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ProPetro (PUMP) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited interim financial information, including statements, notes, and management's discussion and analysis ITEM 1. FINANCIAL STATEMENTS (Unaudited) This section presents unaudited condensed consolidated financial statements, detailing financial position, performance, and cash flows Condensed Consolidated Balance Sheets The balance sheets provide a snapshot of the company's assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (September 30, 2020 vs. December 31, 2019) | ASSETS (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $54,255 | $149,036 | | Accounts receivable - net | $94,663 | $212,183 | | Total current assets | $157,073 | $375,591 | | Property and equipment - net | $936,283 | $1,047,535 | | Goodwill | — | $9,425 | | TOTAL ASSETS | $1,096,137 | $1,436,111 | | LIABILITIES (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Accounts payable | $71,577 | $193,096 | | Total current liabilities | $96,267 | $232,966 | | Deferred income taxes | $87,551 | $103,041 | | Long-term debt | — | $130,000 | | Total liabilities | $184,370 | $466,806 | | SHAREHOLDERS' EQUITY (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total shareholders' equity | $911,767 | $969,305 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $1,096,137 | $1,436,111 | Condensed Consolidated Statements of Operations These statements detail the company's revenues, expenses, and net income or loss for the reported periods Condensed Consolidated Statements of Operations (Three Months Ended September 30) | (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------ | :---------- | :---------- | | REVENUE - Service revenue | $133,710 | $541,847 | | Total costs and expenses | $170,162 | $493,286 | | OPERATING INCOME (LOSS) | $(36,452) | $48,561 | | INCOME (LOSS) BEFORE INCOME TAXES | $(36,901) | $46,737 | | INCOME TAX (EXPENSE) BENEFIT | $7,717 | $(12,340) | | NET INCOME (LOSS) | $(29,184) | $34,397 | | NET INCOME (LOSS) PER COMMON SHARE: | | | | Basic | $(0.29) | $0.34 | | Diluted | $(0.29) | $0.33 | Condensed Consolidated Statements of Operations (Nine Months Ended September 30) | (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------ | :---------- | :---------- | | REVENUE - Service revenue | $634,888 | $1,617,521 | | Total costs and expenses | $710,092 | $1,426,465 | | OPERATING INCOME (LOSS) | $(75,204) | $191,056 | | INCOME (LOSS) BEFORE INCOME TAXES | $(77,995) | $184,839 | | INCOME TAX (EXPENSE) BENEFIT | $15,087 | $(44,504) | | NET INCOME (LOSS) | $(62,908) | $140,335 | | NET INCOME (LOSS) PER COMMON SHARE: | | | | Basic | $(0.62) | $1.40 | | Diluted | $(0.62) | $1.35 | Condensed Consolidated Statements of Shareholders' Equity This statement tracks changes in shareholders' equity, including net income and stock-based compensation Shareholders' Equity Changes (Nine Months Ended September 30, 2020) | (in thousands) | Common Stock Amount | Additional Paid-In Capital | Retained Earnings | Total | | :------------------------- | :------------------ | :------------------------- | :---------------- | :-------- |\ | BALANCE - January 1, 2020 | $101 | $826,629 | $142,575 | $969,305 | | Stock-based compensation | — | $5,968 | — | $5,968 | | Tax withholdings paid | — | $(598) | — | $(598) | | Net loss | — | — | $(62,908) | $(62,908) | | BALANCE - September 30, 2020 | $101 | $831,999 | $79,667 | $911,767 | Condensed Consolidated Statements of Cash Flows The cash flow statements categorize cash movements from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30) | (in thousands) | 2020 | 2019 | | :----------------------------- | :---------- | :---------- | | Net cash provided by operating activities | $118,026 | $307,629 | | Net cash used in investing activities | $(82,179) | $(387,569) | | Net cash used in financing activities | $(130,628) | $56,431 | | NET DECREASE IN CASH AND CASH EQUIVALENTS | $(94,781) | $(23,509) | | CASH AND CASH EQUIVALENTS - End of period | $54,255 | $109,191 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements Note 1 - Basis of Presentation This note outlines accounting principles, significant risks, and management's responses to economic conditions affecting financial statements - The company's financial statements are prepared in accordance with SEC requirements for interim financial information