses 316 224

Lease liabilities

2 unchanged sentences

Net operating losses

85,827 66,311

Total deferred tax assets

94,094 73,990

Valuation allowance

Total deferred tax assets — net

$ 93,226 $ 73,990

Deferred Income Tax Liabilities

Property and equipment

$ ( 166,494 ) $ ( 176,404 )

Prepaid expenses

( 2,073 ) ( 627 )

Total deferred tax liabilities

$ ( 168,567 ) $ ( 177,031 )

Net deferred tax liabilities

At December 31, 2019 , the Company had approximately $ 304.7 million of federal net operating loss carryforwards some of which will begin to expire in 2035 .

After January 1, 2018, federal net operating loss carryforwards can be carried forward indefinitely.

Approximately $ 229.5 million of our federal net operating loss carryfoward relates to pre-2018 periods which are not subject to an annual 80% limitation of taxable income.

Our state net operating losses is approximately $ 50.4 million and will begin to expire in 2024 .

$ ( 75,341 ) $ ( 103,041 )

The Tax Cuts and Jobs Act (the “TCJA”) included a reduction to the maxi mum deduction allo wed for net o perating losses generated in tax years after December 31, 2017 and the elimination of carrybacks of net operating losses.

Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which modified the TCJA, U.S.

federal net operating loss carryforwards (“NOLs”) generated in taxable periods beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income.

As of December 31, 2020, the Company had approximately $ 397.4 million of federal NOLs some of which will begin to expire in 2035.

Approximately $ 229.5 million of the Company’s federal NOLs relate to pre-2018 periods.

As of December 31, 2020, the Company’s state net operating losses were approximately $ 51.0 million and will begin to expire in 2024.

Utilization of net operating loss carryforwards may be limited due to past or future ownership changes.

As of December 31, 2019 , we determined that no valuation allowance was necessary against our deferred tax assets.

As of December 31, 2020, we determined that $ 0.9 million valuation allow ance was necessary against our state deferred tax assets.

The Company’s U.S.

federal income tax returns for the year ended December 31, 2017, and through the most recent filing remain open to examination by the Internal Revenue Service under the applicable U.S.

federal statute of limitations provisions.

The various states in which the Company is subject to income tax are generally open to examination for the tax years ended December 31, 2015 and through the most recent filing.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”).

The Tax Act makes broad and complex changes to the U.S.

tax code including, but not limited to (1) reducing the U.S.

federal corporate tax rate from 35% to 21%, (2) eliminating the corporate alternative minimum tax (“AMT’’) and changing how existing AMT credits can be realized, (3) creating a new limitation on deductible interest expense, (4) changes to bonus depreciation, and (5) changing rules related to use and limitations of net operating loss carryforwards for tax years beginning after December 31, 2017.

We have completed our analysis of the Tax Act.

The only material items that impacted the Company’s consolidated financial statements in 2017 was the corporate rate reduction.

While the corporate rate reduction was effective January 1, 2018, we accounted for the effect of the rate change during the year ended December 31, 2017, the year of enactment.

Consequently, we recorded a $ 3.4 million decrease to the net deferred tax liability.

federal statute of

PROPETRO HOLDING CORP.

1 unchanged sentence

INCOME TAXES (Continued)

We record uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority.

limitations provisions.

The various states in which the Company is subject to income tax are generally open to examination for the tax years ended December 31, 2016, and through the most recent filing.

The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority.

As of December 31, 2020, 2019 and 2018, no uncertain tax positions were recorded.

The Company will continue to evaluate its tax positions in accordance with ASC 740 and will recognize any future effect as a charge to income in the applicable period.

The Company will continue to evaluate its tax positions in accordance with ASC 740 and will recognize any future effect as either a benefit or charge to income in the applicable period.

Income tax penalties and interest assessments recognized under ASC 740 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position.

2 unchanged sentences

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 on our corporate office building is approximately $ 0.1 million per year.