and GAAP, with adjustments for normal recurring accruals, and interim results are not indicative of a full year due to market conditions23 - The company faces significant risks and uncertainties due to the COVID-19 pandemic and energy industry disruptions, causing a dramatic decline in demand and a 67% collapse in WTI crude oil prices from January to March 20202426 - In response to adverse economic conditions, the company cancelled growth capital projects, significantly reduced costs, cut its workforce, managed compensation, and negotiated favorable payment terms with vendors27 - Revenue is recognized upon satisfaction of performance obligations, with hydraulic fracturing recognized over time and other services recognized at a point-in-time upon completion282930313234 Allowance for Credit Losses (Nine Months Ended September 30, 2020) | ($ in thousands) | Amount | | :----------------------------------- | :-------- | | Balance - January 1, 2020 | $1,049 | | Provision for credit losses during the period | $4,291 | | Provision for credit losses no longer required | $(3,843) | | Balance - September 30, 2020 | $1,497 | Note 2 - Recently Issued Accounting Standards This note details the adoption and expected impact of new accounting standards on the company's financial reporting - The company adopted ASU 2016-13 (Credit Losses), ASU 2018-13 (Fair Value Measurement Disclosures), and ASU 2017-04 (Goodwill Impairment) effective January 1, 2020, with no material impact on its financial statements383940 - ASU 2019-12 (Income Taxes) is effective for fiscal years beginning after December 15, 2020, and is not expected to have a material effect, while ASU 2020-04 (Reference Rate Reform) is currently being assessed for its impact on the LIBOR transition414243 Note 3 - Fair Value Measurement This note discusses the fair value of financial instruments and significant impairment expenses recorded - The company's financial instruments, including cash, receivables, payables, and debt, approximated their carrying values at September 30, 2020, and December 31, 201948 - During the nine months ended September 30, 2020, the company recorded a total impairment expense of $16.7 million, including $9.4 million for goodwill and $7.2 million for property and equipment; no impairment was recorded in the prior year50515253 Note 4 - Long-Term Debt This note provides details on the company's ABL Credit Facility, borrowing capacity, and outstanding debt balances - The ABL Credit Facility has a $300 million borrowing capacity maturing December 19, 2023, with a borrowing base of approximately $35.3 million as of September 30, 202054 Total Debt (September 30, 2020 vs. December 31, 2019) | (in thousands) | 2020 | 2019 | | :---------------- | :--- | :------- | | ABL Credit Facility | — | $130,000 | | Total debt | — | $130,000 | - The weighted average interest rate for the ABL Credit Facility for the nine months ended September 30, 2020, was 3.6%56 Note 5 - Reportable Segment Information This note presents financial data for the company's Pressure Pumping segment and other operations - The company operates with one reportable segment, Pressure Pumping (hydraulic fracturing and cementing), after shutting down flowback operations and disposing of drilling rigs, with hydraulic fracturing accounting for over 94% of pressure pumping revenue585960 Segment Performance (Three Months Ended September 30) | (in thousands) | Pressure Pumping 2020 | All Other 2020 | Total 2020 | Pressure Pumping 2019 | All Other 2019 | Total 2019 | | :------------------ | :-------------------- | :------------- | :--------- | :-------------------- | :------------- | :--------- | | Service revenue | $131,321 | $2,389 | $133,710 | $528,851 | $12,996 | $541,847 | | Adjusted EBITDA | $26,662 | $(9,308) | $17,354 | $134,789 | $(2,894) | $131,895 | | Capital expenditures | $7,571 | $370 | $7,941 | $83,770 | $3,189 | $86,959 | Segment Performance (Nine Months Ended September 30) | (in thousands) | Pressure Pumping 2020 | All Other 2020 | Total 2020 | Pressure Pumping 2019 | All Other 2019 | Total 2019 | | :------------------ | :-------------------- | :------------- | :--------- | :-------------------- | :------------- | :--------- | | Service revenue | $622,055 | $12,833 | $634,888 | $1,576,781 | $40,740 | $1,617,521 | | Adjusted EBITDA | $139,359 | $(21,671) | $117,688 | $417,017 | $(8,283) | $408,734 | | Capital expenditures | $56,873 | $3,042 | $59,915 | $322,347 | $11,978 | $334,325 | - Corporate administrative expense for the three and nine months ended September 30, 2020, was $7.0 million and $27.9 million, respectively, a significant decrease from prior year periods59 Note 6 - Net Income (Loss) Per Share This note details the calculation of basic and diluted net income or loss per common share Net Income (Loss) Per Common Share (Three Months Ended September 30) | (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------ | :------ | :------ | | Net income (loss) relevant to common stockholders | $(29,184) | $34,397 | | Basic income (loss) per share | $(0.29) | $0.34 | | Diluted income (loss) per share | $(0.29) | $0.33 | Net Income (Loss) Per Common Share (Nine Months Ended September 30) | (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------ | :------ | :------ | | Net income (loss) relevant to common stockholders | $(62,908) | $140,335 | | Basic income (loss) per share | $(0.62) | $1.40 | | Diluted income (loss) per share | $(0.62) | $1.35 | - As of September 30, 2020, 6,480 thousand stock options, restricted stock units, and performance stock units were anti-dilutive and excluded from diluted EPS calculation, compared to 702 thousand in 201973 Note 7 - Stock-Based Compensation This note describes stock-based compensation plans, including options, RSUs, and PSUs, and related expenses - No new stock options were granted in the nine months ended September 30, 2020, with 4,219,648 outstanding stock options at a weighted average exercise price of $4.867475 - 1,143,230 Restricted Stock Units (RSUs) were granted in the nine months ended September 30, 2020, with an unrecognized compensation expense of approximately $7.9 million to be recognized over approximately 2.0 years76 - 966,242 Performance Share Units (PSUs) were granted in the nine months ended September 30, 2020, with vesting tied to TSR relative to a peer group and continued employment78 Total Stock-Based Compensation Expense (Nine Months Ended September 30) | (in thousands) | 2020 | 2019 | | :------------- | :----- | :----- | | Total expense | $6,000 | $5,200 | Note 8 - Related-Party Transactions This note discloses transactions with related parties, including property acquisitions, lease agreements, and service revenues - The company acquired its corporate office building in April 2020 for approximately $1.5 million from an entity with a former executive officer's equity interest82 - The company leases five operations and maintenance yards from an entity with equity interests from former/current executive officers and a director, with total annual rent expenses ranging from $0.03 million to $0.2 million per yard83 - Revenue from services provided to Pioneer (including idle fees) decreased significantly to $68.3 million (Q3 2020) from $120.7 million (Q3 2019) and to $259.9 million (YTD 2020) from $407.8 million (YTD 2019)89 - As of September 30, 2020, accounts receivable from Pioneer totaled approximately $46.0 million, down from $61.7 million at December 31, 201991 Note 9 - Leases This note provides information on the company's operating and finance leases, including maturity analysis and expenses - The company has an operating lease for a real estate contract, with a weighted average discount rate of 6.7% and a remaining lease term of 2.5 years as of September 30, 2020; operating lease cost was approximately $0.3 million for both nine-month periods939495 - The company exercised its option to purchase land associated with a finance lease in March 2020 for approximately $2.5 million96 Operating Lease Maturity Analysis (September 30, 2020) | ($ in thousands) | Amount | | :--------------- | :----- | | 2020 | $92 | | 2021 | $377 | | 2022 | $389 | | 2023 | $98 | | Total undiscounted future lease payments | $956 | | Present value of future lease payments | $878 | - Short-term lease expense was approximately $0.8 million for the nine months ended September 30, 2020, down from $1.0 million in 2019; total remaining commitments for short-term leases and lodging were approximately $6.0 million99 Note 10 - Commitments and Contingencies This note outlines contractual commitments, legal proceedings, and environmental compliance matters - The company impaired and wrote off a $6.1 million option fee for additional DuraStim® equipment due to current market conditions, making