During the years ended December 31, 2019 and 2018 , the Company incurred costs of approximately $ 1.6 million and $ 0.9 million , respectively, for improvements made to our corporate office building that we rent.

The Company rented 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 on our corporate office building was approximately $ 0.1 million per year.

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 rents 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.

The Company also rents five yards from an entity, in which certain former executive officers 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 our drilling yard from another entity, in which a certain former executive officer of the Company has an equity interest, and with annual lease expense of $ 0.1 million.

In November 2020, we terminated the drilling yard lease.

Transportation and Equipment Rental

For the years ended December 31, 2019 , 2018 and 2017 , 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 , $ 0.4 million and $ 0.3 million , respectively.

During the years ended December 31, 2018 and 2017 , the partner in the entity with the former executive officer reimbursed the Company approximately $ 0.05 million and $ 0.1 million , respectively, for the use of the Company’s personnel to operate the transportation equipment.

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.

For the years ended December 31, 2019 , 2018 and 2017 , the Company incurred and paid $ 0.2 million , $ 0.2 million and $ 0.2 million , respectively.

This rental arrangement was terminated in January 2020.

No transportation services were provided by a related party during the year ended December 31, 2020.

For the years ended December 31, 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 $ 0.4 million, respectively.

During the year ended December 31, 2018, the partner in the entity with the former executive officer reimbursed the Company approximately $ 0.05 million for the use of the Company’s personnel to operate the transportation equipment.

The Company rented equipment in Elk City, Oklahoma for our flowback operations from an entity, in which a former executive officer of the Company has an equity interest.

For the years ended December 31, 2019 and 2018, the Company incurred and paid $ 0.2 million and $ 0.2 million, respectively.

This rental arrangement was terminated in January 2020, and accordingly, there was no expense incurred from this related party arrangement during the year ended December 31, 2020.

The Company obtains equipment maintenance services from an entity that has a family relationship with an executive officer of the Company.

During the year ended December 31, 2020, the Company incurred approximately $ 1.2 million for equipment maintenance services associated with this related party.

At December 31, 2020 and 2019, the Company had approximately $ 0 and $ 0 , respectively, as outstanding payables in connection with transactions to all of the above related parties.

There were no receivables at December 31, 2020 and 2019 from the above related party transactions.

PROPETRO HOLDING CORP.

1 unchanged sentence

RELATED-PARTY TRANSACTIONS (Continued)

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

There were no receivables at December 31, 2019 and 2018 from the above related party transactions.

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.

For the years ended December 31, 2018 and 2017 , the Company provided services to PT Petroleum, LLC, an entity in which a director was an officer, of approximately $ 16.7 million and $ 39.0 million , respectively.

On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property in connection with the Pioneer Pressure Pumping Acquisition.

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 connection with the consummation of the Pioneer Pressure Pumping Acquisition and effective January 1, 2019, we became a long-term 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 $ 524.2 million , $ 76.0 million and $ 36.0 million of our total revenue during the years ended December 31, 2019 , 2018 and 2017 , respectively.

During 2019, the Company reimbursed Pioneer approximately $ 4.2 million for our portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company and also Pioneer reimbursed the Company approximately $ 2.5 million for severance payments made on their behalf, in connection with the Pioneer Pressure Pumping Acquisition.

As of December 31, 2019 , the total accounts receivable due from Pioneer, including estimated unbilled receivable for services we provided, amounted to $ 61.7 million and the amount due to Pioneer was $ 0 .

For the year ended December 31, 2018, the Company provided services to PT Petroleum, LLC, an entity in which a director was an officer, of approximately $ 16.7 million.

On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer in connection with the Pioneer Pressure Pumping Acquisition.

Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash.

In July 2019, we terminated our crew camp facility lease entered into with Pioneer in connection with the Pioneer Pressure Pumping Acquisition, and the total crew camp facility lease payments to Pioneer in 2019 were approximately $ 0.1 million.

Revenue from services provided to Pioneer (including idle fees) accounted for approximately $ 335.4 million, $ 524.2 million and $ 76.0 million of our total revenue during the years ended December 31, 2020, 2019 and 2018, respectively.