the exercise of the option improbable100 - The company has contractual commitments of approximately $0.8 million for equipment and assets and minimum volume purchase agreements with sand suppliers, with no shortfall fees recorded in 2020 or 2019101102 - The company is involved in the Logan Lawsuit (class action), the Shareholder Derivative Lawsuit, and an SEC investigation; as of September 30, 2020, no provision was made as outcomes cannot be reasonably estimated104105106107108109 - The company is subject to environmental laws and regulations but has not been fined or cited for material violations, and a routine audit by the Texas Comptroller of Public Accounts is ongoing with no material tax liability expected110111 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operating results, highlighting impacts from the COVID-19 pandemic and energy market downturn Overview This overview introduces the company's core business, operational focus, and hydraulic horsepower capacity in the Permian Basin - ProPetro Holding Corp. is a Midland, Texas-based oilfield services company primarily providing hydraulic fracturing and complementary services to E&P companies in the Permian Basin115 - As of September 30, 2020, the company's total hydraulic horsepower (HHP) was approximately 1,469,000 HHP, including 54,000 HHP of new DuraStim® equipment, with an additional 54,000 HHP expected in 2021116 - The company's primary operational focus is in the Permian Basin's Midland and Delaware sub-basins, aiming to capitalize on drilling and completion activity due to its market presence and customer relationships118119 Commodity Price and Other Economic Conditions This section analyzes the volatile oil and gas market, including the impact of the COVID-19 pandemic and crude oil price fluctuations - The oil and gas industry is highly volatile, influenced by supply/demand, prices, capital investments, economic conditions, and geopolitical factors121 - The COVID-19 pandemic and failed OPEC+ negotiations in early March 2020 led to a dramatic decline in energy demand and a collapse in global crude oil prices, with WTI crude oil prices falling approximately 67% from $62/barrel in January 2020 to just over $20/barrel by March 2020, recovering to approximately $36/barrel by October 31, 2020122123125 - Permian Basin rig count significantly decreased from approximately 403 in January 2020 to approximately 117 in mid-August 2020, recovering slightly to 142 rigs by October 2020, impacting demand for services and potentially leading to pricing pressure126 - The company anticipates a material adverse impact on services, revenue, results of operations, and cash flows if market conditions do not improve, potentially requiring additional asset impairment charges126127 Actions to Address the Economic Impact of COVID-19 and Decline in Commodity Prices The company outlines strategic actions to mitigate adverse economic impacts, including capital expenditure cuts and cost reductions - The company implemented several actions to address economic impacts, including: - Growth Capital: Cancelled substantially all planned growth capital expenditures for the remainder of 2020 - Other Expenditures: Significantly reduced maintenance expenditures and field-level consumable costs; negotiated lower pricing for expendable items and internalized certain outsourced support services - Labor Force Reductions: Reduced workforce by over 60% between April and May 2020 to align with changing activity levels - Working Capital: Negotiated more favorable payment terms with larger vendors and increased diligence in collecting accounts receivables129 How We Evaluate Our Operations This section explains management's key performance indicators, including Adjusted EBITDA and Adjusted EBITDA margin - Management uses Adjusted EBITDA and Adjusted EBITDA margin as key performance indicators to evaluate operating segments, defining Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, and certain non-recurring items130131 - Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures used to compare operating performance consistently across periods by removing effects of capital structure, asset base, non-recurring expenses, and items outside management's control132133 Adjusted EBITDA Reconciliation (Three Months Ended September 30) | (in thousands) | Pressure Pumping 2020 | All Other 2020 | Total 2020 | Pressure Pumping 2019 | All Other 2019 | Total 2019 | | :------------------------- | :-------------------- | :------------- | :--------- | :-------------------- | :------------- | :--------- | | Net loss | $(20,920) | $(8,264) | $(29,184) | $65,961 | $(31,564) | $34,397 | | Depreciation & amortization | $36,326 | $1,141 | $37,467 | $36,110 | $1,543 | $37,653 | | Loss on disposal of assets | $11,256 | $30 | $11,286 | $30,987 | $166 | $31,153 | | Stock-based compensation | — | $2,535 | $2,535 | — | $577 | $577 | | Adjusted EBITDA | $26,662 | $(9,308) | $17,354 | $134,789 | $(2,894) | $131,895 | Adjusted EBITDA Reconciliation (Nine Months Ended September 30) | (in thousands) | Pressure Pumping 2020 | All Other 2020 | Total 2020 | Pressure Pumping 2019 | All Other 2019 | Total 2019 | | :------------------------- | :-------------------- | :------------- | :--------- | :-------------------- | :------------- | :--------- | | Net loss | $(30,140) | $(32,768) | $(62,908) | $228,285 | $(87,950) | $140,335 | | Depreciation & amortization | $114,205 | $3,639 | $117,844 | $101,916 | $4,336 | $106,252 | | Impairment expense | $15,559 | $1,095 | $16,654 | — | — | — | | Loss on disposal of assets | $39,659 | $216 | $39,875 | $81,110 | $468 | $81,578 | | Stock-based compensation | — | $5,968 | $5,968 | — | $5,246 | $5,246 | | Adjusted EBITDA | $139,359 | $(21,671) | $117,688 | $417,017 | $(8,283) | $408,734 | Results of Operations This section details the company's financial performance, including revenue, expenses, and net income trends Key Financial Results (Three Months Ended September 30) | (in thousands, except percentages) | 2020 | 2019 | Variance | % Change | | :--------------------------------- | :---------- | :---------- | :---------- | :--------- | | Revenue | $133,710 | $541,847 | $(408,137) | (75.3)% | | Cost of services | $99,592 | $396,922 | $(297,330) | (74.9)% | | General and administrative expense | $21,817 | $27,558 | $(5,741) | (20.8)% | | Depreciation and amortization | $37,467 | $37,653 | $(186) | (0.5)% | | Loss on disposal of assets | $11,286 | $31,153 | $(19,867) | (63.8)% | | Interest expense | $137 | $1,749 | $(1,612) | (92.2)% | | Net income (loss) | $(29,184) | $34,397 | $(63,581) | (184.8)% | | Adjusted EBITDA | $17,354 | $131,895 | $(114,541) | (86.8)% | | Adjusted EBITDA Margin | 13.0% | 24.3% | (11.3)% | (46.5)% | Key Financial Results (Nine Months Ended September 30) | (in thousands, except percentages) | 2020 | 2019 | Variance | % Change | | :--------------------------------- | :---------- | :---------- | :---------- | :--------- | | Revenue | $634,888 | $1,617,521 | $(982,633) | (60.7)% | | Cost of services | $468,633 | $1,164,663 | $(696,030) | (59.8)% | | General and administrative expense | $67,086 | $73,972 | $(6,886) | (9.3)% | | Depreciation and amortization | $117,844 | $106,252 | $11,592 | 10.9% | | Impairment expense | $16,654 | — | $16,654 | 100.0% | | Loss on disposal of assets | $39,875 | $81,578 | $(41,703) | (51.1)% | | Interest expense | $2,208 | $5,678 | $(3,470) | (61.1)% | | Net income (loss) | $(62,908) | $140,335 | $(203,243) | (144.8)% | | Adjusted EBITDA | $117,688 | $408,734 | $(291,046) | (71.2)% | | Adjusted EBITDA Margin | 18.5% | 25.3% | (6.8)% | (26.9)% | - Revenue decreased significantly due to reduced demand for pressure pumping services, pricing discounts, and lower fleet utilization (average 8.5 active fleets in Q3 2020 vs. 25.1 in Q3 2019; 10.4 active fleets YTD 2020 vs. 25.4 YTD 2019); idle fees contributed $6.9 million (Q3 2020) and $41.1 million (YTD 2020) to revenue143156157 - Cost of services decreased in line with lower activity levels but increased as a percentage of revenue due to pricing pressure, partially offset by idle fees145159 - General and administrative expenses decreased due to lower nonrecurring advisory fees, retention bonuses, and severance, partially offset by increases in stock compensation and payroll146160 - Depreciation and amortization increased by 10.9% for the nine months ended September 30, 2020, primarily due to an overall increase in the fixed asset base, including a 3.8% increase in pressure pumping fleet capacity161 - The company recorded a $16.7 million impairment expense in the nine months ended September 30, 2020, for goodwill and property and equipment, reflecting depressed market conditions162 - Interest expense decreased significantly