In connection with the Pioneer Pressure Pumping Acquisition, the Company agreed to reimburse Pioneer for our portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company.

During years ended December 31, 2020 and 2019, the Company fully reimbursed Pioneer approximately $ 2.7 million and $ 4.2 million for our portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company.

During the year ended December 31, 2019, Pioneer fully reimbursed the Company approximately $ 2.5 million for severance payments made on their behalf, in connection with the Pioneer Pressure Pumping Acquisition.

As of December 31, 2020, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services (including idle fees) we provided, amounted to $ 41.7 million and the amount due to Pioneer was $ 0 .

As of December 31, 2019, the balance due from Pioneer for services (including idle fees) we provided amounted to approximately $ 61.7 million and the amount due to Pioneer was $ 0 .

On January 1, 2019, we implemented ASC 842, using the modified retrospective transition method and elected not to restate prior years.

7 unchanged sentences

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.

The lease is with an entity in which a former director of the Company has a noncontrolling equity ownership interest.

For the years ended December 31, 2020, 2019 and 2018, the Company made lease payments of approximately $ 0.4 million, $ 0.4 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.

In addition to the contractual lease period, the contract includes an optional renewal of up to 10 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.

1 unchanged sentence

Effective January 1, 2019, the remaining lease term in our present value estimate of the minimum future lease payments was four years .

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

PROPETRO HOLDING CORP.

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LEASES (Continued)

because we concluded that the accounting effect was insignificant.

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 December 31, 2020, the weighted average discount rate and remaining lease term was 6.7 % and 2.3 years, respectively.

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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 year ended December 31, 2019 , in connection with the Crew Camp Lease was $ 0.1 million .

Effective July 1, 2019, we disposed of our camp assets 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 year ended December 31, 2019 of approximately $ 4.2 million .

Prior to the termination, the total operating lease cost recorded during the year ended December 31, 2019, in connection with the Crew Camp Lease was $ 0.1 million.

Effective July 1, 2019, we disposed of our camp assets and entered into a twelve month lodging arrangement, 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 year ended December 31, 2019 of approximately $ 4.2 million.

As of December 31, 2020, our total operating lease right-of-use asset cost was $ 1.2 million, and accumulated amortization was $ 0.5 million.

For the year ended December 31, 2019 , we recorded operating lease cost of $ 0.4 million in our statement of operations.

During the years ended December 31, 2018 and 2017 , our operating lease expense, under legacy GAAP, ASC 840, was $ 1.7 million and $ 1.4 million , respectively.

As of December 31, 2019, our total operating lease right-of-use asset cost was $ 1.2 million, and accumulated amortization was $ 0.3 million.

For the years ended December 31, 2020 and 2019, we recorded operating lease cost of $ 0.3 million and $ 0.4 million, respectively, in our statement of operations.

During the year ended December 31, 2018, our operating lease expense, under legacy GAAP, ASC 840, was $ 1.7 million.

Finance Leases

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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 1.2 years, assuming we will exercise our option to purchase the land shortly 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 1.0 year from the commencement date.

As of December 31, 2019 , the weighted average discount rate and remaining lease term was 4.3 % and 0.2 years , respectively.

As of December 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 .

The interest on our finance lease for the year ended December 31, 2019 was $ 0.1 million .

No amortization was recorded in the period for our fin ance lease right-of-use asset because it is comprised of land.

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

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (Continued)

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

In March 2020, the Company exercised its option and purchased the land associated with the Ground Lease for approximately $ 2.5 million.

Prior to the exercise of our purchase option, the interest on our finance lease for the years ended December 31, 2020 and 2019 was approximately $ 0 and 0.1 million, respectively.

The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for operating lease as of December 31, 2020 are as follows:

($ in thousands)

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The total cash paid in connection with our operating and finance lease liabilities during the year ended December 31, 2020 was $ 0.4 million and $ 0.03 million, respectively.