due to a lower average debt balance, with zero debt balance in Q3 2020149164 - The company reported an income tax benefit of $7.7 million (Q3 2020) and $15.1 million (YTD 2020) due to projecting a pre-tax loss, compared to income tax expenses in the prior year152166 Liquidity and Capital Resources This section discusses the company's liquidity sources, including cash and credit facilities, and their management - Liquidity is provided by existing cash, operating cash flows, and the ABL Credit Facility; the COVID-19 pandemic and energy downturn significantly impacted liquidity, but a gradual recovery in Q3 2020 has led to increased liquidity167168169 Liquidity Position | (in millions) | Sep 30, 2020 | Oct 31, 2020 | | :---------------------- | :----------- | :----------- | | Cash and cash equivalents | $54.3 | $66.7 | | ABL Credit Facility availability | $31.6 | $43.9 | | Total liquidity | $85.9 | $110.6 | - The ABL Credit Facility has a $300 million borrowing capacity, with a borrowing base tied to 85% of eligible accounts receivable; the borrowing base was $35.3 million as of September 30, 2020, and $47.6 million as of October 31, 2020172 - The company repaid all $130.0 million of ABL Credit Facility borrowings during the nine months ended September 30, 2020, aiming for a conservative leverage ratio177 Cash and Cash Flows This section analyzes the company's cash movements from operating, investing, and financing activities Historical Cash Flows (Nine Months Ended September 30) | ($ in thousands) | 2020 | 2019 | | :--------------------------- | :---------- | :---------- | | Operating activities | $118,026 | $307,629 | | Investing activities | $(82,179) | $(387,569) | | Financing activities | $(130,628) | $56,431 | - Net cash provided by operating activities decreased by $189.6 million due to lower activity levels from depressed crude oil prices and COVID-19 impact, partially offset by timing of receivables and vendor payments180 - Net cash used in investing activities decreased significantly due to reduced growth and maintenance capital expenditures; in 2019, investing activities included $110.0 million for Pioneer Pressure Pumping Acquisition assets and $102.9 million in deposits for DuraStim® equipment181 - Net cash used in financing activities was $130.6 million, primarily due to the repayment of $130.0 million in ABL Credit Facility borrowings, a reversal from net cash provided by financing activities in 2019182 Off-Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements - The company had no off-balance sheet arrangements as of September 30, 2020183 Critical Accounting Policies and Estimates This section notes no material changes to the company's critical accounting policies and estimates - There have been no material changes to the methodology for critical accounting policies during the nine months ended September 30, 2020, as previously disclosed in the Form 10-K184 Recently Issued Accounting Standards This section refers to the notes for disclosures regarding recently issued accounting standards - Disclosure concerning recently issued accounting standards is incorporated by reference to Note 2 of the Condensed Consolidated Financial Statements185 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section confirms no material changes in market risk disclosures compared to the company's previously filed Form 10-K - As of September 30, 2020, there were no material changes in market risk compared to the disclosures in the company's Form 10-K186 ITEM 4. CONTROLS AND PROCEDURES This section details the evaluation of disclosure controls and internal control over financial reporting, identifying material weaknesses Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of disclosure controls and procedures, noting identified material weaknesses - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2020, due to identified material weaknesses189 - Despite the material weaknesses, management concluded that the financial statements in this Quarterly Report fairly present the company's financial position, results of operations, and cash flows in all material respects in accordance with GAAP189 Management's Report on Internal Control over Financial Reporting Management's report identifies material weaknesses in internal control, particularly in control environment and related party transactions - Management determined that the company