During the year ended December 31, 2019, the total cash paid in connection with our operating and finance lease liabilities was $ 0.4 million and $ 0.4 million,

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (Continued)

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.

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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 year ended December 31, 2019 , our short-term asset lease and Lodging Lease expense was approximately $ 1.3 million and $ 2.4 million , respectively.

For the year ended December 31, 2020 and 2019, our short-term asset lease expense was approximately $ 1.0 million and $ 1.3 million, respectively.

At December 31, 2020, the total remaining commitments and other obligations for all of our short-term lease and lodging arrangements was $ 6.0 million.

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCIES

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

See Note 17 for additional lease disclosures under the new lease standard, ASC 842.

($ in thousands)

2023 and thereafter

As of December 31, 2019 , the Company has an agreement with its equipment manufacturer granting the Company the option to purchase additional 108,000 of DuraStim® hydraulic horsepower (“HHP”), with the purchase option expiring at different times 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 December 31, 2019 , the total outstanding remaining contractual obligations under the purchase agreement for the original DuraStim® fleets and related ancillary equipment was $ 1.7 million .

As of December 31, 2019 , other contracted capital commitments entered into as part of normal course of business for supply of certain equipment, including improvement to our corporate office building, was $ 2.7 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.

As of December 31, 2020, the Company has an agreement with its equipment manufacturer granting the Company the option to purchase additional 108,000 HHP of DuraStim® equipment, with the purchase option expiring at different times through July 31, 2022, as amended.

The option fee of $ 6.1 million, which we have classified as a deposit for property and equipment when the agreement was entered into in 2019, has been impaired and written off during the year ended December 31, 2020, as it was not probable that we will exercise our option to purchase the equipment given the current market conditions and the depressed oil and gas industry.

As of December 31, 2020, there were no additional contractual capital commitments entered into as part of normal course of business for supply of certain equipment.

The Company enters into purchase agreements with its sand suppliers (the “Sand suppliers”) to secure supply of sand in the normal course of its business.

The agreements with the Sand suppliers require that we purchase certain sand volumes, which is based on a certain percentage of our overall sand requirements and agreed minimum volumes;

otherwise, certain penalties may be charged.

Under certain of the purchase agreements, a shortfall fee applies if we purchase less than the agreed percentage of our sand requirements or agreed minimum volumes.

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.

O ur agreements with the Sand suppliers expire at different times prior to April 30, 2022.

Our current agreements with Sand suppliers expire at different times prior to April 30, 2022.

During the years ended December 31, 2020, 2019 and 2018, no shortfall fees have 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 year ended December 31, 2019 and 2018 was approximately $ 44.3 million and $ 10.3 million , respectively, and the estimated indirect benefit to the former executive officer of the Company was approximately $ 1.5 million and $ 0.4 million , respectively.

As of December 31, 2019 and 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.

During the year ended December 31, 2019 , we recorded severance expense of approximately $ 2.0 million relating to the resignation of two former executive officers, which was included as part of our general and

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCIES (Continued)

administrative expense in our statement of operations and the outstanding balance included in accrued liabilities and other current liabilities in our consolidated balance sheet at December 31, 2019 .

During the year ended December 31, 2020, the total sand purchased from SandCo through the time the former executive was associated with the Company was approximately $ 5.3 million.

During the year ended December 31, 2019, the total sand purchased from SandCo was approximately $ 44.3 million.

As of December 31, 2020 and 2019, the Company had issued le tters of credit of $ 3.7 million and $ 1.5 million, respectively, under the Company's ABL Credit Facility relating to the Company's casualty insurance policy.

During the year ended December 31, 2020, we accrued severance expense of approximately $ 1.0 million relating to the resignation of a former executive officer of the Company, which was included as part of our general and administrative expense in our statement of operations.

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.

ProPetro Holding Corp., et al., (the “Logan Lawsuit”), was filed against the Company and certain of its then 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 December 31, 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.