did not maintain effective internal control over financial reporting as of December 31, 2019, and it remained ineffective as of September 30, 2020, due to material weaknesses192 - Identified material weaknesses include: - Control Environment: Deficiencies in commitment to integrity, board oversight, management structures, competence, and accountability, leading to a poor tone of compliance and control consciousness - Information and Communication: Miscommunication between management and the Board regarding contract conditionality and non-disclosure of commitments - Control Activities: Pervasive impact from poor tone at the top, resulting in a risk to virtually all financial statement account balances and disclosures - Related Parties: Failure to maintain controls to sufficiently identify, evaluate, and disclose related party transactions, leading to two unidentified transactions194195197198199200201 Remediation Plan and Status This section outlines the company's ongoing remediation efforts to address identified material weaknesses in internal controls - Remediation efforts are ongoing and include appointing new executive officers, enhancing policies (Code of Ethics, Expense Reimbursement), implementing control activities for related party transactions and conflicts of interest, and establishing a disclosure committee202203 - Material weaknesses will not be considered remediated until new and existing controls have operated effectively for a sufficient period and management has concluded through testing that they are effective203 Changes in Internal Control over Financial Reporting This section reports on any changes in internal control over financial reporting during the quarter - Except for the material weaknesses described, there were no other changes in internal control over financial reporting during the quarter ended September 30, 2020, that materially affected or are reasonably likely to materially affect it204 PART II – OTHER INFORMATION This section provides additional information beyond financial statements, including legal proceedings, risk factors, and exhibits ITEM 1. Legal Proceedings This section outlines ongoing legal proceedings, including class action and derivative lawsuits, and an SEC investigation - The company is involved in several ongoing legal proceedings: - Logan Lawsuit: A class action complaint alleging violations of Sections 10(b), 20(a), 11, and 15 of the Exchange Act and Securities Act, based on allegedly inaccurate or misleading statements - Shareholder Derivative Lawsuit: Consolidated in May 2020, alleging breaches of fiduciary duties, unjust enrichment, and contribution, seeking damages and equitable relief - SEC Investigation: Initiated in October 2019, requesting information and documents related to the company's expanded audit committee review, with the company cooperating - The company is currently unable to predict the duration, scope, or result of these legal proceedings and has made no provision for them as of September 30, 2020104105106107108109207208209210211 ITEM 1A. Risk Factors This section confirms no material changes to the risk factors previously disclosed in the company's Form 10-K - There have been no material changes to the risk factors disclosed in Part I, Item 1A of the company's Form 10-K212 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or related use of proceeds - None213 ITEM 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities - None214 ITEM 4. Mine Safety Disclosures This section clarifies that mine safety disclosures are not applicable to the company's operations - Not applicable215 ITEM 5. Other Information This section confirms no other material information to report - None216 ITEM 6. Exhibits This section lists all exhibits filed or furnished with the Form 10-Q, including corporate documents and certifications - Exhibits include: - Amended and Restated Certificate of Incorporation and Bylaws - Certifications of Principal Executive and Financial Officers (Rule 13a-14(a) and 18 U.S.C. Section 1350) - XBRL Instance Document and Taxonomy Extension Documents are filed/furnished217218 SIGNATURES This section contains the official signatures of the company's authorized executive officers, certifying the report - The report is duly signed by Phillip A. Gobe (CEO), David S. Schorlemer (CFO), and Elo Omavuezi (Chief Accounting Officer) on November 5, 2020220222