In July 2020, the Logan Lawsuit Lead Plaintiffs Nykredit Portefølje Administration A/S, Oklahoma Firefighters Pension and Retirement System, Oklahoma Law Enforcement Retirement System, Oklahoma Police

PROPETRO HOLDING CORP.

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COMMITMENTS AND CONTINGENCIES (Continued)

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 third amended class action complaint in the U.S.

District Court for the Western District of Texas, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule l0b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933, as amended, based on allegedly inaccurate or misleading statements, or omissions of material facts, about the Company’s business, operations and prospects against the Company, and certain of its current and former officers and directors.

In August 2020, the Company filed a motion to dismiss the Logan Lawsuit and in September 2020, the plaintiffs filed their opposition.

In October 2020, the Company filed its reply brief in support of the motion to dismiss.

In May 2020, the U.S.

District Court for the Western District of Texas consolidated two shareholder derivative lawsuits previously filed against the Company and certain of its current and former officers and directors into a single lawsuit captioned In re ProPetro Holding Corp.

Derivative Litigation (the “Shareholder Derivative Lawsuit”).

In August 2020, the plaintiffs in the Shareholder Derivative Lawsuit filed a consolidated complaint alleging (i) breaches of fiduciary duties, (ii) unjust enrichment and (iii) contribution.

The plaintiffs did not quantify any alleged damages in its complaint but, in addition to attorneys’ fees and costs, they seek various forms of relief, including (i) damages sustained by the Company as a result of the alleged misconduct, (ii) punitive damages and (iii) equitable relief in the form of improvements to the Company’s governance and controls.

In October 2020, the Company and other defendants filed motions to dismiss the Shareholder Derivative Lawsuit and in December 2020, the plaintiffs filed their opposition.

In January 2021, the Company and other defendants filed reply briefs in support of the motions to dismiss.

In October 2019, the Company received a letter from the SEC indicating that the SEC had opened an investigation into the Company, which followed the SEC’s issuance of a formal order of investigation, 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 Shareholder Derivative Lawsuit, the SEC investigation, or any other related lawsuit or investigation.

As of December 31, 2020, 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

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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.

In 2020, the Texas Comptroller of Public Accounts commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020.

As of December 31, 2020, the audit is still at an early stage and the final outcome cannot be reasonably estimated.

In 2021, the Texas Comptroller of Public Accounts completed a routine audit of gross receipts, and sales, excise and use taxes for the periods of July 2015 through December 2018.

The net refund to the Company from the sales and excise and use tax audit was approximately $ 2.1 million, which will be recorded in our financial statements in the first quarter of 2021, the period when the refund was received by the Company.

PROPETRO HOLDING CORP.

4 unchanged sentences

(In thousands, except for per share data)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

First Quarter Second Quarter Third Quarter Fourth Quarter

Revenue - Service revenue $ 395,069 $ 106,109 $ 133,710 $ 154,344

Gross profit $ 94,221 $ 37,916 $ 34,118 $ 38,698

$ ( 7,804 ) $ ( 25,920 ) $ ( 29,184 ) $ ( 44,112 )

Net income per common share:

$ ( 0.08 ) $ ( 0.26 ) $ ( 0.29 ) $ ( 0.44 )

Weighted average common shares outstanding:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

100,687 100,821 100,897 100,911

First Quarter Second Quarter Third Quarter Fourth Quarter

Revenue - Service revenue $ 546,179 $ 529,494 $ 541,847 $ 434,794

Gross profit $ 164,656 $ 143,276 $ 144,925 $ 129,101

$ 69,805 $ 36,133 $ 34,397 $ 22,675

Net income per common share:

$ 0.70 $ 0.36 $ 0.34 $ 0.23

$ 0.67 $ 0.35 $ 0.33 $ 0.22

Weighted average common shares outstanding:

PROPETRO HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUBSEQUENT EVENTS

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.

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;

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.

If the depressed oil prices and the current economic conditions continue 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.

100,232 100,425 100,606 100,618

104,123 104,379 103,652 103,055

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data